Australian And Global Equity Preferences

Array
(
    [0] => Array
        (
            [0] => ((ILU))
            [1] => ((OZL))
            [2] => ((LYC))
            [3] => ((UGL))
            [4] => ((BLY))
            [5] => ((MND))
            [6] => ((BSL))
            [7] => ((SGM))
            [8] => ((NUF))
            [9] => ((IPL))
            [10] => ((NWS))
            [11] => ((JBH))
            [12] => ((DOW))
            [13] => ((TOL))
            [14] => ((SEK))
            [15] => ((BLD))
            [16] => ((LLC))
            [17] => ((CPU))
            [18] => ((WOR))
            [19] => ((OSH))
            [20] => ((WPL))
            [21] => ((BPT))
            [22] => ((ORI))
            [23] => ((ORG))
            [24] => ((RIO))
            [25] => ((WOW))
            [26] => ((SYD))
            [27] => ((TCL))
            [28] => ((AGI))
            [29] => ((BEN))
            [30] => ((IAG))
            [31] => ((AGO))
            [32] => ((CTX))
            [33] => ((TTS))
            [34] => ((SUL))
            [35] => ((SKC))
            [36] => ((FSF))
            [37] => ((AIO))
            [38] => ((AIZ))
            [39] => ((AUB))
            [40] => ((GPC))
            [41] => ((MGR))
            [42] => ((OGC))
            [43] => ((STO))
            [44] => ((WES))
            [45] => ((WRT))
            [46] => ((WSA))
            [47] => ((PNA))
            [48] => ((CSL))
            [49] => ((SKI))
            [50] => ((CHC))
            [51] => ((DLX))
            [52] => ((NAB))
            [53] => ((GPT))
            [54] => ((CAB))
        )

    [1] => Array
        (
            [0] => ILU
            [1] => OZL
            [2] => LYC
            [3] => UGL
            [4] => BLY
            [5] => MND
            [6] => BSL
            [7] => SGM
            [8] => NUF
            [9] => IPL
            [10] => NWS
            [11] => JBH
            [12] => DOW
            [13] => TOL
            [14] => SEK
            [15] => BLD
            [16] => LLC
            [17] => CPU
            [18] => WOR
            [19] => OSH
            [20] => WPL
            [21] => BPT
            [22] => ORI
            [23] => ORG
            [24] => RIO
            [25] => WOW
            [26] => SYD
            [27] => TCL
            [28] => AGI
            [29] => BEN
            [30] => IAG
            [31] => AGO
            [32] => CTX
            [33] => TTS
            [34] => SUL
            [35] => SKC
            [36] => FSF
            [37] => AIO
            [38] => AIZ
            [39] => AUB
            [40] => GPC
            [41] => MGR
            [42] => OGC
            [43] => STO
            [44] => WES
            [45] => WRT
            [46] => WSA
            [47] => PNA
            [48] => CSL
            [49] => SKI
            [50] => CHC
            [51] => DLX
            [52] => NAB
            [53] => GPT
            [54] => CAB
        )

)

This story features ILUKA RESOURCES LIMITED, and other companies.
For more info SHARE ANALYSIS: ILU
The company is included in ASX200, ASX300 and ALL-ORDS

– Country exposures discussed
– Sector preferences highlighted
– Upside for Oz earnings?
– Brokers update Conviction Lists

By Greg Peel

Citi strategists note that global equity price/earnings ratios rose in the March quarter of 2013 as stock prices rose and earnings forecasts fell. While such a dichotomy might at other times suggest caution, Citi believes the re-rating can continue given PEs are yet to return to long term averages, and as such the strategists forecast a further 7% gain to year-end.

Among global regions, Citi has upgraded Emerging Markets as a group to Overweight given a considerable de-rating to date, upgraded Continental Europe to Neutral given the efficiency of companies in generating cash, downgraded both the US and Australia to Neutral given solid runs, and maintains an Underweight on Japan given the runaway re-rating. Within the Emerging Market group, China and Asia ex-Japan are among the individual Overweights.

On a sector basis, globally, Citi has upgraded financials and healthcare to join IT on Overweight, downgraded energy and utilities to join consumer staples and materials on Neutral, and retains Underweights on consumer discretionary, industrials and telecoms.

BA-Merrill Lynch disagrees with Citi when it comes to Japan. Despite the strong yen devaluation-led equity rally to date, Merrills believes the investing climate remains favourable. Merrills concurs in reducing its exposure to Europe, largely due to the spurious Cyprus bail-out, but remains partial to the US given America remains the world leader in innovation.

The Alliance Bernstein economists find this latest US recovery-out-of-recession to be unusual. Cumulative gross GDP has grown a mere 7.6% since the 2009 bottom compared to 10.5% from the 2002 recession bottom and 12% from the 1991 recession bottom. Yet as to why this recovery is a bit lacking is not immediately clear.

The popular suggestion is that the debt-based GFC terrified both households and businesses into major deleveraging and away from the care-free borrowing of the lead-up years. Hence it hasn’t mattered how far interest rates have been forced down and liquidity taps turned on, neither households nor businesses have yet felt confident to start borrowing again, hence the impact on GDP has been sluggish.

Makes perfect sense, except that Alliance Berstein has found no evidence of such in the data. The cumulative growth in cyclical industries in the US has actually been greater this time around than following 2002 or 1991. The growth shortfall has been concentrated in non-cyclical industries. This is typical of a recovery, so why is this one so weak?

