Investor Confidence Receives Another Boost

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By Rudi Filapek-Vandyck

Will they? Won't they?

The number of market experts who is expecting a revaluation of the Chinese currency anytime soon has unmistakably increased over the past two weeks, but does this mean anything as far as the Chinese government is concerned?

Analysts at Morgan Stanley believe the answer is negative. They remain of the view the Chinese policy makers will not bow to the US (or others) and leave their currency exactly where it is right now. Morgan Stanley does see a revaluation for the renminbi this year, but argues it remains too early, regardless of this month's spike in market speculation.

Come back after June, say the analysts who stick to their previous forecast that a renminbi revaluation will occur in Q3 and not one minute sooner.

This hasn't stopped investors across the globe to get excited in advance. That and a possible solution to the Greek sovereign debt problems seems to have injected a whole new dose of investor optimism into financial markets.

How long is this going to last? FX experts at CommSec predict on Monday morning this may well last for the whole week with China's Q1 GDP release on the agenda for Thursday. The most important question is, however, whether a predicted growth path of 11%-plus (market consensus) will not trigger the opposite response as surely the Chinese government will get serious about using the brakes?

The other point of worry is the upcoming US corporate reporting season. At the Wall Street Journal, they formulated it as follows:

“The worry is that, with the Dow already up 9% in the past two months amid hopes of economic recovery and strong corporate profits, stocks could do the same thing they did in the last earnings season: sell off when the good news actually arrives.”

Returning to the Chinese currency theme, analysts at Citi are also of the view that present market speculation about an imminent move on the Chinese currency will prove too soon. Their prediction is it'll happen but somewhere in the vicinity of halfway this calendar year – that's about eleven more weeks away.

Over at Barclays, analysts don't think a revaluation of the renminbi will have a lasting impact on commodity prices, regardless of the short term hype. Barclays, and others, assume the Chinese will further tighten at the same time, and one is likely to offset the other.

Regardless, Citi analysts stick to the view that a firmer RMB will be a short term positive for commodities in general, for share prices of companies related to commodities, as well as for the Australian economy and thus for Australian equities.

Citi analysts do not mention the Australian dollar, but one would have to assume the AUD will benefit as well due to the double positive impact from rising commodity prices and a firmer Australian economy (which is bound to keep Glenn Stevens & Co on a tightening path).

Longer term, however, Citi analysts point out allowing the RMB to strengthen is a form of policy tightening, so ultimately it will assist in putting a lid on Chinese growth, and thus all of the short term positives should reverse over a longer term horizon.

Regardless of one's time frames, transport and gaming stocks in the Australian share market should always be among the clear winners, argues Citi, while retailers and consumer stocks should be among the main losers, no matter what the investment horizon.

That hasn't stopped market strategists at GSJB Were seeking increased exposure to the buoyant market conditions for bulk commodities. Instead of going directly for more equity exposure to the likes of BHP Billiton ((BHP), Rio Tinto ((RIO)) and Macarthur Coal ((MCC)) -the stockbroker is currently under research restriction for all three stocks- GSJBW strategists believe it is more appropriate to seek exposure one step further away from the source.

As such, investors are guided towards increased equity exposure towards the likes of UGL ((UGL)) and Downer EDI ((DOW)), and towards Bradken ((BKN)) and Sims Group ((SMX)).

Note: the latest switches in GSJBW's model portfolio have been funded by selling some shares in Downer EDI and in SEEK ((SEK)).

Over at BA-Merrill Lynch, market strategists have decided to remove Oil Search ((OSH)) from their Australia Focus 1 list. Main reason: the stock is now trading close to the stockbroker's twelve month price target.

The list now consists of Commbank ((CBA)), Computershare ((CPU)), CSL ((CSL)), Foster's ((FGL)), Lend Lease ((LLC)), Macquarie Group ((MQG)), MAp Group ((MAP)), Rio Tinto ((RIO)), Virgin Blue ((VBA)), Ten Network ((TEN)) and Asciano ((AIO)).

Meanwhile, the theme of increasing market growth expectations continues with UBS economists revealing they have grown even more bullish on GDP forecasts for Australia as well as on the outlook for corporate profits (due to increased confidence about the economic outlook).

No wonder thus, the latest update by market strategists at Macquarie contains another lift to projected share market returns in the year ahead. Macquarie now forecasts the S&P/ASX 200 will return 16.6% which translates into a March 2011 fair value target of 5,564.

The projected return comprises a capital return of 12.3% and a dividend yield of 4.3%. Within this, resources are forecast to return 7.9% and industrials 20.3%. For the Small Ords, Macquarie projects total shareholder return of 11.1%, comprising a capital return of 6.8% and dividend yield of 4.4%. Within this, small industrials are forecast to generate a return of 15.0% and small resources 4.2%.

Macquarie dismisses any doubts whether present earnings estimates for Australian companies might be too optimistic: “achievable” is the word, the strategists respond.

Note that among all these positives, BA-Merrill Lynch analysts and their peers at Credit Suisse have started to doubt the pace of recovery for housing markets in both Australia and the US. They argue "slower" is the word for this market segment.

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