By Rudi Filapek-Vandyck, Editor FNArena

Guide:

The FNArena database tabulates the views of eight major Australian and international stock brokers: Citi, Credit Suisse, Deutsche Bank, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS.

For the purpose of broker rating correlation, Outperform and Overweight ratings are grouped as Buy, Neutral is grouped with Hold and Underperform and Underweight are grouped as Sell to provide a Buy/Hold/Sell (B/H/S) ratio.

Ratings, consensus target price and forecast earnings tables are published at the bottom of this report.

Summary

Period: Monday January 23 to Friday January 27, 2017
Total Upgrades: 10
Total Downgrades: 17
Net Ratings Breakdown: Buy 43.87%; Hold 41.88%; Sell 14.25%

Stockbroking analysts continue to issue more downgrades for individual stock ratings than upgrades. For the week ending Friday, 27th January 2017, FNArena registered ten upgrades versus 17 downgrades.

Stocks receiving upgrades during the week include BlueScope Steel, ResMed, Vicinity Centres and Western Areas (twice). Stocks receiving downgrades include Bendigo and Adelaide Bank (twice), ERM Power (three times), Village Roadshow, Westfield and, yes, BlueScope Steel too.

BlueScope Steel also tops the week's table for positive gains to price targets (+19%), beating Sims Metal, CSL, ResMed and others. On top of the list for negative revisions to price targets sits Village Roadshow (-10.9%), followed by APN News & Media (-9.3%) and Santos (-3%).

Investors might draw confidence from the fact that one week out from the start of the local reporting season, positive revisions are considerably larger than negative adjustments. This is not necessarily the case for profit estimates.

Western Areas was primus inter pares for positive adjustment to forecasts. The gain of 1589% merely proves how fickle the commodities space still is with leverage high in both directions. Sandfire Resources, Santos, South32 and Sims Metal all enjoyed noticeable gains too.

Negative adjustments were large too with ERM Power grabbing the wooden spoon for the week, suffering a blow of -134% to broker estimates. Other noticeable victims of negative revisions include AMP, Village Roadshow, Senex Energy and Oil Search.

Upgrade

ALS LIMITED ((ALQ)) Upgrade to Buy from Hold by Deutsche Bank .B/H/S: 3/2/2

Share prices for engineers and contractors in Australia have recovered from last year's lows on the basis that outlooks and market dynamics have improved. Deutsche Bank analysts acknowledge this much, but they still maintain it's better to remain cautious.

The analysts continue to see earnings risks across the sector, highlighting there are significant differences between markets and sub-markets when it comes to assessing this part of the share market.

ALS Ltd receives an upgrade to Buy from Hold. Price target jumps to $6.74 from $5.50.

BLUESCOPE STEEL LIMITED ((BSL)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 5/2/0

BlueScope has raised its first half earnings guidance by 18% to $600m  driven by improved pricing, spreads and a solid performance from the building products division.

Following the upgrade to guidance, Ord Minnett raises its rating to Accumulate from Hold and the target to $12.50 from $10.20.

Underpinning the broker's view is the fact that the company's low earnings multiples, which more than compensate for earnings volatility, and a rapidly de-gearing balance sheet provide potential for near-term capital management.

See also BSL downgrade.

BRAMBLES LIMITED ((BXB)) Upgrade to Buy from Neutral by UBS .B/H/S: 4/2/1

A lack of disclosure and a poor explanation from management for the surprise downgrade to guidance has driven a sharp correction in the share price, UBS observes.

The impact of US retailer de-stocking experienced in December is without anecdotal support and how long the impact continues is uncertain. The broker notes the company is waiting to see January numbers before assessing the likely full year impact.

UBS takes the view that the de-stocking represents a one-off step change in earnings. Despite the uncertainty, UBS believes the business model is intact and upgrades to Buy from Neutral. Target is reduced to $11.60 from $12.60.

See also BXB downgrade.

CHARTER HALL RETAIL REIT ((CQR)) Upgrade to Neutral from Underperform by Macquarie .B/H/S: 0/3/3

Macquarie reviews the outlook ahead of the first half results. The stock remains a relatively defensive proposition although the broker is of the view that near-term income growth will be hindered by fewer anchor tenants in turnover rent, low initial yields on development and further dilutive asset sales.

