Australian Stock Bears Rise to Six-Year High After Rally

Photographer: Brendon Thorne/Bloomberg

A pedestrian is reflected in a window against an electronic board displaying stock information as he walks past the Australian Securities Exchange in Sydney. The S&P/ASX 200 gained 15 percent in 2013, lagging behind a 24 percent rise in the MSCI World Index. Close

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Photographer: Brendon Thorne/Bloomberg

A pedestrian is reflected in a window against an electronic board displaying stock information as he walks past the Australian Securities Exchange in Sydney. The S&P/ASX 200 gained 15 percent in 2013, lagging behind a 24 percent rise in the MSCI World Index.

Investors are the most bearish on Australian stocks since 2007 after last month’s rally pushed up valuations by the most since April and the central bank signaled a reluctance to add stimulus to the economy.

Outstanding put options on the S&P/ASX 200 (AS51) Index outnumbered equivalent call contracts by 2.50 times on March 3, according to data compiled by Bloomberg. The ratio rose to 2.52 on Feb. 28, the highest since September 2007. Bearish three-month options yesterday cost 7.1 points more than bullish ones, up from 5.8 points at the end of 2013, the data show.

The total return on Australian shares exceeded that of the Standard & Poor’s 500 Index last month, even while the U.S. equities measure rose to a record, as companies from BHP Billiton Ltd. (BHP) to Rio Tinto Group boosted dividends and earnings grew at Commonwealth Bank of Australia. That pushed profit multiples on the Australian measure to more than 8 percent above the average of the past five years.

“We’ve had a very good run and people are wanting to take out some protection against that move,” Toby Lawson, head of futures, options and cash equities trading for Asia Pacific at Newedge Group SA in Sydney, said by phone. “A few have said ‘right, I’ve got to be careful’, so you tend to see more options to protect against a downside move.”

Westpac Banking Corp. (WBC), Australia & New Zealand Banking Group Ltd. and BHP contributed most to last month’s rally on the Australian stock index, pushing the forecast price-earnings ratio on the measure to 15.1 yesterday, compared with the average of 13.9 over the past five years. Valuations increased by 4 percent last month, the most since April. The MSCI World Index of global developed equity markets trades at 15.4 times estimated profit.

Fund Flows

Australian equity funds attracted $482 million this year through Feb. 25, according to EPFR Global, a Cambridge, Massachusetts-based fund research firm. Investors withdrew $234 million from bond funds, the data show.

The S&P/ASX 200 gained 15 percent in 2013, lagging behind a 24 percent rise in the MSCI World Index. The S&P/ASX 200 VIX Index, a measure of expected volatility on the Australian share gauge, has climbed 11 percent this year to close at 12.78 today. In the U.S., the Chicago Board Options Exchange Volatility Index, or the VIX, dropped 12 percent to 14.1 yesterday, paring its 2014 increase to 2.8 percent.

The benchmark index for global developed-market shares dropped the most in a month on March 3 on concern about Russia’s growing military presence in Ukraine.

“For the more educated investor, there is a lot of caution out there,” Angus Gluskie, a Sydney-based money manager who helps oversee about $550 million at White Funds Management, said by phone. “There are now fewer valuation opportunities.”

Puts, Calls

Investors traded 16,928 puts on the S&P/ASX 200 yesterday compared with 5,728 calls, data compiled by Bloomberg show.

Open interest for bearish contracts on the iShares MSCI Australia exchange-traded fund climbed to 37,650 on March 3, an increase of 15 percent from the end of last year. Outstanding calls slipped 0.8 percent to 7,612. The $1.7 billion fund provides investment results that mirror moves in the MSCI Australia Index.

All 10 options with the highest ownership on the ETF were bearish, according to data compiled by Bloomberg. January 2015 $20 puts and July 2014 $24 puts had the largest open interest. The ETF closed at $24.76 on March 3.

Money managers were whipsawed in the first two months of this year as traders shrugged off economic data in the U.S. hampered by the weather and a report showed capital spending in Australia slumped the most since 2009.

Being Careful

The S&P/ASX 200 tumbled 5.3 percent from the start of the year through Feb. 5, before rebounding 6.5 percent through yesterday. The measure handed investors a total return of 5 percent in February, compared with 4.6 percent on the U.S. benchmark index.

“Investors are cautiously optimistic and want to be careful,” Stephen Halmarick, the Sydney-based head of investment markets research at Colonial First State Global Asset Management, which oversees about A$170 billion ($152 billion), said by phone. “The volatility in January really affected people’s perceptions.”

Australia’s central bank yesterday signaled it’s not planning to add more stimulus to the economy as the mining investment boom fades. The Reserve Bank of Australia held its key interest rate at a record-low 2.5 percent, as forecast by all 32 economists surveyed by Bloomberg News.

Stable Period

“On present indications, the most prudent course is likely to be a period of stability in interest rates,” Governor Glenn Stevens said in a statement, adding that housing prices “have increased significantly” and the Australian dollar “remains high by historical standards.”

The U.S. central bank began paring its unprecedented monetary stimulus in January amid signs of recovery in the labor market. Manufacturing expanded at a faster pace than projected in February, data showed this week.

“We’ve got a backdrop of a global economic recovery and synchronized growth that is generally positive,” Keith Poore, the head of investment strategy at AMP Capital Investors Ltd. in Wellington, which manages about $131 billion, said by phone. “What we’re now seeing in Australia is some solid earnings growth for the first time in a while.”

BHP, Rio

BHP reported first-half profit last month that beat analysts’ expectations and increased its dividend 3.5 percent. Rio Tinto also bolstered its payout after reporting a 43 percent gain in second-half profit.

Commonwealth Bank, the nation’s biggest lender, said Feb. 12 that first-half profit rose 14 percent to a record on lower bad-debt charges and growth in home lending.

“The key here is for investors to understand that the market has had a tremendous run in February and is poised for a pull back,” Matthew Sherwood, who helps manage about $25 billion as the Sydney-based head of investment markets research at Perpetual Ltd., said by e-mail March 4. “If earnings growth globally picks up this year, the larger the selloff, the better the entry point.”

To contact the reporter on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net

To contact the editor responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net

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