The Australian Equities Outlook

Array
(
    [0] => Array
        (
            [0] => ((SUN))
            [1] => ((SGP))
            [2] => ((AMP))
            [3] => ((CWN))
            [4] => ((AMC))
            [5] => ((RMD))
            [6] => ((SWM))
            [7] => ((MYR))
            [8] => ((IAG))
            [9] => ((SEK))
            [10] => ((NWS))
            [11] => ((EGP))
            [12] => ((CCL))
            [13] => ((WES))
            [14] => ((WPL))
            [15] => ((OSH))
            [16] => ((RIO))
            [17] => ((NCM))
            [18] => ((DUE))
            [19] => ((TLS))
            [20] => ((WDC))
            [21] => ((CSL))
            [22] => ((PRY))
            [23] => ((BXB))
            [24] => ((AMC))
            [25] => ((IPL))
        )

    [1] => Array
        (
            [0] => SUN
            [1] => SGP
            [2] => AMP
            [3] => CWN
            [4] => AMC
            [5] => RMD
            [6] => SWM
            [7] => MYR
            [8] => IAG
            [9] => SEK
            [10] => NWS
            [11] => EGP
            [12] => CCL
            [13] => WES
            [14] => WPL
            [15] => OSH
            [16] => RIO
            [17] => NCM
            [18] => DUE
            [19] => TLS
            [20] => WDC
            [21] => CSL
            [22] => PRY
            [23] => BXB
            [24] => AMC
            [25] => IPL
        )

)

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

– Brokers anywhere from wildly to mildly optimistic
– ASX200 year-end targets range from 4850 to 5200
– Expect a rough patch before smoother sailing later in the year
– Brokers moving away from yield plays
 

By Andrew Nelson

It was a pretty good end to last year and a pretty good start to this one for equities, which begs the question that all of us want answered: what’s the story going to be in 2013?

Unfortunately, the turmoil of the last few years has left investors feeling a bit sceptical, not trusting the run and becoming increasingly concerned the recent re-rating of the market has happened despite continuing global challenges and a near stagnant domestic economy and little in the way of earnings growth in Australia.

Well, analysts from Citi aren’t quite as pessimistic, pointing out that while the market may have re-rated, it has only re-rated back to an average multiple. And with an increasing level of confidence in earnings growth over the next couple of years, the broker sees the ASX200 moving up to around 5200 by the end of this year.

To some extent, Citi has pinned its hopes on the more concerted work being done by governments and central banks, whose collective accommodative push over the past year seems to have provided a bit of a platform for growth. Risk is slowly being sought and at least to the broker, the global prospects look brighter.

What’s more, the broker notes the lower interest rates in Australia also seem to be gaining some traction, providing some much needed support to earnings. While high, the exchange rate has stabilised, while the recently rising equity market is also helping. Citi thinks this trend will continue, especially as consumer spending begins to respond a little more. If rates need to soften further to maintain the current momentum, Citi sees no problem with this, either.

Thus, Citi expects improving earnings and this will serve to take some of the blinding shine off of yield plays that intensified over 2012. The broker predicts mining stocks will continue on with their recent outperformance over banks, while cyclical stocks should start outperforming higher-yield stocks.

The view is not a new one from Citi, with the broker noting that it has highlighted a number of stocks that could benefit from improving conditions; these include Suncorp ((SUN)), Stockland ((SGP)), AMP ((AMP)), Crown ((CWN)), Amcor ((AMC)) and ResMed ((RMD)). This list has now been augmented to take in the last few months and sees the broker make a few additions. New inclusions include Seven West Media ((SWM)) and Myer ((MYR)), while IAG ((IAG)) and Seek ((SEK)) are removed. 

Analysts at Goldman Sachs are also positive on the year ahead, although not quite so much as Citi. The broker has pegged its year-end ASX200 price target from between 4800 to 5000. The broker expects a total return of 9% for 2013, comprised of 7% EPS growth and a 5% yield.

While Goldman’s admits this would still see Australia listed as a regional underperformer, it does follow directly on the heels of a year that saw Australia become a significant outperformer, delivering a total return of 20.3% in 2012.

However, Goldman Sachs’ does issue a bit of a warning along with its positive outlook: expecting a period of profit taking in the weeks ahead.

The broker notes domestic economic momentum remains sub-par. Also, its own numbers are pointing to at least modest downside risk to earnings forecasts as we head into reporting season.

Goldman’s also points out that equities have broken away from one year forward growth expectations in more developed markets, which suggests that growth expectations are either about to be revised higher, or more likely, equity prices will likely drift a little lower for a while.

Lastly, the broker notes that we are towards the top end of the historical range in terms of risk sentiment and momentum in risk appetite. However, this has historically indicated a period of profit taking, says Goldman’s. Thus, a period of consolidation appears likely in the nearer term.

The broker’s advice is to look for any pull back in the share market for chances to add to positions in the following sectors: Materials, Diversified Financials,Transport and Resources.

CIMB is also upbeat about the prospects of 2013, but like Goldman Sachs, only after a brief respite. The main driver is the current amount of global liquidity, which has helped developed economies into a state of moderate repair, while action in China is also seeing improvement, albeit gradual. This easy monetary policy has pushed bond yields down to historical lows, which is starting to pull money back in from the sidelines.  

However, for this domestic recovery to stay on track, the broker needs to see the RBA continuing to cut rates. Hopefully, by another 50bp in 1H13 to 2.5%, which would have the broker looking for 2.8% GDP growth in 2013. CIMB’s ASX200 price target is 5100 for the end of 2013, which would imply 8% capital growth and a 13% total return. And with the ASX 200 currently paying a net yield of 4.5%, Australian shares should remain attractive globally relative to other asset classes, which only adds further support.

Analysts from BA-Merrill Lynch are also positive on 2013, but much like Citi, they still see a rocky run over the next few months. The broker’s year-end target is just 4850 and given stocks are still sporting some poor fundamentals, the broker thinks the market is currently vulnerable to a correction. This keeps BA-ML underweight on the banks, with valuations looking to be stretched pretty tight, especially given we’re not out of the woods just yet.

The broker also doubts we’ll see a healthy consumer in 2013, which inclines the broker towards stocks with good balance sheets and leverage to consumers offshore like News Corp ((NWS)) and Crown and yes, even Echo Entertainment ((EGP)). Meanwhile, Coca-Cola Amatil ((CCL)) and Wesfarmers ((WES)) are removed from the list on increasingly stretched looking valuations and slowing earnings momentum.

The broker also switches its preference from miners to energy plays given the current issues being faced by most commodity markets. Woodside ((WPL)) and Oil Search ((OSH)) are liked in the space, as are Rio Tinto ((RIO)) and Newcrest ((NCM)) amongst the miners.

The broker also remains cautious on the yield theme, switching its preference to those stocks delivering good cost of capital or strong return on equity metrics. These would include Duet ((DUE)), Telstra ((TLS)) and Westfield ((WDC)). Otherwise, the broker likes defensive exposure in the way of stocks whose growth is independent of the Australian economic cycle, like healthcare. CSL ((CSL)) and Primary Health Care ((PRY)) are liked, while the broker also retains exposures to industrials such as Brambles ((BXB)), Amcor ((AMC)), Incitec Pivot ((IPL)) and Computershare ((CPU) given their offshore earnings leverage.
 

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