Nevertheless, with the stock trading near estimates of net tangible assets and the potential corporate risk from Shopping Centres of Australasia ((SCP)) the rating is upgraded to Neutral from Underperform. Target is raised to $4.24 from $4.18.

OROTONGROUP LIMITED ((ORL)) Upgrade to Neutral from Sell by Citi .B/H/S: 0/1/0

OrotonGroup's market update yet again did not meet market expectations. Citi analysts have reduced their price target to $1.90 from $2.05 but post share price shellacking they've also upgraded to Neutral from Sell.

The decision to upgrade is motivated by the fact the analysts anticipate a turnaround in fortune in FY18, when a new range in designer handbags, jewelry and perfume should help sales, along with less discounting.

RESMED INC ((RMD)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 6/1/0

Ord Minnett considers the company on the cusp of a return to double-digit growth, following the successful launch of its new masks. A refresh of the product should deliver a solid benefit to product mix, supporting a rise in gross margins.

The broker's confidence in the outlook is supported by US political changes, which signal a more benign funding environment and this limits the pressure on prices. The broker raises its recommendation to Accumulate from Hold and the target to $9.50 from $8.25.

TOX FREE SOLUTIONS LIMITED ((TOX)) Upgrade to Overweight from Equal-weight by Morgan Stanley .B/H/S: 2/2/1

Morgan Stanley forecasts Tox's earnings from resource sector construction will fall to less than 1% in FY18, from 43% in FY13. Higher margin production earnings will grow in FY18 driven by contract wins.

Tox is trading at a 35% discount to peers and has a history of rapid re-rates, Morgan Stanley points out. With earnings troughing, and the Daniels acquisition offering long term synergies, valuation and risk/reward are now attractive to the broker.

Upgrade to Overweight. Target rises to $3.00 from $2.65. Industry view: In-line.

VICINITY CENTRES ((VCX)) Upgrade to Accumulate from Hold by Ord Minnett .B/H/S: 1/2/2

Ord Minnett suggests the A-REIT sector retains all the necessary ingredients for attractive risk-adjusted returns. The main risk is an inflection point in the property cycle. Underperformance has potential to continue if long bond yields continue to rise.

Ord Minnett upgrades to Accumulate from Hold, mainly on valuation grounds. Target is $3.25.

WESTERN AREAS NL ((WSA)) Upgrade to Hold from Sell by Deutsche Bank and Upgrade to Neutral from Sell by Citi .B/H/S: 1/4/1

December quarter production was ahead of Deutsche Bank's estimates because of strong mined grades. Operating costs were below forecasts.

The broker suspects the company could exceed guidance for the seventh year in a row. The stock trades as a proxy for nickel price sentiment and, given the imminent re-start of Indonesian ore exports, sentiment remains weak.

Whilst uncertainty continues, the broker considers the valuation is less stretched and, while remaining cautious, upgrades to Hold from Sell. Target is $2.40.

As the company released a stronger-than-expected December quarter performance, Citi analysts have decided to upgrade to Neutral from Sell. They expect the company to either meet or beat FY17 production guidance and have lifted forecasts.

Estimates have received a boost and this pushes up the price target by 46c to $2.38. On current projections, shareholders should expect resumption of dividend payouts from FY18 onwards.

Downgrade

AIR NEW ZEALAND LIMITED ((AIZ)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 0/4/0

After a share price rally for Air NZ, Macquarie is downgrading to Neutral, suggesting the stock is now fair value. Dec Q stats showed yields continued to fall due to competition, but that the rate of those falls is now slowing.

Air NZ's numbers should start to improve ahead as a year passes since competition entry, Macquarie suggests. Yield momentum will need to improve but the broker finds competition rationalisation encouraging. Target falls to NZ$2.18 from NZ$2.25.

BENDIGO AND ADELAIDE BANK LIMITED ((BEN)) Downgrade to Sell from Neutral by UBS and Downgrade to Sell from Buy by Citi .B/H/S: 0/1/5

Headwinds facing Australian banks are well known and UBS believes in recent times many of these factors have eased.

Investment property lending has picked up again, mortgage re-pricing suggests banks are more comfortable with meeting targets, while higher bond yields should reduce pressure on net interest margins.

To reflect the improvements the broker upgrades FY17 forecasts by around 2%. That said, a subdued medium-term growth outlook continues.

