Model Portfolios And Potential Earnings Surprises

This story features CSR LIMITED, and other companies. For more info SHARE ANALYSIS: CSR

By Chris Shaw

Debt issues in Europe continue to impact on investor sentiment but for UBS the combination of reasonable global growth expectations, expanding profit margins, low inflation, easy global monetary portfolios and attractive valuations is enough to remain positive on global and local equities.

In terms of its model portfolio UBS has made only minor changes as at the end of May, trimming its domestic defensive and US economy exposure given recent outperformance in favour of adding some cyclical and value positions.

Overall UBS remains overweight the Mining and Industrial Cyclical sectors while being Neutral on the banks. The bank position has come down from slightly overweight previously. The broker remains underweight Energy, REITs and Industrial Defensives.

Stock changes at the end of May were limited, UBS adding CSR ((CSR)) and Crown Limited ((CWN)) to its model portfolio and removing Woolworths ((WOW)) and Sky City Entertainment Group. Weightings have been increased in JB Hi-Fi ((JBH)) and Fairfax Media ((FXJ)), while there are now lower weightings in News Corporation ((NWS)) and Brambles ((BXB)).

According to UBS the fact domestic economic performance has been patchy, and given weak UK and European economies, there is an increasing risk of downgrades leading into August's profit reporting season.

Any such downgrades should be fairly contained in UBS's view, with a greater risk at the smaller cap end of the market. Overall it suggests earnings risk is more than priced into the market at current levels.

RBS Australia has gone a bit further into where the most likely sources of upside and downside earnings surprise may rest in the upcoming reporting season, basing its analysis on both quantitative and qualitative factors.

The screens used in RBS's analysis include a company's track record of earnings surprise relative to consensus estimates, the magnitude of earnings revisions over one month and a net revisions ratio. Other factors such as the dispersion of analyst earnings estimates is also considered.

Based on its analysis RBS suggests the S&P/ASX100 stocks most likely to deliver an upside earnings surprise compared to existing consensus estimates are Ansell ((ANN)), ASX, Boral ((BLD)), Cochlear ((COH)), Crown, Fairfax, Goodman Group ((GMG)), Telstra, United Group ((UGL)) and WA Newspapers ((WAN)).

Those in the ASX100 most likely to disappoint relative to current consensus forecasts according to RBS are Amcor ((AMC)), Alumina ((AWC)), AXA Asia Pacific ((AXA)), Boart Longyear ((BLY)), BlueScope Steel ((BSL)), Brambles, Nufarm ((NUF)), Sims Metal ((SGM)) and Transurban ((TCL)).

Click to view our Glossary of Financial Terms