Brokers Update Oz Equity Strategies

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            [1] => ((WOW))
            [2] => ((AMP))
            [3] => ((ALL))
            [4] => ((AMC))
            [5] => ((TLS))
            [6] => ((RIO))
            [7] => ((ORG))
            [8] => ((NAB))
            [9] => ((LLC))
            [10] => ((NWS))
            [11] => ((SKI))
            [12] => ((DOW))
            [13] => ((CPU))
            [14] => ((CAB))
            [15] => ((AWE))
            [16] => ((SFR))
            [17] => ((GEM))
            [18] => ((MIO))
            [19] => ((MMS))
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            [3] => ALL
            [4] => AMC
            [5] => TLS
            [6] => RIO
            [7] => ORG
            [8] => NAB
            [9] => LLC
            [10] => NWS
            [11] => SKI
            [12] => DOW
            [13] => CPU
            [14] => CAB
            [15] => AWE
            [16] => SFR
            [17] => GEM
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This story features WESFARMERS LIMITED, and other companies.
For more info SHARE ANALYSIS: WES
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

– Revenue growth concerns linger
– Gold correction suggests lower growth
– Yield stocks remain defensive
– Broker preferences updated
 

By Greg Peel

February’s Australian reporting season was largely positive, Citi acknowledges, yet it still threw up lingering doubts about general revenue growth. Leading into the season the global economy was looking brighter, and companies across the board have either specifically or generally announced cost cutting initiatives, yet for revenues to grow a pick-up in spending from businesses and households is required.  Here uncertainty remains, thus calling into question consensus forecasts for 10% earnings growth in FY14, Citi suggests.

Since the reporting season, the global economic outlook has weakened. Yet broad leading indicators, recently updated, are providing some encouragement, Citi believes. Subdued industrial production has led to weakness in commodity prices, yet after incorporating manufacturing orders and construction indicators across the globe since mid last year, the OECD suggests growth should strengthen. Citi doubts there will be enough pick-up in industrial production to affect a rebound in commodity prices, but there should be enough to prevent prices falling further. Resource companies can thus grow earnings on increased volumes.

In Australia, leading indicators suggest the economy should be able to rebalance away from mining dominance without a slump in GDP growth, and consumer sentiment remains above average, Citi notes. Housing finance and building approvals are picking up and business investment plans, ex-mining, appear to be increasing. Such a scenario should lead to improved revenues which, in conjunction with cost cutting, foreshadows earnings growth.

Credit Suisse, on the other hand, believes we may be in for a sharp slowing in global growth. There are many theories being put forward as to why the gold price collapsed last week but CS cites “concerns about European sales, fiscal austerity and general expensiveness”. In the past, excess global liquidity (ie low rates and QE programs) has been a good indicator for the price of gold but the recent correction suggests to the analysts that nominal GDP growth is slowing below policy rate settings, driven by fiscal austerity and problems in Europe along with a weaker Chinese GDP.

The implication is that other asset prices, which have already appeared “expensive” of late, will fall to match the price of gold rather than gold rally to underpin growth expectations. Credit Suisse thus prefers exposure to defensive stocks in this environment, but notes stocks which are a “play” on further RBA rate cuts are already expensive, such as banks and domestic cyclicals). Resources stocks are cheap, the analysts acknowledge, but we are yet to see a bottom for commodity prices.

Underlying the debate over global growth is the yield story. As Australian bank stocks, for one, have proven, investors are not going to be overly concerned about the impact on bank earnings of a slower economy as long as yields on offer exceed those available in typical safe havens (bonds, deposits). UBS suggests yield stocks could even continue to rise in the short term for this very reason, although a turnaround would come if global and domestic bond yields start rising later in the year, particularly if the market starts contemplating eventual RBA tightening.

If investors are worried about weaker Australian growth expectations leading to a correction in stock prices, UBS suggests steering clear of the banks and sticking to low volatility real estate investment trusts (REIT) and telcos, utilities and infrastructure funds instead. Infrastructure looks more appealing to UBS in yield terms than REITs.