Despite the recent pull back the broker believes most of the positive news is factored in and downgrades to Sell from Neutral. Target is raised to $10.00 from $9.50.

Citi analysts have been reviewing the regional lenders in Australia. While Bank of Queensland is seen as offering one of most attractive yields in the market, the opinion about Bendigo and Adelaide Bank at present share price level is quite the opposite.

Citi analysts are of the view "Bendalaide's" strong performance over H2 2016 has run ahead of expectations, and risk is now that disappointment is about to announce itself. Downgrade to Sell from Buy. Target falls to $11.75 from $12.25.

BLUESCOPE STEEL LIMITED ((BSL)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 5/2/0

The company has confirmed first half expectations for $600m in EBIT, materially higher than the guidance "of at least $510m" delivered at the AGM in November.

The greatest surprise to Credit Suisse was the uplift in building products, dominated by a stronger performance in US operations from higher steel prices and margins.

The broker downgrades to Neutral from Outperform on valuation grounds and increases the target to $10.70 from $10.30.

See also BSL upgrade.

BRAMBLES LIMITED ((BXB)) Downgrade to Underperform from Neutral by Credit Suisse .B/H/S: 4/2/1

US retailer de-stocking and weak pricing in recycled pallets, along with delayed purchase decisions, have caused the company to issue a warning that it will not achieve forecast profit estimates in FY17. Credit Suisse lowers its FY17 US pallets EBIT estimates by around 15%.

The broker notes it is not clear how severe or how long the de-stocking will be and there is a risk with the new CEO that earnings will get re-based. Rating is lowered to Underperform from Neutral. Target is reduced to $9.80 from $11.30.

See also BXB upgrade.

CIMIC GROUP LIMITED ((CIM)) Downgrade to Sell from Hold by Deutsche Bank .B/H/S: 0/0/3

Share prices for engineers and contractors in Australia have recovered from last year's lows on the basis that outlooks and market dynamics have improved. Deutsche Bank analysts acknowledge this much, but they still maintain it's better to remain cautious.

The analysts continue to see earnings risks across the sector, highlighting there are significant differences between markets and sub-markets when it comes to assessing this part of the share market.

The rating for Cimic has been downgraded to Sell from Hold. Target lifts to $27.12 from $25.76.

ERM POWER LIMITED ((EPW)) Downgrade to Underperform from Neutral by Macquarie and Downgrade to Reduce from Hold by Morgans and Downgrade to Neutral from Buy by Citi .B/H/S: 0/1/2

ERM Power has made an unusual move in using penalty credits over its inventory to settle 2016 large-scale generation certificate (LGC) obligations. The move should increase earnings and tax, Macquarie notes, yet ERM has not changed earnings guidance.

The broker sees the move as logical, but the absence of an upgrade to Australian gross margins is concerning. Current margins appear thus to be well down on FY16. On that basis, and with no earnings upgrade, Macquarie downgrades to Underperform. Target falls to $1.15 from $1.24.

The company has changed strategy regarding Large-scale Generation Certificates (LGC) and this means, bottom line, it'll become a tax payer, accumulating franking credits that can later on be attached to dividends paid.

Morgans analysts point out this will also reduced cash flows in the medium term. This implies there is downside risk to the cash dividend, and that means downside risk for the share price, Morgans finds. Downgrade to Reduce from Hold. Target price remains 99c.

Note: Morgans has cut DPS forecasts to 8c from 12c previously (unchanged on gross basis given the addition of franking credits).

Citi analysts have pulled back the rating to Neutral from Buy. On their observation, the share price has rallied by 50% since July last year. There are issues with management's credibility, given omissions in prior guidance provided, suggest the analysts.

While Citi continues to see value on a longer term horizon, there's now an expectation the twelve months ahead won't be that flash. The new deal (complex and not for everyone to understand, explain the analysts) gets the thumbs up. Target loses 1c to $1.31.

GPT ((GPT)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 1/3/2

Macquarie expects 2016 operating earnings per share of 29.9c, in line with the growth guidance provided at the September quarter update. The growth rate into 2017 is expected to slow.

The broker considers the stock a solid, defensive proposition with a diversified exposure but with a single digit return and lower trajectory for earnings expected it is downgraded to Neutral from Outperform. Target slips to $4.98 from $5.16.

