Weekly Broker Wrap: Myer/DJs, Oz Confidence & Consumption and EUR/USD

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            [0] => ((MYR))
            [1] => ((DJS))
            [2] => ((OSH))
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            [0] => MYR
            [1] => DJS
            [2] => OSH
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This story features MYER HOLDINGS LIMITED.
For more info SHARE ANALYSIS: MYR
The company is included in ASX300 and ALL-ORDS

-Myer/DJs value less likely
-Delay in Oz credit growth
-Oz consumption lifting in 2014
-Taza key for Oil Search
-EUR/USD strength continues
 

By Eva Brocklehurst

A deal between Myer ((MYR)) and David Jones ((DJS)) is becoming harder to envisage, according to Deutsche Bank. David Jones shares have outperformed by over 20% since the proposal was made public and consensus estimates for Myer have fallen after the first half result. Press speculation has indicated Myer may borrow up to $500m to introduce a cash component to the transaction in order to overcome the widening gap between the two share prices. Deutsche Bank's analysis suggests a cash and scrip structure is unlikely to be more compelling and would result in a merged entity which would be too highly geared. The broker reminds the market that one of the original advantages of a merger was an appropriately geared balance sheet. A cash and scrip deal is expected to lead to a more highly leveraged entity and wouldn't enhance the value accretion of the deal.

***

Credit Suisse has looked at the relationship between business confidence and credit in Australia. Credit growth has typically lagged GDP growth as it was relatively insensitive to the cash rate, but in recent years it has decoupled. Credit Suisse observes that where there's been a sustained or sizeable decline in business confidence, such as in the early 1990s and the period after 2008, it has led to a much longer period of subdued credit growth. What this means is the longer and deeper the fall in confidence and, subsequently, reduced credit growth, the longer it takes for credit to then respond to improving business confidence.

UBS expects Australian consumption to lift in 2014, still below trend at a 3.0% annual pace but up from 2.0% seen in 2013. Areas where the most significant rise in consumption has already occurred are insurance and financial services, clothing, cigarettes, hotels and eating out. Recreation is also witnessing a spending recovery. The areas where consumption slowed most significantly in 2013 were cars, health, transport and communications. The strongest themes UBS sees emerging are increased housing-related consumption, and a casting aside of the more cautious spending approach to entertainment, recreation, hotels, eating out and alcohol. Longer term, the broker has compared consumption patterns with the 1990s and 2000s and notes that households are spending significantly more on a range of services such as utilities, finance, insurance and health, and significantly less on alcohol, furnishings, household goods, transport, recreation and communication.

***

Morgan Stanley has been to Kurdistan to review the Oil Search ((OSH)) operations at Taza. The second appraisal well is being drilled and this well, Taza-2, will also test deeper formations known to be oil bearing in other parts of the country. Morgan Stanley's unrisked valuation calculates Taza as worth between 55c and $3.30 a share, depending on the ultimate resource size.

***

The euro has appreciated against the US dollar substantially over the past year and Commonwealth Bank strategists believe this state of play will continue for a while yet. The eurozone is running a large current account surplus, equivalent to 2.3% of GDP. Despite a narrowing of the US deficit to 1.9% of GDP it remains a stark contrast to the eurozone. The real eurozone-US two-year bond spread is very supportive of the EUR/USD appreciation as well. Eurozone inflation, while declining to 0.5% in March, is supporting higher real yields.

Eurozone exporters are under-hedged, according to the evidence the strategists have garnered. They suspect there's a "buy euro on the dips" mentality among these exporters and there is more EUR/USD buying to come, consistent with the eurozone's large trade surplus. Despite the move towards more normal monetary policy in the US the anticipated appreciation of the US dollar has not materialised. The strategists believe this is due to the persistence of negative US real rates, as the US dollar is influenced by the real Fed funds rate. The US current account deficit has improved but it's still a deficit and that, combined with negative real US short-end yields, does not encourage currency appreciation. In other words, net inflows into the US economy are not sufficient enough to strengthen the currency.

There are other reasons too. The People's Bank of China has been actively recycling accumulated US dollar reserves into euros in keeping with a diversification strategy, as it endeavours to lift the US dollar rate against its own currency. Eurozone banks have also been repatriating capital for a number of years as they reduce offshore assets and increase capital adequacy ratios. Moreover, European equities are performing well and the strategists believe this will stay the case while the European Central Bank maintains rates at record lows. The strategists are increasingly of the belief that US dollar strength will be delayed until the real Fed funds rate turns positive in late 2016.
 

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