Brokers’ Conviction Is Defensive

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            [3] => ((NWS))
            [4] => ((WES))
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This story features MINERAL RESOURCES LIMITED, and other companies.
For more info SHARE ANALYSIS: MIN
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

– Threat of more earnings downgrades ahead
– Other than mining, time to go defensive
– Even contrarian strategies are at risk 

By Greg Peel

“Australia has serious challenges ahead,” suggest the equity strategists at Macquarie, “The impact of the mining boom on the rising AUD, near zero productivity growth, rising inflation, a cautious consumer, and fiscal policy focussed on other issues are leading to a deteriorating domestic operating environment.” The conclusion is that “Australia is in a period of wrenching structural change”.

We have recently seen extensive profit downgrades from the retail sector, and on a wider timescale downgrades have also been forthcoming from cyclical industrials. For more than a year, stock analysts have been gradually pulling back forecast earnings as the reality hits home that the expected bounce out of the GFC just ain't happening yet, except in mining. It was supposed to begin in FY11 but now it looks like even FY12 is a stretch.

For retail, it may never happen. At least not in terms of returning to glory days, in this generation. That's the way the RBA now sees it, and incidentally the way FNArena has seen it since 2008.

Macquarie suggests there is a risk of further “large” earnings forecast downgrades in consumer related industries and cyclical industries in general, irrespective of downgrades already booked. For that reason, the equity strategists' preferred portfolio is now “highly defensive” and centred on consumer staples, infrastructure and healthcare.

To reflect their view the strategists have added toll-collector Transurban ((TCL)) to their portfolio and increased the weightings in hospital operator Ramsay Healthcare ((RHC)) and staple beverage retailer Coca-Cola Amatil ((CCL)). Mining is still at the forefront nevertheless, and Macquarie has added Atlas Iron ((AGO)) and increased the weighting in Mineral Resources ((MIN)).

Exiting the portfolio are retail-exposed Westfield ((WDC)) along with oil & gas giant Woodside ((WPL)) given the impact from the rising Aussie dollar on the company's future earnings hopes.

Macquarie also runs a conviction list – those stocks for which it has most conviction either positively or negatively – and given solid success on outperformance in CFS Retail Property ((CFX)) and Bradken ((BKN)), those names have now been removed (albeit the broker retains an Outperform rating on both).

Credit Suisse strategists like to take the contrarian angle, and note “The Australian market is cheap and global risk appetite is close to panic”. On that basis, CS would normally be looking for opportunities to “buy beta”, which means buying cyclical stocks. However, this time the strategists are none too keen on their own model given ongoing global deleveraging.

European Union officials may have made some progress in slowing the pace of deleveraging in that region, CS notes, but as the focus swings from sovereigns to banks the stiff austerity measures around the EU (which includes the UK) mean a risk of further deleveraging from the private sector. The strategists believe Washington will ultimately lift the US debt ceiling but at what cost? Tough budget cuts will only mean similar austerity in the US, putting the consumer spending recovery at risk.

So while now might normally be the time Credit Suisse “buys beta”, in the shorter term the strategists are going the other way. They see defensive (low beta) stocks outperforming.

Goldman Sachs has made only one change to its conviction list this time around, and that is to remove Aquarius Platinum ((AQP)). Goldmans is bullish platinum but just does not like the sovereign risk in Zimbabwe and now even South Africa.

Over the past three months the only other changes to the GS list have been the additions of National Bank ((NAB)) and Woodside ((WPL)), which join CFS Retail, Iluka ((ILU)), News Corp ((NWS)), PanAust ((PNA)), UGL ((UGL)), and Wesfarmers ((WES)).

It's been a fun ride in News, one assumes, but on 12-month basis Goldman's conviction list has outperformed by 12%.

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