NATIONAL STORAGE REIT ((NSR)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 1/2/1

Ord Minnett suggests the A-REIT sector retains all the necessary ingredients for attractive risk-adjusted returns. The main risk is an inflection point in the property cycle. Underperformance has potential to continue if long bond yields continue to rise.

Ord Minnett downgrades to Hold from Accumulate, mainly on valuation grounds. Target is $1.52.

NORTHERN STAR RESOURCES LTD ((NST)) Downgrade to Neutral from Outperform by Macquarie .B/H/S: 2/3/0

Northern Star's net production and costs were largely in line with Macquarie's forecasts for the Dec Q. Increased production at Jundee foreshadows expectation of a similar increase at the Kalgoorlie operation as new mines begin to contribute.

But the share price has gained 30% since December against a 5% rise for the ASX100, reaching the broker's target price of $3.70. Hence Macquarie downgrades to Neutral.

SCENTRE GROUP ((SCG)) Downgrade to Accumulate from Buy by Ord Minnett .B/H/S: 3/1/2

Ord Minnett suggests the A-REIT sector retains all the necessary ingredients for attractive risk-adjusted returns. The main risk is an inflection point in the property cycle. Underperformance has potential to continue if long bond yields continue to rise.

The broker downgrades to Accumulate from Buy, mainly on valuation grounds. Ord Minnett retains a $4.70 target.

SANDFIRE RESOURCES NL ((SFR)) Downgrade to Neutral from Buy by Citi .B/H/S: 4/3/1

Citi downgrades to Neutral from Buy following a rally in the share price. The analysts have also pushed out some of their production forecasts.

The analysts point out, with mine life at DeGrussa constrained by exploration, developing a new project medium term is necessary.

SPOTLESS GROUP HOLDINGS LIMITED ((SPO)) Downgrade to Neutral from Buy by Citi .B/H/S: 0/3/0

Citi analysts have updated their analysis and there's now an expectation the company's interim report is poised for disappointment. Estimates have been reduced by no less than -30% for this year and next.

Dividend payout ratio has fallen too. Price target dives to $1.07 from $1.80. Downgrade to Neutral from Buy.

VILLAGE ROADSHOW LIMITED ((VRL)) Downgrade to Neutral from Buy by Citi .B/H/S: 2/2/0

As Village Roadshow has reported attendance at its Theme Parks has been adversely impacted by Dreamworld’s incident over at competitor Ardent Leisure ((AAD)), Citi analysts have downgraded to Neutral from Buy. Citi analysts estimate Village’s total theme park attendance is down -6% since the incident.

The stockbroker finds the short term outlook clouded, with the impact on the international and interstate customers yet to reveal itself. Estimates have been cut. Price target falls to $3.85 (was $5.40) also taking into account lower valuation multiples.

WESTFIELD CORPORATION ((WFD)) Downgrade to Underperform from Outperform by Macquarie .B/H/S: 4/1/1

Macquarie reviews the outlook ahead of the 2016 results. The broker expects operational earnings of US33.1c, below recently downgraded guidance of US33.7-34.0c.

Positive aspects to the investment thesis include the potential for a value-affirming restructure and material apartment earnings potential not yet factored into consensus.

The broker downgrades to Underperform from Outperform as the recent re-rating of the share price has compressed total returns and there is downside risk to the 2017 outlook. Target falls to $9.30 from $9.58.

 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

Broker Rating

Order Company New Rating Old Rating Broker Upgrade 1 ALS LIMITED Buy Neutral Deutsche Bank 2 BLUESCOPE STEEL LIMITED Buy Neutral Ord Minnett 3 BRAMBLES LIMITED Buy Neutral UBS 4 CHARTER HALL RETAIL REIT Neutral Sell Macquarie 5 OROTONGROUP LIMITED Neutral Sell Citi 6 RESMED INC Buy Neutral Ord Minnett 7 TOX FREE SOLUTIONS LIMITED Buy Neutral Morgan Stanley 8 VICINITY CENTRES Buy Neutral Ord Minnett 9 WESTERN AREAS NL Neutral Sell Citi 10 WESTERN AREAS NL Neutral Sell Deutsche Bank Downgrade 11 AIR NEW ZEALAND LIMITED Neutral Buy Macquarie 12 BENDIGO AND ADELAIDE BANK LIMITED Sell Buy Citi 13 BENDIGO AND ADELAIDE BANK LIMITED Sell Neutral UBS 14 BLUESCOPE STEEL LIMITED Neutral Buy Credit Suisse 15 BRAMBLES LIMITED Sell Neutral Credit Suisse 16 CIMIC GROUP LIMITED Sell Neutral Deutsche Bank 17 ERM POWER LIMITED Sell Neutral Morgans 18 ERM POWER LIMITED Sell Neutral Macquarie 19 ERM POWER LIMITED Neutral Buy Citi 20 GPT Neutral Buy Macquarie 21 NATIONAL STORAGE REIT Neutral Buy Ord Minnett 22 NORTHERN STAR RESOURCES LTD Neutral Buy Macquarie 23 SANDFIRE RESOURCES NL Neutral Buy Citi 24 SCENTRE GROUP Buy Buy Ord Minnett 25 SPOTLESS GROUP HOLDINGS LIMITED Neutral Buy Citi 26 VILLAGE ROADSHOW LIMITED Neutral Buy Citi 27 WESTFIELD CORPORATION Sell Buy Macquarie

