Positioning For The Second Half Bounce

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            [1] => ((WBC))
            [2] => ((ILU))
            [3] => ((FMG))
            [4] => ((BBG))
            [5] => ((BXB))
            [6] => ((BHP))
            [7] => ((MBN))
            [8] => ((FGE))
            [9] => ((GBG))
            [10] => ((GRR))
            [11] => ((MML))
            [12] => ((OGC))
            [13] => ((RES))
            [14] => ((ALS))
            [15] => ((NVT))
            [16] => ((SXL))
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            [19] => ((QRX))
            [20] => ((NUF))
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            [2] => ILU
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            [6] => BHP
            [7] => MBN
            [8] => FGE
            [9] => GBG
            [10] => GRR
            [11] => MML
            [12] => OGC
            [13] => RES
            [14] => ALS
            [15] => NVT
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            [17] => SSM
            [18] => PMV
            [19] => QRX
            [20] => NUF
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This story features APA GROUP, and other companies.
For more info SHARE ANALYSIS: APA
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

– Brokers tipping second half global improvement
– Model portfolios adjusted accordingly
– Consensus overweight on banks
 

By Greg Peel

As I write, the ASX 200 is looking undecided at the flatline. Traders and investors appear unsure as to whether it's worth selling any further from or here, or as to whether it's yet time to buy. Last night's trade on Wall Street exhibited a similar lack of conviction.

Yesterday the ASX 200 breached the previous low for the year, set in March just after the Japanese earthquake. That earthquake is significant so we'll come back to it. The S&P 500 on the other hand remains a couple of percent above the same March low, but then the US does not have the same currency issue. Such technical levels are important because they at first offer support, but can also suggest accelerated downside if convincingly breached.

The reasons we're back down here having bounced up to new highs post-earthquake are pretty clear. Greece is back needing more bail-out funds, contagion fears are rising again in Europe with Spain now in the frame, China's data indicate a slowing economy as well as CPI inflation pressures and, most recently, the US economic recovery appears to have stalled. The latter has been particularly noticeable in a big drop in the manufacturing PMI and a sudden drop in jobs growth. And the US housing market is now double-dipping.

From the US perspective, Fed chairman Ben Bernanke is not as concerned as markets have been. He sees a bounce in activity in the second half and a continuing modest, albeit frustrating slow, economic recovery with bumps along the way as expected. Last night's Fed Beige Book backed up Bernanke's view. Only four of twelve Fed regions were seeing slowing growth over the past month, seven were flat and one was seeing accelerated growth. And the slowing and flat-lining regions cited two clear reasons for their weak performances – the weather and the earthquake.

The worst Mississippi flood in however long and the most damaging tornadoes don't help economic performance. There's not much we can do about the weather, but if the Mississippi flood proves to be one out of the box like the Queensland floods then one can only assume the recovery can now resume. As for the earthquake, well it appears markets were simply too quick in assessing its global impact.

There was a lot of talk back in March-April that while Japan would suffer in the short term it would bounce back sharply in the medium term once rebuilding commenced. It has now commenced at a pace, but the shorter term impact has simply been underestimated. It has been “chaotic”, in that loss of production of specialised parts used in electronic goods manufacture and particularly auto manufacture has flowed through, step by step along the supply chain to end-production, sales and revenues in both Japan and the US, as well as elsewhere . If you can't get a part then you can't build that car and if you can't build cars you can't sell them. If you can't build them you have to lay off workers and if you can't sell them your earnings are shot. The reality is it has taken until May and June for the impact to reach the data.

But by July, one presumes, the data will start to turn back the other way as the parts start to flow once more.

This is certainly a view held by the Fed, as well as by analysts at many major international broking houses. The bounce-back in Japan will flow into the US, where receding floodwaters will also provide a boost. And later this month, an announcement on a new bail-out package for Greece should once again quell eurozone fears, and an easing of food inflation in China should ease excessive Chinese tightening fears. Consensus has it that things can only get better.

How then are those broking houses positioning their model portfolios to exploit this view?

Deutsche Bank sees an improving risk appetite supporting resources stocks and believes Australian banks now look cheap and have limited downside from here. Industrial cyclicals are not particularly attractive however, even though many look cheap at these levels. More earnings downgrades could come and the strong Aussie is the biggest hurdle. Defensives have less downside risk and valuations here don't look stretched.

Deutsche is overweight Australian resources, resource services, banks, food retailers and utilities.

RBS Australia has decided to ease off in utilities and shift funds into banks which, within the analysts' model portfolio, has been achieved by pulling back the overweight in Australian Pipeline ((APA)) and going overweight Westpac ((WBC)).

RBS has also decided it's time to take profits in Iluka ((ILU)) following its astounding run, given the recent mineral sands price hikes mean there won't be any new news for a while. The analysts are loading up on Fortescue ((FMG)) as the greatest beneficiary of receding concerns over Chinese growth.

On the short side of the portfolio, RBS has swapped its short in Billabong ((BBG)) for a short in Brambles ((BXB)).

BA-Merrill Lynch is also now finding banks attractive. The RBA is now looking less aggressive, valuations are now reasonable on forwards PEs under 10x, and if Chinese banks are looking more risky an earnings proposition given stiffer and stiffer capital requirements then Aussie banks may well offer a substitute for global investors, Merrills suggests.

Merrills has tweaked its model portfolio by adding 5% weighting to the big banks, taking that from a 2% less weighting in both BHP Billiton ((BHP)) and Rio Tinto ((RIO). The portfolio is now overweight (by 7%) banks, property (2%) and infrastructure (3%) and underweight miners (6%), and other materials (4%) and is square (market weight) on mining services.

Moving to small caps, Citi sees a total return for the Small Ords of 24.5% in the twelve months ahead. The biggest boost will come from gold and iron ore in the resources sector, the analysts suggest, with positive contributions also provided by capital goods and consumer discretionary in the industrials space.

Citi has moved Mirabela Nickel ((MBN)) into its “Top Buys” resources portfolio and Forge Group ((FGE)) into industrials. 

The analysts' resources model portfolio now includes Mirabela, Gindalbie ((GBG)), Grange ((GRR)), Medusa ((MML)), OceanaGold ((OGC)) and Resource Generation ((RES)). Industrials feature Forge, Alesco ((ALS)), Navitas ((NVT)), Southern Cross Media ((SXL)), Service Stream ((SSM)), Premier Investments ((PMV)) and QRxPharma ((QRX)).

Citi has Nufarm ((NUF)) as its only “Top Sell”.
 

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