Weekly Broker Wrap: China To The Rescue (Soon)

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By Rudi Filapek-Vandyck

What was the most important event of the week past? Jim O'Neill, Chairman of Goldman Sachs Asset Management, asked everyone he encountered during the week, from family members and friends, to colleagues at work and elsewhere. The answers he received: Italy. When asked about other events, most persisted: Italy. Only one person mentioned China.

China's consumer inflation (CPI) is in rapid descent and many an economist is now confident we are going to witness CPI data that start with a "4" in the months ahead, from 5.5% this month and from 6%-plus in the previous months. If it wasn't for the all-dominating news flow and general focus on Italy, China's slowing inflation would have received the attention it deserved. Because Chinese inflation starting with 4 is going to make the authorities in Beijing comfortable enough to move the foot off the tightening pedal and start thinking "stimulus" again.

Don't just take my word for it. The number of research reports about China that are now predicting a switch to economic stimulus has increased exponentially this month. In fact, say economists, China's switch is already taking place at a time Europe and Italy are commanding investors' full attention. According to freshly released data this week, new CNY loans rebounded strongly in October to CNY 586bn from CNY 470bn in the previous month. Andi Ji at Commonwealth Bank points out that if the October momentum continues, new CNY loans in the final quarter could reach CNY 1,800bn, up significantly from CNY 1,511bn in Q3.

In other words: China is already confident enough to loosen the tightening and to start stimulating again. In typical Chinese style, it's being done with no fanfare and no announcements in that regard. This, however, doesn't make it less important. Jim O'Neill predicts this is how the BRIC nations can and will support economic growth next year. Combined they will grow their respective economies by an estimated extra US$2trn, which is the equivalent of a troubled Italy. Investors with a specific interest in resources and resources stocks on the share market will be delighted as history shows Chinese tightening tends to have a downward effect on prices, but stimulus usually has the opposite impact.

Prospects of falling earnings forecasts are still attracting a lot of attention (for obvious reasons) and analysts at RBS this week tried to determine where some of the risks are located for potentially positive and negative surprises. On the positive side, they selected Perseus Mining ((PRU)), Santos ((STO)), Newcrest Mining ((NCM)), Carsales.com ((CRZ)) and Amcor ((AMC)) as prime candidates to surprise with their profit results this year. When it comes to potential negative surprises the analysts selected Mineral Resources ((MIN)), Myer ((MYR)), Macquarie ((MQG)), Cochlear ((COH)), CSL ((CSL)), Primary Healthcare ((PRY)), Qantas ((QAN)), OneSteel ((OST)) and Ten Network ((TEN)).

RBS also believes mining services are finally going to live up to the hype and witness peak activity levels in the second half of FY12, which would be after New Year, with good follow-through in FY13 and FY14. In case you hadn't noticed as yet, shares in the likes of Fleetwood ((FWD)), Campbell Brothers ((CPB)) and Monadelphous ((MND)) have met with increasing demand this month and judging by RBS's report, this is unlikely going to subside anytime soon. Note that RBS doesn't expect any fireworks in earnings in FY12 just yet, but there's plenty of upside coming in subsequent years.

The stockbroker advises investors should look for contract exposure to iron ore, coal and energy. RBS believes Downer EDI ((DOW)) is significantly undervalued, Lend Lease ((LLC)) is likely going to surprise to the upside, while Monadelphous is simply the best single name exposure to benefit from increases in resources capex. The stockbroker is cautious on WorleyParsons ((WOR)), predominantly because of the lofty share price.

Market strategists at Deutsche Bank have taken the opportunity to express their skepticism about domestic cyclicals in the Australian share market even with a RBA rate cut in the bag and possibly more to come and with sold down valuations in the media, transport and retail sector. Deutsche Bank's motivation is simple: Australian households seem to be spending more on services than goods. Unfortunately, the market has more exposure to goods.

Deutsche Bank's model portfolio contains Virgin Blue ((VBA)), Crown ((CWN)), Seek ((SEK)), Woolworths ((WOW)) and Wesfarmers ((WES). The analysts also like Flight Centre ((FLT)), Qantas ((QAN)), Kathmandu ((KMD)), Premier Investments ((PMV)), Domino's Pizza ((DMP)), Collins Foods ((CKF)) and Tatts ((TTS)).

Goldman Sachs suspended its coverage of UGL ((UGL)) this week as the investment banker is now acting as corporate advisor. This meant that UGL was dropped from GS's Conviction List which now contains BHP Billiton ((BHP)), Iluka ((ILU)), Iress ((IRE)), National Australia Bank ((NAB)), Wesfarmers ((WES)) and Woodside ((WPL)) on the Buy side and sole Alumina Ltd ((AWC)) on the Sell side.

Quantitative researchers at Citi finally provided some welcome positive news for the Australian market from an international perspective; all those funds managers' surveys that place Australia in the least liked basket are now being countered by Citi's freshly updated country selection which has Australia fourth in the most attractive looking Top 5 alongside Brazil (1), Germany (2), Korea (3) and the UK (5).
 

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