Recommendation

Positive Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 CSL CSL LIMITED 64.0% 29.0% 35.0% 7 2 WSA WESTERN AREAS NL -7.0% -36.0% 29.0% 7 3 SDA SPEEDCAST INTERNATIONAL LIMITED 100.0% 75.0% 25.0% 4 4 BLD BORAL LIMITED 50.0% 33.0% 17.0% 4 5 CQR CHARTER HALL RETAIL REIT -50.0% -67.0% 17.0% 6 6 SYD SYDNEY AIRPORT HOLDINGS LIMITED 29.0% 14.0% 15.0% 7 7 APN APN NEWS & MEDIA LIMITED 80.0% 67.0% 13.0% 5 8 VCX VICINITY CENTRES -30.0% -40.0% 10.0% 5 9 RMD RESMED INC 79.0% 71.0% 8.0% 7 10 PGH PACT GROUP HOLDINGS LTD 42.0% 40.0% 2.0% 6

Negative Change Covered by > 2 Brokers Order Symbol Company New Rating Previous Rating Change Recs 1 EPW ERM POWER LIMITED -67.0% 33.0% -100.0% 3 2 BEN BENDIGO AND ADELAIDE BANK LIMITED -79.0% -36.0% -43.0% 7 3 AHY ASALEO CARE LIMITED 33.0% 67.0% -34.0% 3 4 CIM CIMIC GROUP LIMITED -100.0% -67.0% -33.0% 3 5 WFD WESTFIELD CORPORATION 42.0% 75.0% -33.0% 6 6 SGM SIMS METAL MANAGEMENT LIMITED -7.0% 21.0% -28.0% 7 7 VRL VILLAGE ROADSHOW LIMITED 50.0% 75.0% -25.0% 4 8 AQG ALACER GOLD CORP 60.0% 80.0% -20.0% 5 9 NST NORTHERN STAR RESOURCES LTD 40.0% 60.0% -20.0% 5 10 RRL REGIS RESOURCES LIMITED 31.0% 44.0% -13.0% 8

Target Price

Positive Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 BSL BLUESCOPE STEEL LIMITED 11.966 9.986 19.83% 7 2 SGM SIMS METAL MANAGEMENT LIMITED 12.387 11.017 12.44% 7 3 CSL CSL LIMITED 116.479 108.990 6.87% 7 4 RMD RESMED INC 9.556 9.078 5.27% 7 5 BLD BORAL LIMITED 6.333 6.143 3.09% 4 6 CIM CIMIC GROUP LIMITED 19.867 19.293 2.98% 3 7 SDA SPEEDCAST INTERNATIONAL LIMITED 4.445 4.333 2.58% 4 8 SFR SANDFIRE RESOURCES NL 6.320 6.164 2.53% 8 9 WSA WESTERN AREAS NL 2.573 2.514 2.35% 7 10 BEN BENDIGO AND ADELAIDE BANK LIMITED 10.821 10.750 0.66% 7

Negative Change Covered by > 2 Brokers Order Symbol Company New Target Previous Target Change Recs 1 VRL VILLAGE ROADSHOW LIMITED 4.500 5.055 -10.98% 4 2 APN APN NEWS & MEDIA LIMITED 3.290 3.628 -9.32% 5 3 STO SANTOS LIMITED 4.613 4.763 -3.15% 8 4 EPW ERM POWER LIMITED 1.150 1.183 -2.79% 3 5 AHY ASALEO CARE LIMITED 1.533 1.567 -2.17% 3 6 NST NORTHERN STAR RESOURCES LTD 4.260 4.280 -0.47% 5 7 ANZ AUSTRALIA & NEW ZEALAND BANKING GROUP 29.175 29.306 -0.45% 8

