Treasure Chest: New Ideas From The Brokers

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By Greg Peel

The ageing global population is leading to increased demand for safe haven bank deposits which in turn has led to a price/earnings de-rating for equities given the smaller pool of funds being invested in stocks. Such a trend has been readily apparent in recent years, post-GFC, but RBS Australia notes the trend actually began following the market downturn of the early noughties (tech-wreck, 9/11). Given the global population will continue to age, de-rating is expected to continue.

More recently the significant rise in price (fall in yield) of safe haven sovereign bonds on extensive central bank monetary policy easing has seen a shift of investment out of such assets, given they are unlikely to rise much further, and into lower grade (higher yield) fixed income assets, RBS notes. It has also meant solid demand for “defensive” equities, which thus acts as a counterbalance to the general de-rating of equities. Australian banks and consumer staple sectors offer global investors an attractive dividend yield. The yield on telcos, which basically means Telstra ((TLS)), is also high but not as high as can be found in Germany, Finland and the Netherlands, RBS points out. Australian utilities offer lower yields than those of Germany and Finland but higher than the US.

The bottom line is that RBS believes it is too early as yet to rotate out of the global yield trade (despite prices of yield stocks having had a good run in many cases) and indeed sees further potential upside.

In light of a combined drop recently in both iron ore prices and the Aussie dollar, the Macquarie quant boffins decided to have a look at which stocks historically have the highest sensitivity to the commodity price/Aussie combination. It is of not great surprise that sensitivity to one is very similar to that of another, given the close correlation (normally) of commodity prices and the currency.

Note that while lower commodity prices impact on resource sector export earnings, a weaker currency acts as a dampener because exporters receive more Australian dollars at the US dollar price. And vice versa.

The stocks that benefit the most from a falling Aussie/commodity price combination, according to the Macquarie analysis, are defensives such as ResMed ((RMD)), Treasury Wine Estate ((TWE)), Coca-Cola Amatil ((CCL)), SP Ausnet ((SPN)) and Ansell ((ANN)).

The stocks that suffer the most are PanAust ((PNA)), Lynas ((LYC)), Atlas Iron ((AGO)), Fortescue Metals ((FMG)) and Boart Longyear ((BLY)).

Back on Earth, the Macquarie equity analysts have conducted a bit of “spring cleaning” of their Marquee Ideas list (which includes those stocks for which the analysts have the greatest positive or negative conviction) in response to movements post reporting season. The analysts also list preferred “pairs trades” (long/short).

The pairs trades Macquarie has added are long National Bank ((NAB))/short Westpac ((WBC)), and long Fortescue/short Atlas Iron. These trades replace long NAB/short CommBank ((CBA)), which has made a slightly positive return, and long Santos ((STO))/short Woodside ((WPL)) which has been a slight loser.

On an outright basis, Macquarie has added the emerging leaders REA Group ((REA)) as a Buy and Cabcharge ((CAB)) as a Sell. These replace three earlier Buy ideas, being Mermaid Marine ((MRM)) which has been a slight winner, Seven Group Holdings ((SVW)), which has been a big loser, and RCR Tomlinson ((RCR)) over which the analysts are still in therapy.

Macquarie's big cap Marquee Ideas include Amcor ((AMC)), Ansell, BHP Billiton ((BHP)), David Jones ((DJS)), Newcrest ((NCM)), Oil Search ((OSH)), and QR National ((QRN)) and in property the analysts like CFS Retail ((CFX)).

Goldman Sachs maintains its own Conviction List but also an Emerging Companies Focus List. The ECFL provided a 7.2% excess return in August and a 17.5% excess return over 12 months. The analysts have now removed those stocks which have had a positive run and added some new contenders.

In go Ausenco ((AAX)) and OceanaGold ((OGC)) and out go Bradken ((BKN)) and Teranga Gold ((TGZ)).

Stocks remaining in the list are Austbrokers ((AUB)), Carsales ((CRZ)), Emeco Holdings ((EHL)), FlexiGroup ((FXL)), Henderson Group ((HGG)), iiNet ((IIN)), IRESS ((IRE)), Kinsgate Consolidated ((KCN)), Kathmandu ((KMD)), Mineral Deposits ((MDL)), McMillan Shakespeare ((MMS)), SAI Global ((SAI)), Sandfire Resources ((SFR)) and Super Retail ((SUL)).

Morgan Stanley's Asia-Pacific analysts have published a short term Tactical Idea, being buying Stockland ((SGP)). MS has upgraded Stockland directly to Overweight from Underweight following a 6.7% share price fall post result, or 5.3% more than the REIT sector.

Despite a weak FY13 earnings profile, the broker highlights a 6.2% compound average growth rate (CAGR) forecast for 2013-16, and a 7.5% forecast FY13 dividend yield.
 

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