Increased Forecasts And Agricultural Stocks

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By Rudi Filapek-Vandyck

Upgrades in economic growth forecasts for Australia continue flowing in with BA-Merrill Lynch today lifting GDP growth estimates for the lucky country to 3.8% and 3.7% for this year and next respectively.

Economist John Rothfield's confidence was further strengthened by dwelling commencements in the final quarter of last year, fuelling expectation of a sharp rebound in construction this year, as well as the latest ACCI-Westpac industrial trends survey which signalled businesses are getting ready to start spending.

The upgrades compare with GDP growth expectations of 3.4% (twice) previously and have had no impact on Rothfield's forecast that the Reserve Bank of Australia will hike three times this year. But Rothfield is ready to add at least one more hike this year anytime as he concedes “the skew has changed toward risks of more hikes”.

For now, he sticks to rate hikes at RBA meetings in May, July and September.

The good news from the economic desk is immediately wiped away by a strategy update from market strategists Tim Rocks and Jacob Markus. Both BA-ML strategists conclude that it will be more difficult for Australian companies to grow their profits in a similarly robust fashion as during the previous cycle.

This leads to the conclusion that FY10 estimates may turn out a little low, and they may require some additional upgrades, but as for FY11 and FY12 the market might be too optimistic given obvious constraints in credit expansion and available labour.

The BA-ML strategists believe everyone available to work will end up in the mining sector, leaving the rest of Australian companies in a pickle: no workers, less growth?

No such problems should haunt the Australian agricultural products sector, advocates RBS, where the analysts believe the sector appears well-positioned for 2010 but investors in the share market have yet to catch up on this.

RBS has three clear favourites to benefit from an overall improved operational environment: Graincorp ((GNC)), Incitec Pivot ((IPL)) and Ridley Corp ((RIC)).

Talking about favourites (and not about agri), at Credit Suisse the small caps specialists have updated their sector views and the five stocks believed to carry the most upside potential are Tower Australia ((TAL)), Pacific Brands ((PBG)), Campbell Bros ((CPB)), Pan Australian Resources ((PNA)) and Virgin Blue ((VBA)).

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