Weekly Broker Wrap: Risk Aversion Dominates

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    [0] => Array
        (
            [0] => ((TLS))
            [1] => ((ANN))
            [2] => ((AMC))
            [3] => ((CSR))
            [4] => ((ABC))
        )

    [1] => Array
        (
            [0] => TLS
            [1] => ANN
            [2] => AMC
            [3] => CSR
            [4] => ABC
        )

)

This story features TELSTRA GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: TLS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Andrew Nelson

The week past saw risk aversion rear its ugly head with risk assets and even the perceived safe haven gold encountering serious headwinds. No surprise thus risk aversion was back at the top of the focus list for analysts and investment specialists across the Asia-Pacific region.

Bank of America-Merrill Lynch released a little gem during the week; the EM and Asia Fund Manager Survey. The survey is bit of a what’s hot and what’s not among fund managers across Asia and other emerging markets.

What’s Hot? Risk Aversion. What’s not? Risk.

What amounts to an ongoing parade of misguided global policy, compounded by the absence of any sort of end in sight to the European crisis, has robbed investors of confidence in what is traditionally a positive month. According to the data from Merrills, global fund managers reported cash levels at 4.9% (pretty high), while equity allocations improved but only by 8.0%, which the broker notes is pretty low by historical standards. Historically, the average equity overweight allocation is +26.0%, note the analysts.

The fundies are also telling BA-ML that 2012 will be a difficult year for growth. According to the survey, 27% of investors think the global economy will slow over the next 12 months. The only silver lining is that while China is expected to keep on cooling, more than 80% of fund managers surveyed believe that China will at least book growth of better than 7.0% and thus avoid a “hard landing”, as the broker puts it.

Market strategists at UBS share the outlook about 2012 being a year of slow growth. UBS observes investors as a group already moved into safety mode in the year past and this raises a problem, because the popular defensives like Telstra ((TLS))), Ansell ((ANN)), Amcor ((AMC)), Coca Cola Amatil ((CCL)) are now overbought, says the broker.

UBS warns this means either the defensive are going to cycle downwards, or we’re going to see some significant downgrades next year in other areas of the market. UBS takes a brave step next, saying all the defensiveness is looking a bit overdone given expectations for domestic economic growth and sluggish, but still positive global growth.

The fund managers surveyed by BA-ML also share this mildly optimistic outlook on there being at least some growth around. Without a doom and gloom outlook from Asia and the EMs, there is still a tone of scepticism, but with an undertone of hope.

Resources and Materials equities are expected to keep on doing it tough, say both Goldman Sachs and BA-ML. After revisiting FX assumptions and looking at domestic Australian housing construction, GS has turned a little sour on the likes of James Hardie ((JHX)), Boral ((BLD)) and especially CSR ((CSR)).

In a nutshell, the broker thinks the recent slowing trend in housing construction will continue at least over the short-term, while the USD won’t have the legs to keep on rallying, as it had done over the course of last week.

Adelaide Brighton ((ABC)) is a lone Buy amongst the big materials guys and this is due to its link with the miners. Boral and CSR are perceived as more of a 2013 story. Goldmans admits the RBA rate cuts expected early next year will help, but it’ll take 6-12 months for the benefits to percolate down.

There’s an interesting split on steel, with BA-ML seeing little hope for big upside here as long as the miners keep making good money on iron ore, the AUD stays strong and the Americans and Europeans don’t have any money to buy anything with.

Of the three big boys in the sector -Bluescope ((BSL)), OneSteel ((OST)) and Sims Metal ((SGM))- Bluescope’s earnings demonstrate the best leverage to an improving steel sector. When and if… The broker notes OneSteel is the cheapest on a PE basis and it will probably remain so for the foreseeable future, given its high gearing levels and the fact current earnings are being driven more by iron ore sales than steelmaking operations.

Sims Metal is wholly and solely a US recovery story and there are scarce bets being taken at that table right now.

RBS is a little more upbeat about Bluescope and OneSteel, noting both are trading so close to liquidation value that there must be some upside, somewhere. They’re both at Hold and the broker does feel the AUD and US/Europe stories will keep the pressure on, but they are both looking more and more attractive in corporate terms given how cheap they are looking.

Ultimately, the broker does see improvements in the steel price coming next year, but until then any sort of takeover premium isn’t near enough justification to stick one's neck out. RBS sums up by saying until there’s some real improvement in steel prices, Bluescope isn’t a buy. And until the Chinese start buying iron ore again (late Q1, early Q2 next year), OneSteel isn’t either.

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