Broker Strategy And Stock Allocation Updates

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            [1] => ((NAB))
            [2] => ((WBC))
            [3] => ((TLS))
            [4] => ((DOW))
            [5] => ((RIO))
            [6] => ((SFR))
            [7] => ((LEI))
            [8] => ((AIX))
            [9] => ((SUN))
            [10] => ((TEN))
            [11] => ((TEL))
            [12] => ((ORG))
            [13] => ((LLC))
            [14] => ((PRY))
            [15] => ((CPU))
            [16] => ((WOW))
            [17] => ((GEM))
            [18] => ((MIO))
            [19] => ((MMS))
            [20] => ((AWE))
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            [2] => WBC
            [3] => TLS
            [4] => DOW
            [5] => RIO
            [6] => SFR
            [7] => LEI
            [8] => AIX
            [9] => SUN
            [10] => TEN
            [11] => TEL
            [12] => ORG
            [13] => LLC
            [14] => PRY
            [15] => CPU
            [16] => WOW
            [17] => GEM
            [18] => MIO
            [19] => MMS
            [20] => AWE
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)

This story features NEWS CORPORATION, and other companies.
For more info SHARE ANALYSIS: NWS
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Australia’s major equity brokers are bullish. Not that they aren’t always bullish – it’s a bit hard to make a dollar by telling clients not to invest – but after five years of GFC gloom, successive years of earnings forecast downgrades, and a sharp rally beginning late last year, the general feeling is that the dust is now settling and things are quietly returning to some sort of normal.

The search for yield in a low global interest rate environment, an apparent recovery in the US economy, a lack of hard landing in the Chinese economy, and an increasingly more ho-hum attitude toward Europe have all conspired to provide risk-takers with the green light they’ve been looking for, at least so far. For four years the major risks were double-dip in the US, a crash landing for China, and implosion in Europe. Even in Australia, in which the non-mining economy has been hard hit while mining has driven the train, a quiet shift towards greater equilibrium is reducing overall risk.

The consumer sentiment survey published earlier this month showed a “noticeable uptick”, declares Citi, from December to March in equities as a place for Australians to put their savings. The data confirm anecdotal evidence from financial executives and retail brokers, Citi notes, of an increase in retail flows and trading. New money is entering the market.

It’s early days, Citi warns, and we must bear in mind the uptick represents only a slight blip off a very low post-GFC base, but with bank term deposit rates likely to stay low there’s little reason why the trend cannot continue. On Citi’s numbers the average market multiple (price/earnings) has returned to a “normal” 14x. Bull markets in the past have featured investors pushing PEs beyond normal and into “bullish” levels, ahead of expected earnings growth. The rally to date has transpired despite any real sign of earnings growth in FY13, but the forecast numbers for FY14 suggest the catch-up can still eventuate, believes Citi.

CIMB notes the ASX 200 has been one of the better global performers in the rally into 2013, well outperforming the Asia Pacific ex-Japan index. Financials, staples and consumer discretionary, including a strong move from News Corp ((NWS)), have driven the Australian result. Large caps have performed “strikingly well”, suggests CIMB, compared to the rest of the world in which small caps have been the significant outperformers. Defensive sector valuations are now stretched, particularly food & beverage, the strategists suggest.

The CIMB strategists are retaining some defensive yield in their preferred portfolio, through National Bank ((NAB)), Westpac ((WBC)) and Transurban ((TCL)). The rest of the portfolio leans towards “value” as opposed to yield. Overvalued defensives have been exited or shorted. Telstra ((TLS)) is now out, while the healthcare sector has been shorted. In industrials, CIMB is long Downer EDI ((DOW)), Fairfax Media ((FXJ)) and Seven West Media ((SWM)).

CIMB sees the resource sector as a “second derivative” investment opportunity. Investors sitting on underperforming miners are no doubt bemoaning that while China may have turned around its economic trajectory, its new growth path is less inspiring than it used to be, and in the meantime it is the US economy which is apparently firing along. Australian industrials with US exposure have provided strong returns. Do not fear, says CIMB. If the US economy is growing, demand for Chinese exports will grow, and hence demand for Australian raw material exports will grow indirectly.

CIMB has added miner Rio Tinto ((RIO)) to its portfolio along with mining service provider WorleyParsons ((WOR)), and has increased exposure to a knocked-down copper market with investments in OZ Minerals ((OZL)) and Sandfire Resources ((SFR)).

CIMB also runs a high conviction “long-short” portfolio. A long-short portfolio implies a degree of “pairs trading”, in which one stock is shorted to provide funds to purchase another, preferred stock in a similar business or at least similar sector. Long-short portfolios are not the domain of the small retail investor, but CIMB’s pairs at the very least provide readers with an idea of the strategists’ preferences on a relative basis.

