Weekly Broker Wrap: A Little Bit More Optimism

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Andrew Nelson

We’ll start off this week’s wrap with what fund managers from around the world have to say about financial markets in October 2012. Last week, analysts at Bank of America-Merrill Lynch put out the findings from their Global Fund Manager Survey and while they don’t claim that funds managers are bursting with optimism, they do note that there is an ongoing if cautious shift towards growth.

However, we’re still a long way away from needing to book any party space, or to start printing the invitations, with the broker noting a still large allocation to cash holdings. As far as growth goes, BA-ML notes fund managers like US domestic demand growth plays, as opposed to value plays like Japan and Resources.

Sentiment is certainly improving, if slowly. The survey shows that 20% of respondents expect the global economy to get stronger. This is up from 17% last month. However, the broker notes a majority of those polled also expect weaker profit growth, with China growth expectations especially taking a hit. Only 5% of investors now expect above-trend growth from the Middle Kingdom in 2013. 

What are they afraid of? 42% put the US fiscal cliff on the top of their tail risk list, with the EU debt crisis garnering just 27%. The bigger issue here, however, is that only 20% believe the cliff is actually priced into equities at the moment. And while cash holding may still be high, cash balances have pulled back to 4.3% from 4.5%. That means the broker’s Cash Rule buy signal is also terminated after 5 months.

There was a small shift to equities from bonds in October, seeing the largest positive moves to commodities in the last six months. The analysts also see a shift in preference to corporate bonds, and when asked how more exposure to high beta equities would be funded, 37% said government bonds, 33% responded with cash and 19% would sell defensive equities, while only 4% would reallocate from corporate bonds.

With less money heading to Japan, equity funds made their way to emerging markets, the UK and the eurozone. BA-ML notes this is the first time in almost 2 years that eurozone equity weightings matched that of US. 72% think the yen is overvalued, 53% think the euro is overvalued, while just 16% think the US dollar is overvalued.

The sectors that saw the best support in October were Tech and Pharma, while Banks and Utilities were the least liked. Otherwise, investors remain long on US domestic demand plays like Consumer Discretionary and are very short China-plays such as Energy and Materials.

The next cab off the rank was a new assessment of the small to medium business (SMB) segment of the Australian telecom services market from analysts at Goldman Sachs, prompted by the broker picking up coverage of M2 Telecommunications Group ((MTU)).

The broker estimates the SMB market size is somewhere in the neighbourhood of $7bn in revenues, or about 20% of total telecom market revenues. The market is comprised of about 735,000 businesses with 2-20 seats and around 84,000 businesses with 21-200 seats.

However, what really makes this segment of the market unique is that of all the telecom industry market segments, the broker notes the SMB segment is the most leveraged to the economy. Goldman’s points out that during periods of slower economic growth, SMB spending on IT&T contracts as businesses look to reduce overheads and conserve capital.  The broker sees this as being one of the main reasons that during periods of slow economic activity and weak business confidence, like 2009 and 2012, SMB telecom market revenues slow significantly.

On the broker’s numbers, Telstra ((TLS)) currently owns the SMB market with a 65%-70% share. Next is SingTel’s ((SGT)) Optus at 10%-15%, while up and comer MTU has become the third largest player in the SMB market, with around a 5% share.   

While Goldman’s notes Telstra is best positioned to compete in the SMB space given its range of products and expanded distribution, the broker also believes it will be tough for Telstra to squeeze that much more juice from this orange given its already dominant share, increasing levels of competition and high price points. 

The broker believes both iiNet ((IIN)) and TPG Telecom ((TPM)) are looking at the SMB market as the next big opportunity, with TPM likely to cause some disruption on the price front. However, the broker also thinks both companies lack a sufficient enough distribution footprint to cause too many headaches. As a reseller, MTU cannot differentiate on price, but it does have a nationwide dealer network. A-Ha!

Goldman Sachs has initiated coverage on M2 Telecommunications with a Neutral call. Looking at the FNArena Database shows us one Buy call from Citi, who just initiated coverage last month.

Macquarie put out an interesting comment on Banks and bank rates last week, noting once again the nation’s major lenders have stood firm with deposit rates after the prior week’s surprise 25bps cut from the RBA.  

The broker notes this decision has seen deposit competition intensify to levels not seen since May and could mean the banks have reached the tipping point in terms of deposit prices. While Macquarie admits this is positive from a loan-to-deposit ratio (LDR) perspective and also positive in terms of getting ready for the raft of new liquidity requirements, Macquarie worries the inability to pass on rate cuts to deposits could come at a significant margin cost to the banks.

Macca’s notes the average major bank’s cost of deposits has increased between 6-11bps since the October rate cut. This adds up to $0.2-$0.7m cost to the majors every day they delay reducing term deposit rates. It’s true the majors are clawing some back via out-of-cycle standard variable rate (SVR) re-pricing, they are still running at a loss, losing $0.50m more a day compared to two weeks ago.

This latest development sees a shift in the broker’s sector preferences, removing its long National Australia Bank ((NAB)) position in favour of its most preferred stock, ANZ Bank ((ANZ)). The revised pairs trade Long ANZ/Short Westpac ((WBC)) play on cost-out work, earnings momentum and less exposure to the mining states.

Lastly, analysts at Morgan Stanley had a few things to say about a few sectors last week. First, the broker has called the end of the boom years for consumer electronics retailers. The broker notes industry profits remain pressured for four reasons: technological improvements are slowing, there are too many stores, products and purchasing channels are both becoming digitized and Apple is out there eating everyone’s lunch. The view saw the broker downgrade JB HiFi ((JBH)) to Underweight last week, with Harvey Norman ((HVN)) already there.

The broker also notes the Healthcare sector has been on a bit of a tear despite net in-line earnings delivery and relatively flat outlook commentary. Healthcare PE re-ratings have been the dominant driver and the broker believes the currently rich valuations are likely to be sustained until market EPS trends reverse. In the meantime, or until earnings revisions reverse, healthcare is likely to maintain its premium to fair value, says Morgan Stanley.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms