Resources sector leads the way as Australian shares recover

THE resources sector led a broad-based recovery in the Australian sharemarket yesterday, after China's Shanghai Composite continued to improve and Wall Street edged higher despite falls on European markets.

Takeover activity helped the market, although some strategists warned of a challenging year ahead.

The benchmark S&P/ASX 200 index closed up 1.1 per cent at 4152.2 on light trading volumes after hitting a three-day high of 4154.3. It was the first advance in the index in the past four sessions.

BHP Billiton, Rio Tinto, Newcrest Mining, Fortescue Metals and Woodside Petroleum rose 1.3-2.5 per cent as China's Shanghai Composite climbed 1.6 per cent, adding to a 2.9 per cent rise on Monday.

Pacific Brands surged after a takeover approach from KKR, and Alumina jumped after Alcoa predicted higher alumina prices.

"I think takeover activity is going to be the interesting thing domestically," said Macquarie Private Wealth investment adviser John Milroy.
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"Top-line growth will be difficult so you will see cashed-up companies looking for bolt-on acquisitions."

Pacific Brands shares rose 8c, or 14.3 per cent, to 64c, valuing the company at $584 million.

"It highlights the extent to which private equity is back in the M&A space and the opportunities in beaten-up retail sector," said Commonwealth Bank Institutional Equities head of sales trading Justin Rooney.

CBA values Pacific Brands at 84c a share and says a "reasonable" PE multiple of six to seven times earnings before interest, tax, depreciation and amortisation would imply a takeover price between 72c and 88c a share.

Cape Lambert rose 8.3 per cent after Dow Jones Newswires reported that South Africa's Exxaro was in advanced talks to buy African Iron, part-owned by Cape Lambert.

Among stocks listed by Citigroup as its "top M&A ideas for 2012", Santos rose 3.1 per cent, IAG rose 2.1 per cent, Echo Entertainment rose 2 per cent, Atlas Iron rose 4.6 per cent and Paladin rose 1.8 per cent.

Alumina surged 6.4 per cent to $1.17 as investors piled in near multi-year lows after Alcoa World Alumina and Chemicals joint venture partner Alcoa predicted global aluminium demand would grow 7 per cent in fiscal 2012, amid a global deficit in primary aluminium supply.

Macquarie Equities reiterated its outperform rating and $2.10 price target on the stock, arguing that the current share price presented an opportunity to those with a similar view to its own bullish view on current aluminium market pricing.

However, Macquarie's Mr Milroy expects some challenges in the upcoming Australian earnings period.

"Our expectation is for more trimming of earnings estimates from some of the industrials, particularly as they seem too high from a bottom-up perspective," Mr Milroy said.

Credit Suisse strategists took a bearish view on the sharemarket, saying the S&P/ASX 200 index could "undershoot fair value" by falling as low as 3500 points in coming months.

The broker said global equities could weaken further this year, because US equities were expensive and, despite low global interest rates, the global yield curve was inverted, pointing to negative growth in 2012.

"Should this forecast materialise, US earnings could be downgraded, and equities globally could sell off," they said.

CMC Markets' chief market analyst Ric Spooner said investors would be watching the US earnings season over the next month before the Australian reporting season began next month.

"If these signs of improved demand translate into better than expected revenue growth for companies, it will become difficult for investors to ignore equities at current earnings multiples," Mr Spooner said.