JP Morgan is largely on the same page as UBS, citing weakening global economic momentum in the June quarter as a reason to adjust back to a more defensive investment portfolio. Given defensive stocks are already trading at full valuations, this is a strategy designed more to underpin returns rather than increase them. JPM has updated its Model Portfolio with such a strategy in mind.

The strategists have added ResMed ((RMD)) to the portfolio given its PE ratio is similar to stocks with less attractive growth profiles. Wesfarmers ((WES)) has held up well on a consumer staple basis which is to ignore, JPM believes, the company’s exposure to falling prices for coal and explosives. Wesfarmers is thus switched out for Woolworths ((WOW)) in the portfolio.

JP Morgan admits its Underweight recommendation on the banking sector has proven an expensive call, yet the strategists still do not believe the banks are the place to “hide out” from weakening economic growth. Miners would certainly not normally be a good investment as growth weakens yet JPM maintains a Neutral recommendation on the sector. The argument is that concerns over the Australian economy should lead to a weakening of the Aussie dollar, which is good for miners.

JP Morgan has given up on Newcrest ((NCM)), so out it goes. The strategists like the bottom-up story on Newcrest’s production but with gold now having corrected, that story loses its appeal.

AMP ((AMP)) has proven a solid winner in the Model Portfolio as it has enjoyed the benefit of rising equity prices, but will not continue to be beneficial if prices have peaked. JP Morgan also cites concerns over the Wealth industry structure as a reason to exit AMP.

JP Morgan’s Model Portfolio is not a “conviction list” which comprises of stocks analysts feel are solid Buys in the shorter term and which are popular with many brokers. It is a diversified investment portfolio of stocks for which the analysts have assigned Neutral (Hold) as well as Overweight (Buy) ratings.

Following the changes, the Portfolio now consists of Aristocrat Leisure ((ALL)), Tabcorp ((TAH)), Coca-Cola Amatil ((CCL)), Graincorp ((GNC)), Woolworths, Transfield ((TSE)), Brambles ((BXB)), Sonic Healthcare ((SHL)), ResMed, Amcor ((AMC)), Orica ((ORI)), Telstra ((TLS)), BHP Billiton ((BHP)), Rio Tinto ((RIO)), Sims Metal ((SGM)), Origin Energy ((ORG)), Santos ((STO)), ANZ Bank ((ANZ)), National Bank ((NAB)), Insurance Australia Group ((IAG)), QBE ((QBE)), Lend Lease ((LLC)) and GPT Group ((GPT)).

Macquarie’s Marquee Ideas is indeed a “conviction list” and the Macquarie analysts also updated its components last week.

The portfolio has done very well out of REITs Charter Hall ((CHC)) and GPT Group but on price appreciation it’s time to cash in. Macquarie has added News Corp ((NWS)), citing earnings and share price upside potential from investment in cable networks globally, with new markets in Latin America and India on offer, and from the pending demerger of the company into two businesses.

Other Macquarie Marquee Ideas stocks include CSL ((CSL)), Beach Energy ((BPT)), Oil Search ((OSH)), BlueScope ((BSL)), Spark Infrastructure ((SKI)), DuluxGroup ((DLX)), Air New Zealand ((AIZ)), PanAust ((PNA)), National Bank, Downer EDI, ((DOW)) and Computershare ((CPU)) with Cabcharge ((CAB)) a conviction Sell.

The Small Cap sector has suffered from a degree of turmoil this month, Citi notes, with falls in small resources stocks a major factor. The Small Ords index now sees a higher weighting to consumer discretionary than it does to resources. The small cap sector has significantly underperformed the large cap sector in the rally from late last year, which might otherwise suggest it’s time for a catch-up. But Citi believes this will be prevented by ongoing weakness in resources.

The analysts warn switching into heavily knocked down small resources stocks on the basis of apparent cheapness may prove a “value trap”. They do nevertheless believe AWE ((AWE)), Mt Gibson ((MGX)), Persues Mining ((PRU)) and Sandfire Resources ((SFR)) offer upside, while among the small industrials, Forge Group ((FGE)), G8 Education ((GEM)), Miclyn Express ((MIO)), McMillan Shakespeare ((MMS)), M2 Telecommunications ((MTU)), Southern Cross Media ((SXL)) and TPG Telecom ((TPM)) are worth an investment.

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