Brokers Refresh Market Views Following Recent Volatility

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            [1] => ((BDR))
            [2] => ((SLR))
            [3] => ((RRL))
            [4] => ((EVN))
            [5] => ((AGK))
            [6] => ((TOL))
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            [1] => BDR
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            [4] => EVN
            [5] => AGK
            [6] => TOL
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This story features NEXTDC LIMITED, and other companies.
For more info SHARE ANALYSIS: NXT
The company is included in ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

-Defensives key for Morgans
-And value in gold stocks
-Yield plus certainty for Morgan Stanley
-AGK, TOL now tops for Credit Suisse
 

By Eva Brocklehurst

Markets appear to have recovered quickly from September's losses, with the sell-off in the Australian dollar and then stabilisation the likely explanation for the volatility, in Morgans' view. The broker reiterates a conviction for several stocks which still offer compelling buying on the back of weakness. The correction was short lived but overdue and the broker believes the market remains in sound shape. The recovery has been concentrated in those stocks which offer defensive characteristics, such as healthcare and consumer staples, or income certainty such as utilities, telcos and banks. Growth sectors such as resources and energy were weakest and have since struggled to show much upside.

The broker anticipates a fresh bout of Australian dollar weakness in coming weeks and warns this may induce more volatility similar to what was witnessed in early September. Morgans adds NextDC ((NXT)) among the small caps to its high conviction stocks to provide exposure to upcoming catalysts.

Meanwhile, gold producers received a drubbing and, while the September quarter results suggest cost cutting initiatives are working, Morgans notes all-in sustaining costs have not realistically changed for 18 months, as ore bodies mature and the need to re-invest capital to access more remote locations increases. The broker observes the largest impact has come from waste stripping and underground drive development, with progress for Beadell Resources ((BDR)) and Silver Lake Resources ((SLR)) of note in this regard.

Deal flows among the gold stocks continue with valuations being cheap but industry commentary has suggested that some producers trying to do deals are being beaten by private equity outfits at higher prices. Morgans observes competition is fierce around securing good assets and corporates are conscious of the value therein. General investors need to catch up on this value trade, in the broker's opinion. Morgans prefers the mid-tier producers including Regis Resources ((RRL)), with Evolution Mining ((EVN)) considered a solid performer.

Morgan Stanley has downgraded macro drivers for its Australian portfolio, adjusting for lower GDP growth, a higher peak in unemployment levels and a longer, harder transition from the resources boom. Market multiples are elevated in the context of such a growth outlook, hence the broker envisages the 12-month outlook as range bound. The growth versus yield debate has moved back and forth over the last two months and the broker considers the current level of US 10-year treasuries implies low growth will be around for longer. In this environment Morgan Stanley prefers to ensure greater earnings certainty in order to anchor the portfolio construction. 

The broker notes some complacency on the part of investors regarding any threat of a downturn. There is the view that monetary and fiscal policy options are available to deal with any threat. However, the broker believes conditions would need to worsen before such options will be considered by the various authorities. Australian cash rates are expected to remain at multi-decade lows until at least the first quarter of 2016. Low rates have meant the retail investor is seeking yield more aggressively and this appetite will likely be sustained. Nonetheless, the broker cautions that, rather than simply seeking yield, a high degree of earnings certainty needs to be the main plank in portfolio construction.

Morgan Stanley's investment focus is on non-bank financials, global, dividend and structural growth. The broker is more constructive on health care, energy and insurance and less so on banks, real estate and capital goods.

Top picks in Credit Suisse's portfolio now include AGL Energy ((AGK)) and Toll Holdings ((TOL)). In the case of AGL the broker's Outperform rating is based on detail analysis of the generation market's gas and coal supply agreements. AGL is the largest generator in the market and has a fixed cost of coal to 2025. As coal contracts reset in coming years to export net-back prices the cost of generating electricity will rise proportionally which will result in higher wholesale electricity prices.

For Toll, the new IPEC sorting facility has opened in Sydney and this equipment can sort to the level of street, compared with only post codes in the previous system. A similar facility is under construction in Melbourne. Credit Suisse estimates that the cost savings and efficiency gains could deliver a 1.4 percentage point margin improvement for the Australian operations of Toll's Express logistics business.
 

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