CIMB is long Oil Search ((OSH)) and short Woodside ((WPL)), long Fletcher Building ((FBU)) and short Boral ((BLD)), long Downer EDI and short Leighton Holdings ((LEI)), long Goodman Fielder ((GFF)) and short Metcash ((MTS)), long Starpharma Holdings ((SPL)) and short Ramsay Healthcare ((RHC)), long Transurban and short Australian Infrastructure ((AIX)), and long Suncorp ((SUN)) and short Perpetual ((PPT)).

The strategists are also long Seek ((SEK)) and short Ten Network ((TEN)), long Perseus Mining ((PRU)) and short OceanaGold ((OGC)), Long Rio Tinto and short BHP Billiton ((BHP)), long iiNet ((IIN)) and short Telecom NZ ((TEL)), long Qantas ((QAN)) and short Brambles ((BXB)), long Programmed Maintenance ((PRG)) and short Navitas ((NVT)), long Hills Holdings ((HIL)) and short Imdex ((IMD)), and long Transpacific ((TPI)) and short Oakton ((OKN)).

UBS agrees with its peers that the “value” space is now the most compelling area of the Australian market, despite some stocks now looking fairly valued. UBS’ preferences for taking advantage of the value push involve those value stocks that have proven laggards to date, those with operational turnaround momentum, those with mid-cycle return on equity (ROE) upside, and those which are priced for growth.

Hence the strategists like Incitec Pivot ((IPL)) and Origin Energy ((ORG)) as laggards, Lend Lease ((LLC)), Primary Health Care ((PRY)), Harvey Norman ((HVN)) and Boral ((BLD)) as those offering turnaround momentum, Sims Metal Management ((SGM)) and Macquarie Group ((MQG)) for ROE upside, and Asciano ((AIO)) and Qantas for priced-for-growth upside.

Macquarie is also rotating its preferred portfolio out of stocks with “bond-like characteristics” and into stocks with domestic cyclical exposure to housing and consumer demand. The analysts believe the Australian reporting season just passed “strongly” suggested a bottom to the earnings cycle. They also believe a reversal in US long bond yields is a “critical” signal suggesting a shift away from “fear” and into “greed”.

Locally, Macquarie has added DuluxGroup ((DLX)), Mirvac ((MGR)), JB Hi-Fi ((JBH)) and Toll Holdings ((TOL)) to its portfolio while reducing an overweight position in Telstra and exiting positions in GPT Group ((GPT)), Investra Office ((IOF)), Transurban and Sydney Airport ((SYD)).

Macquarie also considers Dulux to be one of its “counter consensus” calls, given the broker rates the stock Outperform when market consensus is neutral. The broker’s other counter consensus calls, for which an Outperform rating is ascribed when the market is neutral, are Echo Entertainment ((EGP)) and IOOF Holdings ((IFL)).

Goldman Sachs has introduced a new approach to recommendations for the longer-term investor by launching its SUSTAIN focus list for Australian and New Zealand stocks. The list comprises of 15 stocks which the broker believes are best positioned to sustain industry leading returns as “long-term leaders”. This approach varies from other broker recommendations, such as those above, in terms of time horizon.

Goldman’s SUSTAIN list includes ANZ Bank ((ANZ)), Ausbroker Holdings ((AUB)), BHP Billiton, Brambles, Commonwealth Bank ((CBA)), Coca-Cola Amatil ((CCL)), Cochlear ((COH)), Computershare ((CPU)), CSL ((CSL)), Domino’s Pizza ((DMP)), DuluxGroup, Insurance Australia Group ((IAG)), Super Retail ((SUL)), WorleyParsons and Woolworths ((WOW)).

Moving into small caps, and back to a nearer term time horizon, Citi notes the results season just passed could have been worst for Australia’s small caps given reported earnings were only marginally softer than expected. Given the smalls have materially underperformed the large caps in this recent rally, the broker believes value is beginning to appear. Relative valuations remain compelling, although a trigger for the catch-up is hard to identify, the broker concedes, while the market is keen on chasing more liquid stocks.

Nevertheless, Citi has listed its top industrial small cap Buys as Forge Group ((FGE)), G8 Education ((GEM)), iiNet, Miclyn ((MIO)), McMillan Shakespeare ((MMS)), M2 Telecommunications ((MTU)) and Southern Cross Media ((SXL)).

For small resources, Citi likes AWE ((AWE)), Gryphon Minerals ((GRY)), Mt Gibson Iron ((MGX)) and Medusa Mining ((MML)).

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