The Australian Market in 2011

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            [3] => ((OST))
            [4] => ((PNA))
            [5] => ((ILU))
            [6] => ((WPL))
            [7] => ((STO))
            [8] => ((ORG))
            [9] => ((QAN))
            [10] => ((AIO))
            [11] => ((CPU))
            [12] => ((BXB))
            [13] => ((BKN))
            [14] => ((UGL))
            [15] => ((WES))
            [16] => ((MYR))
            [17] => ((NWS))
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            [5] => ILU
            [6] => WPL
            [7] => STO
            [8] => ORG
            [9] => QAN
            [10] => AIO
            [11] => CPU
            [12] => BXB
            [13] => BKN
            [14] => UGL
            [15] => WES
            [16] => MYR
            [17] => NWS
            [18] => JHX
            [19] => LLC
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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The theme of 2010 in Australia has been the “two-speed” economy. National Bank economists don't like the expression, preferring “multi-speed”, while others such as Southern Cross confuse the issue by calling it “one-speed”. They all nevertheless mean the same thing, with Southern Cross referring to the resource sector as being the only economic driver, most simply separating the economy into resources and everything else, and NAB suggesting the “everything else” is not a consistent bloc but that there are variations within.

High hopes were held for the Australian economy, and thus the stock market, as we entered 2010. The main themes were expectation that China would continue its strong demand for commodity exports, that investment in resource sector development would surge as a result, that private investment from the wider sector would turnaround and begin growing strongly post-GFC as public investment waned, and that the consumer would emerge from behind the couch from where he/she had been hiding since 2008 and open his/her wallet once more.

What transpired is that China did indeed continue to demand exports but that tightening from Beijing and trouble in Europe, along with mid-year fears of a US “double-dip”, meant that as we entered the second half 2010 we experienced an easing in that demand. Resource sector investment strode on regardless, but met with problems of rising costs, tight labour markets, delays, set-backs, and more recently, weather problems.

Private sector investment, outside of resources, failed to materialise in any meaningful way. Banks remained reluctant to lend, and RBA rate hikes driven by resources-led inflation fears hit all other sectors at a time when their own recoveries were still marginal. The consumer did emerge from behind the couch, but only to pay off debt and put pennies into the biscuit tin rather than give them to Gerry Harvey. Will consumer timidity eventually ease? Or have we seen a secular jump back to earlier eras of frugality?

That last point is arguably the swing factor for 2011.

There is little disagreement that Australia's resources sector will stride on in 2011, and that the Chinas and Indias will be the drivers. Outside of Europe blowing up, the main risk is that rising inflation will force Beijing to apply the brakes a lot harder in 2011 than it has in 2010, impacting on Australian export volumes. Investment in resources will continue a-pace as new projects begin their ramp-ups, particularly in the gas space, but ongoing cost issues and inevitable delays will ensure the road is not a smooth one.

Resource investment will lead very strong overall private sector investment, but also dominate it. The RBA will hold rates steady until mid-year but then bow to inflationary pressure. Economists expect hikes of 50-100 basis points to year-end. Those hikes will do little to impact on the resources sector, but will impact heavily on the “have-nots”, being everyone else. The housing sector will be a case in point, despite lack of supply.

On the matter of the consumer, opinions are split. On one side there is the “only a flesh wound” camp who thought the consumer would bounce back in 2010 so now has shifted that expectation to 2011. Eventually rising incomes, driven by low unemployment , will be simply too tempting. Another year of distance from the GFC will also help fade memories.

On the other side is the “mortally wounded” camp which believes the return of the savings trend, replacing the “spend now, pay lay later” trend, is not necessarily a short-term phenomenon.

My two bobs-worth here is that the late Gen-Yers and early Gen-Xers – those at the peak of their consumption desire – had known only boom times before the GFC hit. Not only were their jobs secure, they revelled in “trading up” continually. Borrowing for a mortgage was a stroll in the park, because house prices jumped every year. Banks and credit companies were giving money away. Their parents' warnings of the recession in the nineties or the recessions of the seventies just sailed right over their heads. They have since had a rather hard landing back on earth. They are not going to rush out and make the same mistake again, in a hurry.

Indeed, Citi suggests that there is a risk softness in retail and similar sectors, if ongoing, could actually lead to jobs being lost. Resource companies may be finding it difficult to find sufficient labour, but there is still a risk unemployment could rise again, at least slightly. This would, however, ease the pressure on the RBA.

It's thus a juggling game for the RBA, and hence it is of little surprise the central bank has hinted it is now on hold for several months. Six months is a long time in this market, and the circumstances can be reassessed when we get there.

Economist consensus nevertheless has Australia's GDP growing at above trend in 2011, which means around 3.5%. One “speed” will drive and the other will drag. In Goldman Sachs' opinion, the global economy will begin to trend towards more uniform, and thus stable, growth.

A US double-dip was all the talk of mid-2010 but that has now given way to expectations of a more steady recovery, driven by accommodative monetary and fiscal policy. Eurozone debt issues will not go away, but European economic growth, driven by Germany in particular, will also be slow but positive. Authorities will keep eurozone problems in check.

China, India and other developing markets will continue their solid growth, but inflation pressures will force further brakes to be applied. Thus in Goldmans' view, the developed world economies will recover and the developing world economies will slow their growth rates such that together there will be a sort of move to the centre – still a spread, but not as pronounced nor as volatile as the past couple of years.

UBS suggests the quiet waning of Australian public sector investment (government stimulus has provided about half of Australia's 2010 GDP growth, notes Citi) and the swing toward more private sector investment will mean 2011 is more “equity friendly”.

Price/earnings ratios are the measure of market sentiment. They have taken a big hit since the GFC and remain mostly below average levels. Equity valuations remain attractive relative to bonds, notes Goldman Sachs, and earnings risk is to the upside. Goldmans sees earnings as being the driver of share prices in 2011, with some potential for P/E increases as well.

To that end, Goldmans is forecasting the ASX 200 to reach 5375 in June 2011 and 5600 in December. (Yesterday's close 4778). Thereafter they see 5850 in June 2012 and 6100 in December 2012.

The all-time high, just out of interest, is just under 6750 marked in October 2007.

Goldmans has also offered its preferred sectors for 2011 and preferred stocks within those sectors.

The strategists are Overweight Materials, preferring BHP Billiton ((BHP)), Amcor ((AMC)), Orica ((ORI)), OneSteel ((OST)), PanAust ((PNA)), and Iluka ((ILU)).

They are Overweight Energy, preferring Woodside ((WPL)), Santos ((STO)) and Origin ((ORG)).

They are Overweight Transportation, preferring Qantas ((QAN)) and Asciano ((AIO)).

They are Overweight Commercial Services, preferring Computershare ((CPU)), Brambles ((BXB)), Bradken ((BKN)) and United Group ((UGL)).

They are Overweight Retailing, preferring Wesfarmers ((WES)) and Myer ((MYR)).

They are Overweight Media, preferring News Corp ((NWS)).

They are Overweight US Housing & Construction, preferring James Hardie ((JHX)) and Lend Lease ((LLC)).

It is fair to say Goldman Sachs is among the more bullish of forecasters. But for every Overweight sector there must be an Underweight. Goldmans is Underweight on Insurance, Telecoms, REITs, Healthcare, Consumer Staples and Gaming.

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