Weekly Broker Wrap: Will Global Optimism Spread To Australia?

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            [3] => ((BSL))
            [4] => ((SGM))
            [5] => ((UGL))
            [6] => ((TSE))
            [7] => ((OSH))
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            [6] => TSE
            [7] => OSH
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This story features QUBE HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: QUB
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

-Cost discipline still rewarded
-Resource investment subsides
-Return to trend in Oz GDP unlikely
-Need to scout for opportunities
-LNG sector undervalued?
 

By Eva Brocklehurst

CIMB has previewed the reporting season and come up with a slogan. Keep The Faith. The broker thinks revenue growth being weak means cost discipline will remain in focus. Investors will be rewarded for investing in those stocks with strong earnings growth. The broker expects global and cyclical stocks to outperform this year. Underweight sectors include banks, consumer staples and utilities, which may be reliable but have relatively slower earnings growth. The broker is also looking for a continued commitment to lower costs and raising productivity, more upbeat talk on margins and improving earnings quality and cash conversion.

Specifically, stocks that could surprise on the upside include Qube Logistics ((QUB)), in terms of the earnings margin, Origin Energy ((ORG)), in terms of a better second half because of hot weather, and Envestra ((ENV)), which upgraded guidance in December. Those that may disappoint the broker include BlueScope ((BSL)), from slippage in the timetable, Sims Metal ((SGM)), from weak operating conditions, UGL ((UGL)), as guidance may not be met, and Transfield Services ((TSE)), where the second half earnings skew needs to be larger than usual.

BA-Merrill Lynch has listed key themes for 2014. The broker suspects that the transition from resources-driven growth to other sources of domestic demand will be bumpy. Economic growth is expected to stay below trend and unemployment to ratchet higher. A stronger world economy won't be of huge benefit to Australia, where fortunes are more linked to emerging economies. Resource investment is expected to detract modestly from growth this year and Merrills thinks this will become more marked next year as construction on the six big LNG plants winds down. Moreover, the export phase of the resources boom will contribute much less employment and income growth than the investment phase.

Lower interest rates are boosting housing demand and ensuring a renewed upward trend in property prices but Merrills suspects this will not be sufficient to underpin a return to trend growth. Fiscal policy is also expected to be contractionary. Merrills believes the Reserve Bank would prefer support for growth to come from a lower exchange rate rather than cash rate reductions but may be disappointed. The analysts do not think the Australian dollar will fall much further this year. Hence, there's still a chance the RBA will need to reduce the cash rate once again.

As 2014 unfolds, Citi has pared back expectations regarding Australia's potential. Two years of large increases means the Australian equity market has returned to more normal valuations and the broker is cautious regarding further gains. That said, earnings growth still looks promising, particularly for resources, and a solid year on the ASX200 is expected. Citi notes the market is not as cheap as it was and earnings growth is likely to meet current expectations of around 8% over the next two years. That may be as good as it gets.

The big uncertainty is the pace of the US monetary policy changes and how smoothly QE is tapered. Another uncertainty is the degree to which Australian GDP growth picks up, or doesn't, over the next 12-18 months. Citi is optimistic but suspects the next year or so could be frustrating. The broker also believes stock valuations have converged and investors need to scout for opportunities. Less earnings risk is envisaged for the resource sector and Citi continues to find some opportunities there. The more cyclical industrial stocks no longer have compelling valuations and could become expensive as earnings recover, in the broker' view. Still, these are preferred over the more defensive sectors and banks.

Standard Life economists expect global growth to improve this year, as monetary policies remain supportive. On this note they observe that, while the US Federal Reserve began tapering asset purchases earlier than expected, it has specifically indicated raising the funds rate is some way off. The eurozone economic recovery is continuing, albeit in fits and starts, and Standard Life expects more policy support from the central bank. China's prospects are considered reasonable and, while that nation's central bank has tightened monetary policy modestly to restrain banking pressures, there is no sign that a more aggressive stance is needed, given inflation pressures are restrained.

On the Australian scene, Standard Life bemoans investor apathy in the energy sector. The industry has invested heavily in LNG processing infrastructure, sparking concerns about delays and cost blow-outs. To Standard Life, this has meant the sector has been overlooked and many companies left undervalued for the potential growth they offer. Oil Search ((OSH)) is a key favourite. The stock is expected to outperform and deliver on investments. Standard Life also suspects investors have underestimated the impact the PNG LNG expansion will have on gas prices. Currently, almost all domestically produced gas is consumed domestically, meaning new output will be sold at higher offshore prices. The analysts are particularly positive on the prospects for Origin Energy, as arbitrage should mean Australian prices converge with those overseas in the medium term.
 

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