Brokers See Value

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            [2] => ((TEN))
            [3] => ((TTS))
            [4] => ((LEI))
            [5] => ((AMC))
            [6] => ((NAB))
            [7] => ((LLC))
            [8] => ((RIO))
            [9] => ((DJS))
            [10] => ((WTF))
            [11] => ((AIX))
            [12] => ((WBC))
            [13] => ((CPA))
            [14] => ((ALS))
            [15] => ((RES))
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            [2] => TEN
            [3] => TTS
            [4] => LEI
            [5] => AMC
            [6] => NAB
            [7] => LLC
            [8] => RIO
            [9] => DJS
            [10] => WTF
            [11] => AIX
            [12] => WBC
            [13] => CPA
            [14] => ALS
            [15] => RES
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This story features WOOLWORTHS GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: WOW
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Unsurprisingly, the past few days' volatile activity in the Australian and global stock markets has prompted much response from the various broking houses operating in the local market and their equity strategists in particular. This article collates many of those views. The reports straddle three days, so some were written before Monday's rout and some before Tuesday's plunge-and-bounce and all before today's bounce-some-more.

Immediate timing makes the reports no less relevant however, because we are not talking day-trader strategies here. We are talking medium to longer term investment strategies based on the extensive correction the local market has experienced since April as well as recent US downgrade reaction.

America's loss of its AAA rating, says Citi, was not totally unexpected. The timing could have been better handled, but with no change in sight for the US debt “trajectory” (ie onwards ever upwards) and the toxic political climate it appears S&P felt it needed to act. Investors have seen policy missteps as the primary market risk for a good while, Citi suggests. 

History shows that past periods of crisis have ended with major policy upheavals, Citi's US equity strategy team notes. World War II followed the Depression, a decade of inflation in the seventies ended with the Fed finally deciding to attack but the resultant recession was severe, and even the bursting of the tech bubble in 2001 brought about a response which had ramifications for a decade. But all moves halted the stock market slide.

“It is plausible that a period of meaningful austerity could be the trigger this time around,” says Citi, “but it may require political courage that has been lacking”.

Politics, and policy, is a common theme among the brokers' reports.

Before the Big Bounce (and let's not forget one swallow does not a summer make), BA-Merrill lynch strategists were weighing up the possibility of a 2008-style response in Australia, beginning with an initial RBA rate cut of 50bps accompanied by another government free-money hand-out to low income earners. Things may have stabilised for now but if they haven't, Merrills' preferred stocks under such a scenario would be Woolworths ((WOW)), Wesfarmers ((WES)), CFS Retail ((CFX)), Westfield Retail ((WRT)), Asciano ((AIO)), Toll ((TOL)), Stockland ((SGP)), Mirvac ((MRG)), Seven West Media ((SWM)), Ten ((TEN)), Tatts ((TTS)) and Tabcorp ((TAH)). 

Merrills has also identified a group of stocks which have typically performed well after an RBA rate cut, which include Fairfax ((FJX)), Flight Centre ((FLT)), Coca-Cola Amatil ((CCL)), Wesfarmers, Woolies, Leighton ((LEI)), Toll, CFS Retail, Mirvac, Stockland and GPT Group ((GPT)).

If we have truly found stability now in financial markets then maybe another round of 2008 stimulus won't be necessary, but the Westpac economists, for one, are still expecting a rate cut come September (speaking on radio only today).

Credit Suisse's Asia-Pacific team notes investors are lacking confidence in governments, represented by the fact investors are not buying bonds as they normally would at such times but are looking for alternative safe havens such as the Swiss franc and gold instead, both of which are no longer cheap. Investors are eschewing sovereign risk. This is causing cash to be hoarded and not to make its way into lending to encourage economic growth. Could the right policy response turn things around?

If the search for safety continues, Credit Suisse suggests Australian bonds and banks should outperform given their superior credit rating and yield. Low global growth will however weigh on commodity prices, cyclicals and the Aussie dollar.

It is hard to find any broker that doesn't suggest Australian banks are good value at this point. As for the resources sector, there is disagreement.

There is little disagreement that Australia is in an enviable position, able to cope with further global turmoil given scope to act. Australia has “plenty of conventional policy firepower,” notes UBS, unlike the US and Europe. China also has “ample” capacity to reverse its tightening and ease on global risks. This is ultimately positive for both banks and resources, UBS suggests.

UBS has been anticipating “some sort of bounce” but notes uncertainty remains “extremely elevated” either way. The strategists are remaining neutral at this point in looking for relative value but have also considered relative value for those investors who are either bullish from here or bearish. UBS has selected three groups of stocks showing relative value on an oversold basis in low risk (for the bearish), moderate risk (neutral) and high risk (bullish) categories.

For low risk, UBS likes CSL, Amcor ((AMC)), Crown ((CWN)) and Transurban ((TCL)). For moderate risk UBS likes Goodman Group ((GMG)), National Bank ((NAB)), ANZ Bank ((ANZ)) and Lend Lease ((LLC)). For high risk UBS likes Boart Longyear ((BLY)), Incitec Pivot ((IPL)), PanAust ((PNA)) and Rio Tinto ((RIO)).