The economists’ theory relates to the Great Divide in America – between rich and poor. As financial markets have recovered from 2009 to now, wealthy consumers have benefited most from a rebound in wealth and have enjoyed greater access to eased credit restrictions, while the poor have had no exposure to a wealth rebound and are still shut out of the credit market.

CIMB suggest Developed Market equities have held up quite well this past month in the face of Cyprus, North Korea, bird flu in China and softer US economic data. There has clearly been a bit of wavering in the US this past month as Wall Street has struggled to push on through previous peak (S&P 500), but data show equity inflows remained robust in March. Bond inflows were also net positive, albeit corporate bonds are favoured as interest in Treasuries eases.

For Australia, CIMB notes increasing short positions in the materials sector, specifically Iluka ((ILU)), OZ Minerals ((OZL)) and Lynas ((LYC)), capital goods, specifically UGL ((UGL)), Boart Longyear ((BLY)) and Monadelphous ((MND)), steel, specifically Bluescope ((BSL)) and Sims Metal ((SGM)), and chemicals, specifically Nufarm ((NUF)) and Incitec Pivot ((IPL)).

CIMB believes the Australian investment climate is “early cycle”, approaching mid-cycle. Defensive stocks, and particularly food & beverage stocks, look expensive against historical PEs, while domestic cyclicals have begun to outperform. The analysts expect ongoing momentum for cyclicals as earnings leverage to a revenue recovery in FY14 becomes apparent.

Citi’s Australian equity strategists note that a feature of the recent local reporting season in February was the growth of cost savings programs across the sectors. Australia has been slow to catch up to efficiency gains overseas, particularly in the US. Most recently the materials sector has seen the light, with the peak in commodity prices now apparently passed. For other companies, a long period of poor earnings growth has taken its toll, Citi suggests, and any lingering hope of a rapid recovery back to the good old days of bountiful revenues seems to have faded.

Yet revenues are growing, moderately, so a focus on cost saving should enable greater earnings growth than some in the market expect, Citi believes. Taking the numbers from companies which have announced specific cost-out targets adds 2-3% to industrial (ex resources) earnings growth, the analysts calculate, which is “not insignificant”. But more than two-thirds of the companies covered by Citi have suggested a focus on savings yet have not offered specific numbers, hence the ultimate impact could be greater than 2-3%.

Macquarie points out that the trend is recent years is for consensus Australian earnings forecasts to begin optimistically but to suffer ongoing downgrades as the year plays out. It is thus notable that FY13 to date has proven an exception, with market-ex resources forecasts of 5% earnings growth from nine months ago remaining intact. The analysts are increasingly confident earnings growth is now swinging to a more sustained, if only modest, positive outlook.

If this is the case, Macquarie suggests the challenge is now for investors to value stocks on a mid-cycle basis, echoing CIMB’s sentiments. The broker’s own analysis suggests that on this basis the Australian market is not overly expensive, with a notable group of stocks still offering strong value upside. Stocsk which the broker believes can offer total shareholder return in excess of 10%pa over the next 18 months include News Corp ((NWS)), JB Hi-Fi ((JBH)), Downer EDI ((DOW)), Toll Holdings ((TOL)), Seek ((SEK)), Boral ((BLD)), Lend Lease ((LLC)), Computershare ((CPU)), WorleyParsons ((WOR)), Oil Search ((OSH)), Woodside ((WPL)), Beach Energy ((BPT)), Orica ((ORI)), Origin Energy ((ORG)), Rio Tinto ((RIO)), Woolworths ((WOW)), Sydney Airport ((SYD)), Transurban ((TCL)), Ainsworth Game Technology ((AGI)), and Bendigo & Adelaide Bank ((BEN)).

Stocks Macquarie’s modelling suggests are overvalued include IAG ((IAG)), Atlas Iron ((AGO)), OZ Minerals, Caltex ((CTX)) and Tatts ((TTS)).

Goldman Sachs has updated its Australia and New Zealand equity Conviction List (stocks for which the broker has Buy ratings but with added conviction), taking profits after strong performances from Super Retail ((SUL)) and Sky City Entertainment ((SKC)), and replacing those with Fonterra ((FSF)) after an upgrade from Neutral to Buy.

Existing stocks on the List include Asciano ((AIO)), Air New Zealand ((AIZ)), Ausbrokers Holdings ((AUB)), Guiness Peat Group ((GPC)), Infratil (IFT.NZ), Mirvac ((MGR)), OceanaGold ((OGC)), Orica, Oil Search, Santos ((STO)), Wesfarmers ((WES)), Westfield Retail ((WRT)) and Western Areas ((WSA)).

Macquarie has also updated its conviction list, which it calls Marquee Ideas, adding Downer EDI. The broker has also reiterated its conviction calls for Computershare and PanAust ((PNA)).

Other existing stocks in the list of Marquee Buy ideas include CSL ((CSL)), Beach Energy, Oil Search, Bluescope, Spark Infrastructure ((SKI)), Charter Hall ((CHC)), DuluxGroup ((DLX)), Air New Zealand, National Bank ((NAB)) and GPT Group ((GPT)), with Cabcharge ((CAB)) the only Marquee Sell.

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