Weekly Broker Wrap: Portfolio Strategy, Indices, Financials And Oil

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-Credit Suisse long on IIN
-More index weight on IT, energy
-Less weight materials, miners
-Business credit growth improves
-Upside to oil prices likely
 

By Eva Brocklehurst

Credit Suisse has reviewed its portfolio strategy and placed iiNet ((IIN)) into the Long portfolio. The company's recent earnings result confirmed the stock should benefit from many of the investment themes that prevail at present. Cash flow is strong and double digit dividend growth is expected. Debt financed accretive acquisitions remain a potential driver. To make room for iiNet the broker is removing Fortescue Metals ((FMG)). That stock has lost 21% ex dividends since November last year and, while management has stated that credit investors still like the company, it is clear to Credit Suisse that equity investors do not. The stock is cheap vis-a-vis commodity price forecasts but further sluggish activity in China suggests its price may be capped in the shorter term.

Credit Suisse acknowledges a value and growth bias exists in its portfolio. The average valuation of stocks in the Long portfolio is cheaper than those in the Short portfolio. Despite this, growth out to FY16 is expected to be stronger for the Long portfolio.

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WilsonHTM forecasts three additions to the ASX 200 and 14 for the ASX 300 at the September quarterly re-balancing of the indices. Higher weights for IT and energy sectors compare with lower weights in materials and the removal of several miners from the Small Ordinaries. Potential changes include a removal of Insurance Australia Group ((IAG)) or Westfield Corp ((WFD)) from the ASX20/50. JP Morgan concurs, considering it likely that one of these two will be dropped.

Both JP Morgan and WilsonHTM expect the three stocks removed from the ASX 200 will be The Reject Shop ((TRS)), Buru Energy ((BRU)) and NRW Holdings ((NWH)). Liquefied Natural Gas ((LNG)), Asaleo Care ((AHY)) and Technology One ((TNE)) are likely additions in WilsonHTM's view while JP Morgan includes APN News & Media ((APN)), nib Holdings ((NHF)) and Amcom ((AMM)) as well.

WilsonHTM's potential additions to the ASX 300 include LNG, AHY, TNE, Growthpoint ((GOZ)), Equity Trustees ((EQT)), Prime Media ((PRT)), iSentia ((ISD)) Austal ((ASB)), MyNetFone ((MYF)), Burson Group ((BAP)), Mantra Group ((MTR)), Metals X ((MLX)) and Infomedia ((IFM)). To this list JP Morgan adds nib, 3P Learning ((3PL)), Ashley Services ((ASH)), Speedcast ((SDA)) and Donaco International ((DNA)).

JP Morgan lists Bathurst Resources ((BRL)), Red Fork Energy ((RFE)), Ausenco ((AAX)), Codan ((CDA)), St Barbara ((SBM)), Mighty River Power ((MYT)), Boart Longyear ((BLY)), Aspen Group ((APZ)), OrotonGroup ((ORL)) and Maverick Drilling ((MAD)) as likely to be dropped.

BHP Billiton's ((BHP)) de-merger proposal for selected assets, targeted for mid 2015, has an estimated market cap around $13-16bn which Wilson HTM considers easily large enough to qualify for ASX 20 selection.

JP Morgan's market timing model continues to favour the financials ex A-REITs over resources, both currently and over the longer-term, as economic survey data suggest credit growth is likely to expand a further 5.1%. The model's back tests showed a return of 20.1% per annum over the last 20 years with annualised volatility of 20%, outperforming buy-and-hold strategies in either resources or financials.

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Credit Suisse observes domestic business credit growth is starting to tick up. From the latest major bank disclosures the broker deduces credit exposure growth was relatively stronger for Westpac ((WBC)), with an apparent spike in liquid assets. The Reserve Bank stated that business credit growth picked up in the June quarter, but part of the increase was accounted for by the number of banks providing bridging finance for the Westfield restructure.

The broker notes commercial bank net interest margins are holding up well, driven by consumer banking. Asset quality continues to improve but stress remains evident in agri-business portfolios. Corporate and institutional revenue appears to be struggling, notably from financial market income and funds management margins. The broker also believes the decline in bad debt charges may have now run its course, with problem single exposures more visibly affecting headline outcomes at these low levels.

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What is wrong with oil? Prices fell to a 20-month low in August as the recent conflicts in Ukraine and Iraq resulted in Saudi Arabia increasing production to head off a perceived shortfall, which did not happen. As a result the market is out balance. Morgans expects prices will improve once the Saudi Arabian production levels are cut in the second half of the year. The analysts forecast 17% upside to current prices. Those companies with increasing oil-linked production should continue to outperform. The broker lists Santos ((STO)), which has maintained full year guidance, Oil Search ((OSH)), which has ramped up PNG LNG to full production, and Woodside Petroleum ((WPL)) for its near-term yield, as stocks which should benefit. Beach Energy ((BPT)) and Senex Energy ((SXY)) are considered solid plays on the back of production and news flow in FY15.
 

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