Weekly Broker Wrap: Stock Markets, Wagering, Online, Consumers And Financials

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-Oz corporates growing again
-Chinese markets most risk sensitive
-Risks of race field fees overplayed
-Online sector valuations stretched
-Budget turns Oz consumers negative
-Cautious optimism on diversified financials
 

By Eva Brocklehurst

Alphinity Investment Management believes the time has come for the Australian share market to stand on its own account, as tapering by the US Federal Reserve creates a mixed outlook for US equities. Corporate earnings in Australia are growing again and should support positive returns from Australian equity markets. Alphinity envisages growth opportunities in the housing, consumer and energy sectors for the remainder of 2014. The banking sector should still provide decent returns but these are likely to stabilise, while the housing sector gathers momentum. Conditions for retail and consumer goods are set to improve, while resources are expected to remain soft. Alphinity believes the soft patch in the US economy was largely caused by a severe winter and continued improvement on this front will help those companies with international operations in the US and Europe.

On the other side of the Pacific, Australia's largest export market, China, is winding back growth forecasts, and there are implications for resources and other export sectors. The sourcing of goods from Asia has been an important theme for most retailers in recent years but Alphinity believes vetting of supply chains will become increasingly important, given worker conditions are increasingly being scrutinised. Alphinity observes China's shift to consumer-led growth from infrastructure and property investment is well in train. China's desire to clean up its environment and business practices and address unsustainable losses in steel is being dealt with at the same time that resource companies are ramping up supply of raw materials. Alphinity is, therefore, cautious on resources stocks.

Macquarie has surveyed investors and finds them optimistic, with 82% of global investors expecting 2014 will be another positive year for equity markets. Investors still favour equities over bonds and expect cyclical stocks to outperform defensives. Conviction levels have fallen away following a sharp rotation in recent months and Macquarie notes earnings momentum and value are increasingly in favour. Price momentum is expected to show the worst return through to the end of the year. Geo-political risk has been heightened and China is the most commonly identified location where markets could be derailed. Most upside risk is envisaged coming from the US and Europe over the next six months.

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Race field fees across Australia's horse racing industry look set to rise, following Racing Victoria's lead, but Morgan Stanley thinks the longer-term risks to the wagering industry growth, margins and valuation look overplayed, given the recent declines in share prices. Wagering operators can moderate increased fees by increasing pricing to punters. Moreover, the broker's feedback from the industry reduces concerns about the risk of continual fee increases as, if fees increase greatly, it would result in lower growth, which would hurt all involved. The broker remains Overweight on Tabcorp ((TAH)) on the prospects for margin expansion and increased dividends.

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UBS believes now is a good time to review the Australasian online sector. UBS, taking a sample of 30 internet stocks globally, notes the sector has fallen 4% over the last month. In comparison, local stocks are performing better. SEEK ((SEK)) has been the best performer while Trade Me ((TME)) has underperformed its Australasian peers. Still, UBS suggests valuations are now stretched. Valuing the domestic classified franchises based on the addressable market and long-term share implies the other assets of these companies are overvalued by up to 40%. UBS suggests Carsales.com ((CRZ)), Trade Me and SEEK are the most overvalued, while REA Group ((REA)) appears to be fair value. UBS retains a Neutral rating on SEEK based on fundamentals but believes the positives are more than priced in. In contrast, Carsales.com's international assets are now considered richly priced and Trade Me is expensive with limited earnings growth, so both these stocks warrant a Sell rating.

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Bell Potter estimates the federal budget initiatives together amount to a net increase to the burden on consumers of $32 billion over four years, with a skew from FY16. These initiatives include welfare cuts, healthcare changes, the re-introduction of petrol excise and the debt levy. Bell Potter expects consumer sentiment will remain negative over the short term as consumers adjust, and this will be reflected in weaker discretionary trading. Nevertheless, a recovery is expected in the final quarter of 2014 because business confidence should remain positive and drive an improvement in employment prospects, while the wealth effect should remain intact through buoyant house prices and equity markets. Through this volatile period the broker's favoured stocks are large caps such as JB Hi-Fi ((JBH)) and Premier Investments ((PMV)), mid caps such as Kathmandu ((KMD)) and small caps such as Retail Cube ((RCG)). Kathmandu and Retail Cube have vertical models which strengthen the scope to manage margins while JB Hi-Fi's dynamic store model strengthens its capacity to adapt to market conditions.

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Bell Potter has become more selective and pulled back from a strong Overweight position in the diversified financials sector. This is reflected in downgrading Computershare ((CPU)) to Hold and ASX ((ASX)) to Sell. The broker maintains macro drivers are supportive of the sector, but largely for wealth managers rather than the diversifieds. The possibility of a near-term correction is flagged but Bell Potter does not think this is an ongoing risk. The medium-term outlook remains positive and the broker expects the ASX200 to finish 2014 above 5,700. The sector is likely to be characterised over the next 1-2 years by a flow to riskier investments and a slow decline in safe haven investments.
 

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