JP Morgan had previously considered Australia stuck in a “Bad Goldilocks” conundrum. The Australian economy has not been hot enough to promote earnings growth but not cold enough to prompt a rate cut. That deadlock may now have been broken, at least to the point where Australia is one country with policy options. If global weakness continues, the RBA has room to move to the downside which could break the Bad Goldilocks dilemma.

If that is the case, JPM sees domestic earnings risk as more attractive than global earnings risk in Australia's listed companies. On that basis the strategists like Aussie banks, but are remaining underweight the miners.

It was last Thursday when the Goldman Sachs strategists decided “the bears are running amok”. Global issues were impacting on sentiment, and when sentiment is crunched it means price/earnings multiples are crunched, meaning share prices are crunched before earnings forecasts are even downgraded. Goldmans are now assuming an average Australian market PE of 11.5 in FY12, which is one standard deviation below the historical average.

Goldmans has thus cut its ASX 200 price forecasts to 4450 from 5125 at end-2011 (-13%), 4800 from 5400 from mid-2012 (-11%) and 5000 from 5600 at end-2012 (-11%).

This implies a 22% market return from these levels over 12 months comprising 18% in capital return and a 4% yield. That sounds pretty good, but Goldmans has also forecast a “recession scenario” which would see the ASX 200 at 3600 by end-2011 and 4335 by mid-June, suggesting only a 10% 12 month return (unless, of course, you wait until 3600 and then buy).

The strategists nevertheless expect the market to “throw up some excellent value” in the next month, and on that basis they like Amcor, ANZ, BHP Billiton ((BHP)), Bradken ((BKN)), Brambles ((BXB)), Cochlear ((COH)), CommBank ((CBA)), CSL ((CSL)), David Jones ((DJS)), Iluka ((ILU)), PanAust, Woolies, WorleyParsons ((WOR)) and Wotif ((WTF)).

That's a mixed bag of banks, miners, cyclicals, defensives, domestic and global earnings. Goldmans also takes a “very favourable view on gold exposure in the current [short term] environment”, and thus likes Newcrest ((NCM)).

Going a step further, Goldmans suggests deep cyclicals tend to be oversold in bear markets and thus offer the greatest upside leverage to the recovery phase. Examples are Orica ((ORI)), Incitec, OneSteel ((OST)), Bradken, United Group ((UGL)), Qantas ((QAN)) and Macquarie Group ((MQG)).

In such a situation the broker also expects investors to seek out defensive names, and here the strategists like Wesfarmers, Transurban, Asciano, CSL, Australian Infrastructure ((AIX)) and CFS Retail.

Deutsche Bank notes the US market began to weaken steeply after the poor June quarter GDP result (which included a big downward revision to the March quarter result). Speaking before Monday, the strategists suggest the US market was now pricing in no earnings growth in the US over the next 18 months, despite the June quarter results season showing 76% of S&P 500 companies beating record earnings estimates by an average 5%. 

The gap from from the US ten-year Treasury yield to the dividend yield on the S&P 500 is now the widest in 30 years and the average PE of 10.5x matches that reached in the GFC. A recession could see prices move lower, notes Deutsche, but with US discretionary spending already around record lows the scope for further downside is actually limited.

Downgrades to Australian earnings forecasts must come (and indeed they have already begun). Deutsche suggests that while downgrades of 7-8% are appropriate in Australia already 15% has been priced in. The strategists have lowered their year-end forecast for the ASX 200 to 4550 from 5100 and see 4950 by mid-2012.

Deutsche likes banks and resources.

RBS Australia believes the current downturn means the resource sector looks cheap. The analysts prefer Fortescue ((FMG)), Rio and Iluka.

Macquarie notes that although the market as a whole will take time to find a “bottom”, quality stocks with earnings certainty will already have begun to turn. For the Australian market to find a bottom, Macquarie believes the yield curve will first need to normalise via a rate cut and excessively optimistic FY12 earnings forecasts will need to be downgraded. That could take a few months, the strategists point out.

But for quality stocks, Macquarie suggest the preconditions for share price lows are already in place. On that basis the strategists like CBA, Westpac ((WBC)), Woolies, Coca-Cola, Wesfarmers, Ramsay Healthcare ((RHC)), Transurban, Amcor, Rio, Commonwealth Property Office ((CPA)) and CFS Retail.

And the good news is that, in short, Macquarie does not see 2011 as 2008. This downturn reflects declining confidence surrounding the view on global growth, the strategists note, courtesy of the need to address unsustainable public debt. Such events, although traumatic, often prove excessive and therefore present buying opportunities for quality stocks.

For the last word we go back to Citi, and the broker's small cap analysts. They've been looking at high-yield names as a means of generating returns in these volatile times and have concentrated on stocks with good cash coverage, low debt and conservative growth forecasts.

In small industrials, Citi likes Alesco ((ALS)), Forge Group ((FGE)), Southern Cross Media ((SXL)), Service Stream ((SSM)), Pacific Brands ((PBG)), QRxPharma ((QRX)), Henderson Group ((HGG)) and NIB Holdings ((NHF)).

In small resources, Citi likes Gindalbie ((GBG)), Grange ((GRR)), Mirabela ((MBN)), Medusa ((MML)), OceanaGold ((OGC)), Resource Generation ((RES)) and Regis ((RRL)). 

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