Weekly Broker Wrap: Oz Growth Weak But Buying Opportunities Exist

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

-Weak economic growth ahead
-Yield stocks can still give
-Opportunity to buy on dips
-Buy-backs increasing

By Eva Brocklehurst

As 2013 takes hold the broking community is trying to define the themes that will give the year its character. BA-ML expects quite weak growth, based on a stubbornly high exchange rate, fiscal stringency in the lead up to the federal election and higher unemployment. UBS sees the year as a bit of a grind but stocks with strong structural growth prospects should be in demand. Goldman Sachs thinks it will be good for equities and is ready to buy into any pull back.

BA-ML sees the widely expected peak in mining investment as quite pertinent for growth in 2013. A dramatic increase in resources investment, mainly coal, iron ore and LNG/CSG, has been a major driver of Australian economic growth over the past three years. However, with this now peaking, the Australian economy will find it hard to achieve its long-term trend growth rate of 3.25% in 2013. Moreover, BA-ML can't see other sectors taking up the reins so easily. Hence, an expectation for growth of just 2.25%, 0.5% below consensus. The broker also believes that businesses seeking to improve productivity and ongoing fiscal stringency makes it likely the labour market will soften more noticeably in 2013.

BA-ML expects the Reserve Bank to cut the cash rate twice more this year, in March and in June-July, taking the official rate to 2.5%. If it wasn't for house forecasts for the Australian dollar to start easing in the second half of the year, the broker might have had an even lower cash rate outlook. BA-ML observes there is a strong tendency in Australia for interest rates to be seen as an objective in their own right, probably because most Australian mortgages are at floating interest rates. They also feature far more heavily in the political debate and there is a federal election this year. Probably some time between third of August and thirtieth of November.

UBS has looked at its price targets for the ASX-200. It's a grind. Given the easing in global risks, there has been a modest upgrade to the ASX200 price target to 5000 from 4800, representing 4.5% price upside on the current levels. The upgraded price target is based upon a year-end target price/earnings multiple of 13.5 times (formerly 13 times), even though the broker acknowledges economic and earnings growth prospects are likely to be lower than the past 10 to 20 years. So, UBS is overweight mining, based on a cyclical recovery in commodity demand, and overweight energy, based on valuation and oil's scope for a cyclical pick-up. The broker is underweight banks, based on limited capacity for further re-rating, and underweight real estate investment trusts (REITs), because of relatively full valuations and the improving outlook for the global economy.

The broker has added Fortescue Metals ((FMG)), Macquarie Group ((MQG)), Henderson Group ((HGG)) and New Zealand's Trade Me ((TME)) to its preferred portfolio and removed Commonwealth Bank of Australia ((CBA)) and JB Hi-Fi ((JBH)). While valuations are not as compelling as they have been, UBS still sees attractive relative value against fixed interest and cash. The broker notes yield stocks, for the most part, have managed to grind out further gains in absolute terms, and its yield index has performed in line with the market in recent months. The broker still sees structural support for yield, but key sectors such as banks and REITs are looking fully priced.

Stocks with strong structural growth prospects will likely stay in demand, given the relative scarcity of earnings growth, UBS maintains. This suggests that growth stocks that continue to deliver should, at a minimum, hold their P/E multiples. The problem for many is soft demand and a stubbornly high Australian dollar. However, UBS thinks corporate cost cutting and restructuring provides upside potential and this should gather pace this year.

Goldman Sachs has also lifted its ASX200 price target to 5000, expecting a total return of 9% for 2013 and assuming 7% earnings growth and 5% yield. Goldman notes the year often starts optimistically and then there is a period of profit taking. Reasons this time around include poor domestic economic momentum and modest downside risk to earnings forecasts heading into reporting season. Goldman's risk sentiment indicator is at the top end of the historical range in terms of the momentum in risk appetite. However, the broker suggests using any short-term weakness to add risk and not alter sector and stock selections. Instead, a pull back in the equity market would be cause to add to overweight stocks in building materials, diversified financials, materials, transport and resources.

CIMB notes a potential emerging theme in 2013. There has been an increase in share buy-backs in the US, with some firms using this to return capital. The broker views this as a positive for share prices. After years of heavy cost cutting and low investment, corporate America's cash reserves have ballooned to an estimated US$1.26 trillion. According to CIMB, in the absence of better ways to spend that cash, handing some of it back to shareholders through buy-backs is becoming more popular. It appears companies that repurchase regularly most likely use share repurchases as an alternative to dividend payments. However, infrequent repurchases are most likely a return of capital. It appears these stocks experience economically and statistically significant long-term price appreciation, independent of size or valuation.

Finally, JP Morgan has observed, though a survey of Australian share registries, that expertise of the registry service provider remains the most important factor in the decision to outsource the registry system maintenance. Other findings show as many as 73% of companies are reporting flat, or decreasing, shareholder numbers. A total of 3% of new shareholders were added through IPOs/demergers with the bulk coming from the Woolworths ((WOW)) spin-off of the SCA Property Group ((SCP)) and this went to Computershare ((CPU)). Further, only a small proportion of the net Australian market (2%) has changed hands over the last three years due to direct competition. JP Morgan notes, similar to last year, Computershare received a higher percentage of positive responses for overall performance compared with Link (98% versus 88%). However, in terms of cost performance, Computershare had 20% of participants return a negative response, compared to only 3% for Link.

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