Some Insights and Ideas From Citi and Macquarie

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By Rudi Filapek-Vandyck

There are many of them; expert reports that predict base metals and energy prices might go through a soft patch in the current quarter, but the world should start looking rosier again from the final three months of 2010 onwards and thus the price for oil and for copper, to name but two, should start rising again later this year.

Commodities analysts at Citi, in principle of similar view, but they have discovered enough reasons to express less confidence in this scenario in their latest research update on the sector.

The analysts report it would appear underlying consumption of industrial commodities in developed economies is recovering and this is being amplified by restocking. This is what was expected to happen, and thus so far everything seems to be developing according to above mentioned scenario.

If the current trend were to continue, this certainly opens up the possibility for a much stronger apparent consumption growth later this year, say the analysts.

However, that would be a best case scenario.

In more worrisome terms, however, the analysts have discovered that overall momentum in underlying demand seems to be slowing, and that is not a good development. It could imply that once inventories have been built, apparent demand could weaken instead later in the year. This would have the opposite effect on prices.

Citi analysts seem genuinely worried, noting were this slowing in underlying demand sustained, this would casts a shadow over present expectations of a strong consumption rebound, amplified by restocking.

Certainly something to keep a close eye on, and Citi analysts seem intend to doing exactly that.

Meanwhile, quant analysts at Macquarie have made some changes to the broker's so-called Marquee Ideas – comparable with what other stockbrokers label “Ideas with Conviction”.

Brambles ((BXB)), which was on Macquarie's list in a negative sense (short), has now been removed following some considerable underperformance. The ASX ((ASX)), however, which is the other stock on the list in a negative sense has been kept.

Macquarie's own price target continues to suggest some 11% downside to the ASX share price (closing level yesterday) and that seems enough conviction to retain a negative stance on the shares. The third stock on the list Macquarie would rather short than go long is Stockland ((SGP)), which also has been retained.

On the positive side (long) Macquarie's Marquee Ideas contain Boart Longyear ((BLY)), News Corp ((NWS)), Rio Tinto ((RIO)), CommBank ((CBA)) and Westpac ((WBC)). These stocks have as of today been joined by retailer JB Hi-Fi ((JBH)).

Macquarie seems to bank on the fact that JB Hi-Fi will maintain a high growth rhythm in combination with some form of capital return for shareholders. Macquarie is not in favour of a capital return in se, but rather would like to see the company lifting its dividend pay-out ratio. This would transform the retailer into a high growth stock with a high dividend yield. That'll be a combination hard to ignore, suggest the analysts.

As far as the inclusion of CBA and Westpac is concerned, both should be seen in combination with Macquarie's suggestion to switch out of ANZ Bank ((ANZ)) into either of the two. Looking at today's price action on the share market though, the suggestion doesn't seem the correct one.

But then, Macquarie's Marquee Ideas should be considered over a timeframe of three months.

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