Weekly Broker Wrap: Housing, Oz Equities, Consumer, Gold Stocks, FX And Asian Economies

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-Deutsche Bank positive on housing
-Are equity raisings hindering growth?
-Morgans' consumer picks for a downturn
-AUD gold price support as US rates rise
-AUD, NZD rally fading?
 

By Eva Brocklehurst

Housing

Deutsche Bank confesses to being uncertain about what the word "peak" actually means when it comes to housing. Does it mean prices, or construction? Does it mean a peak in the growth rate or the level of construction?

The broker believes the distinctions are crucial to the picture. Recent falls in auction clearance rates may not mean house construction has peaked. It may pre-empt a slowdown in house price growth but, historically, there have been periods when house prices have been flat after a boom.

There is no reason why this time it should be different. The broker also contends there is scope for momentum to spread beyond Sydney, particularly to Queensland.

In terms of record housing starts, relative to the population these are below previous peaks. Deutsche Bank suspects there is a lot of catch-up to be done in terms of building. Construction needs to rise 20% to get back to trend.

The broker also believes renters, not mortgagees, are the ones struggling with affordability. The cycle is also well explained by domestic factors as foreign inflows are not that large in relative terms.

Apartment prices, the main target of foreigners, haven risen 10% less than detached houses. All up, Deutsche Bank finds it is not too difficult to construct a positive view on housing.

Portfolio Strategy

One reason cited for a lack of earnings growth in local stocks has been the large amount of equity issuance, with Goldman Sachs noting that few companies have embarked on a strategy of shrinking to grow.

There are around 400 global firms which have managed to shrink their share base by more than 10% since 2009 while only one Australian has achieved this, that being CSL ((CSL)). Goldman calculates that the net supply of Australian equity is running at twice its historical average. This is bucking a global trend.

Capital raising by the banks may have been a major contributor but the increased flow of small cap initial public offerings of shares has also been significant. Goldman notes the gap is widening between the amount of capital raised by small companies and their performance levels.

Since 2005, the market cap of the small ordinaries index has risen by 68%, despite the index having produced a negative return of 14% over that period, Goldman notes.

Consumer Discretionary

Morgans observes there has been speculation about Australia entering a recession. Regardless of whether this is the case, the broker takes a look at those stocks which would be best positioned to perform in a soft domestic economy with fragile consumer sentiment.

Burson Group ((BAP)) is considered to have defensive earnings growth and a lower Australian dollar should be offset by higher than expect cost synergies. The broker also likes Domino's Pizza ((DMP)), Super Retail ((SUL)) and RCG Corp ((RCG)) as these have strong core products and a dominant market position as well as reasonable valuation.

Wesfarmers ((WES)) and Lovisa ((LOV)) are also in the mix. The strength of the Wesfarmers balance sheet provides additional comfort it can weather a slowdown while Lovisa has a low average transaction value and the fast fashion nature of the product makes it more resilient.

Having a strong competitive advantage is also important and Morgans likes Beacon Lighting ((BLX)) in this regard.

AUD Gold

UBS suspects many investors have been avoiding gold because of risk aversion to commodities in general as well as expectations that higher US interest rates will weigh on the precious metal going forward.

Yet, as the broker notes, some gold names are up around 54% in the year to date, beating the Australian dollar gold price, which has risen 11% while the ASX-200 is down 3.0% comparatively. US interest rates remain the primary driver of the gold price but other factors are inflation, safe haven perceptions and central bank transactions.

Recently China lifted its official gold reserves and, when combined with strong consumer demand, UBS believes this transfer of physical gold from the west to the east could play a crucial part in how gold is priced in future.

The broker believes investor sentiment towards Australia's economy may mean the local dollar trades lower if the US Fed raises rates and this will offset any potential downgrade in the US dollar gold price.

UBS is drawn to Evolution Mining ((EVN)) for its free cash flow which is driven by output of 800,000 ozs per annum at an all-in sustainable cost (AISC) of $1,000/oz. Alacer Gold ((AQG)) also offers exposure to one of the lowest cost gold projects in the world and Regis Resources ((RRL)) has re-positioned to better compete in the mid-tier space with guidance of 200,000 ozs at an AISC of $1,020/oz.

Australian and New Zealand Currencies

Commonwealth Bank analysts suspect the recent rally in the Australian and New Zealand dollars will fade. The pair have risen since the beginning of October, mainly on the back of the weaker US dollar as market participants push back the start of the US Fed's rating tightening cycle.

The analysts believe surging commodity supply is a significant headwind to a recovery in the currencies as commodities comprise around 70% of the two countries' exports.

Mining commodity supply should stay strong because of a decade-long investment surge which has permanently expanded productivity capacity. It is not easy or cheap to close a mine.

The analysts have recently reduced 2016 forecast for global growth to 3.1% from 3.5% because of poor prospects for emerging markets. They believe there is a rising risk of crises in emerging markets. Both Brazil and Russia are already in recession.

In connection, the Australian dollar is often used as a proxy for non-Japan Asian currencies and these are expected to weaken because of soft demand in more advanced economies, which in turn reduces export demand from Asia. In this, New Zealand has less of a direct link but has a high export exposure to Asia via Australia.

The biggest risk to the analysts' view on the currency pair is a further delay to the start of rate hikes in the US.

Asian Economies

The CBA analysts expect most Asian economies will decelerate in the near term, as the demand for products made in the region remains sluggish. China's economy has been slowing for more than five years and there is further to go, the analysts maintain.

The housing market poses the largest threat to Hong Kong's stability as prices have risen more than 183% since 2009. A correction is pending, the analysts maintain. India's economy, meanwhile, is less exposed to global demand and should maintain momentum, driven by increased infrastructure investment and robust urban household consumption.

Indonesia's economic outlook is bleak given the soft commodity price environment but the government is pushing through some reforms to accelerate investment. Malaysia is also struggling while the Philippines has recently showed signs of weakening. The analysts observe South Korea will continue to moderate and growth in Taiwan has turned out at the slowest pace in three years.

Vietnam has been the exception recently, with faster economic growth and its export profile now more technology-intensive. One third of its exports now electronics.

Osprey Medical

Osprey Medical's ((OSP)) trial of the AVERT system did not achieve one of its primary end-points – a reduction in contrast-induced acute kidney injury in patients who had been administered dye with the AVERT system.

Still, based on interim data, the US Food & Drug Administration has approved the addition of claims for dye reduction, image quality and reflex reduction to the AVERT system approval. So, while the company cannot market the direct benefits of using AVERT, it will be able  to promote the product as the only FDA-approved system for minimising the amount of contrast given to patients.

As most guidelines recommend minimising dye, Canaccord Genuity believe  there will be robust adoption of the AVERT system by clinicians. The broker maintains a Buy rating and has reduced its target to $1.15 from $1.50 on the stock.

Blackmores

Chinese consumer demand for foreign health supplements is a bright spot as far as Blackmores ((BKL)) is concerned. Goldman Sachs believe the increased outbound travel to Australia and the popularity of the company's brand in Australia, as well as attractive margins, means strong earnings growth is on the cards for FY16.

The broker has upgraded its target to $150 on higher margins, given operating leverage from strong revenue growth. Goldman retains a Buy rating. The broker believes the stock's premium to the market is justified given its 3-year earnings growth rate  of 27% and high cash returns.
 

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