The Wrap: Asset Managers And The Consumer

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Weekly Broker Wrap: market outlook; Allianz & QBE; asset managers; Australian consumer; Vocus Communications.

-UBS: Global reflation seen favouring cyclical stocks, expressly resources
-Sale of QBE to Allianz would be an obvious positive for IAG, SUN
-MS: Stock picking rather than the cycle to drive Oz consumer stocks

By Eva Brocklehurst

Market Outlook

A backdrop of global reflation should favour cyclical stocks, UBS believes. The broker considers this best expressed through an overweight holding in resources and a selection of cyclical/reflation stocks within the market ex resources. While holding both domestic and globally exposed industrial stocks, the broker envisages better earnings growth trends in global/US exposed stocks and, domestically, consumer discretionary names are highlighted.

The broker is neutral on banks, while non-bank financials are considered reasonably attractive. The reflationary backdrop, the broker believes, is supportive of equities, although these do not look particularly cheap in an absolute sense. Risks over coming months would appear to be either policy risks or the growth pulse fading.

Allianz & QBE

Ord Minnett has analysed speculation regarding a potential bid for QBE Insurance ((QBE)) by Allianz. Speculation has been forthcoming from media both domestic and offshore. The broker notes QBE has emphatically denied it is in discussions with any party regarding a takeover, although Ord Minnett believes this statement does not preclude there being interest on the part of Allianz.

There are synergy considerations, the broker acknowledges, but, that said, QBE already has a very efficient capital-two-premium ratio which is an offset from its increased use of reinsurance. The broker suggests it may be hard for Allianz is to prioritise an acquisition of QBE ahead of possible acquisitions of companies like Generali. The broker believes any sale of QBE to Allianz, was an obvious positive for shareholders, would be also positive for Insurance Australia Group ((IAG)) and Suncorp ((SUN)).

Asset Managers

Credit Suisse observes, in the December quarter, funds under management amongst the listed managers increased on average 3.7%. Growth was primarily driven by positive market movements and complemented by net inflows. Most managers delivered growth of 2-4%, with the exception of very strong growth from Magellan Financial ((MFG)), up 10%, and a contraction in funds under management for Platinum Asset Management ((PTM)), down -1%.

Credit Suisse downgrades Henderson Group ((HGG)) earnings estimates on the back of weaker retail fund flows but retains an Outperform rating. BT Investment Management ((BTT)) is upgraded to Neutral, following a significant fall in its share price since mid December. The broker believes the stock justifies its price/earnings premium – now trading at a 27% premium to its UK peers – because it has consistently delivered inflows above its peer group and successfully executed on its global expansion plans.

Australian Consumer

Domino's Pizza Enterprises ((DMP)), Metcash ((MTS)) and Treasury Wine Estates ((TWE)) are Morgan Stanley's highest conviction, overweight stocks in the Australian consumer sector, with Woolworths ((WOW)) and Flight Centre ((FLT)) the highest conviction underweights. The broker believes stock picking rather than the cycle will drive Australian consumer stock performances.

Feedback on retail trading over Christmas suggests it was better than feared but the broker notes the cycle is cooling. While downgrades are more likely than upgrades, the broad-based weakness the broker had previously predicted is now considered unlikely.

Housing-linked categories are envisaged faring better than apparel, while supermarkets continue to be affected by discounting and deflation. The broker expects 2017 to be a more difficult year than 2016, as leading housing indicators soften while the savings rate is lower and income growth is weak.

Morgan Stanley identifies five potential surprises for the current year, where the outcome has a higher probability than the market is currently pricing in. The surprises include Amazon not entering the Australian marketplace in 2017 and suppliers outperforming the supermarkets. The broker also lists discretionary retail enduring lower earnings and a de-rating, driving under-performance in the segment. The other two surprises involve Domino's Pizza shares going above $100 and Flight Centre shares going below $20.

Vocus Communications

Macquarie has initiated coverage on Vocus Communications ((VOC)) with an Outperform rating and $5.30 target. The broker notes the company has assembled a collection of core fixed line assets, with its fibre network now extending beyond metro to include extensive inter-capital city backhaul in Australasia, and soon-to-be international transit assets between Perth and Singapore.

The broker believes there is scope for ongoing profitable on-net growth in the corporate and government segments with opportunities for market share gains in the consumer segment as the NBN rolls out. Capital expenditure demands are likely to remain high because of the nature of the business but the broker expects them to taper from peak levels in FY17 and FY18.

While the issues regarding the number of acquisitions made recently were largely cleansed at the AGM update in November, the broker acknowledges potential risk to corporate sales momentum and also the risk of medium-term earnings deterioration at Commander. The next catalyst will be the first half result and Macquarie is looking for confirmation that the operating outlook has not deteriorated since the AGM and the company is on track to achieve its synergy targets.

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