Earning Forecast

Positive Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 WSA WESTERN AREAS NL 3.149 0.187 1583.96% 7 2 SFR SANDFIRE RESOURCES NL 53.220 39.438 34.95% 8 3 STO SANTOS LIMITED -4.395 -6.593 33.34% 8 4 S32 SOUTH32 LIMITED 30.248 25.559 18.35% 7 5 SGM SIMS METAL MANAGEMENT LIMITED 59.727 52.111 14.61% 7 6 BSL BLUESCOPE STEEL LIMITED 104.100 96.357 8.04% 7 7 BHP BHP BILLITON LIMITED 176.389 164.585 7.17% 8 8 CSL CSL LIMITED 402.231 377.709 6.49% 7 9 GNC GRAINCORP LIMITED 60.677 57.910 4.78% 6 10 SDA SPEEDCAST INTERNATIONAL LIMITED 17.308 16.597 4.28% 4

Negative Change Covered by > 2 Brokers Order Symbol Company New EF Previous EF Change Recs 1 EPW ERM POWER LIMITED -2.550 7.450 -134.23% 3 2 AMP AMP LIMITED 13.643 19.513 -30.08% 8 3 VRL VILLAGE ROADSHOW LIMITED 23.625 28.975 -18.46% 4 4 SXY SENEX ENERGY LIMITED -12.817 -11.000 -16.52% 6 5 OSH OIL SEARCH LIMITED 10.102 11.819 -14.53% 8 6 EVN EVOLUTION MINING LIMITED 16.780 19.474 -13.83% 7 7 WFD WESTFIELD CORPORATION 34.785 38.773 -10.29% 6 8 NST NORTHERN STAR RESOURCES LTD 35.578 38.504 -7.60% 5 9 BXB BRAMBLES LIMITED 57.511 60.300 -4.63% 7 10 BLD BORAL LIMITED 35.080 36.166 -3.00% 4

Weekly Broker Wrap: Implications of Dec qtr CPI; housing downturn but crash unlikely; gold outlook; US dollar strength; and commodity prices in 2017.

-Downside risk emerging to RBA growth and inflation forecasts
-Housing activity seen peaking, developers become cautious and credit tightens
-Uncertainties underpinning gold but upside limited
-US dollar strength likely to ebb after March quarter
-Supply side factors to drive commodity prices in 2017
 

Consumer Price Index

Inflation is uncomfortably low. This is the message brokers take from the December quarter CPI. The trimmed mean CPI rose by just 0.4%, taking the core inflation rate for the end of the year to 1.6%. Headline CPI was also weak, rising by 0.5% and lifting to 1.5% for the year 2016. Fresh produce posted inflation of 5.6% in the quarter while packaged groceries posted deflation of -1.1%. Pricing power remains weak as consumers continue to experience a squeeze in cost of living.

Inflation is below the Reserve Bank's target band of 2-3% per annum across the cycle. The RBA appears prepared for a prolonged under-shooting of its target. Credit Suisse envisages downside risk emerging to the RBA's forecasts in coming quarters. The broker expects the RBA to downgrade official growth forecasts and possibly tweak inflation forecasts to reflect downside risks. This is consistent with more rate cuts, the broker believes.

Morgan Stanley agrees that the RBA is likely to trim its growth forecasts in February. The broker considers Australian growth and fiscal policy are out of sync with developed market peers and, as a result, expects inflation to only gradually recover to the low end of the target band. The broker expects the RBA will be patient with the below-target inflation rate, as strong dwelling price growth continues in Sydney and Melbourne.

Deutsche Bank expects the cash rate to be unchanged at the February board meeting and does not expect revisions to the central bank's broader view on inflation in the following Statement on Monetary Policy. The broker finds few reasons for core inflation in Australia to lift in coming quarters, given the Australian dollar trade weighted index is higher than a year ago and also because wages growth continues to either make new lows or run near record low levels.

The data, plus the broker's supermarket index, indicate that Wesfarmers ((WES)) and Woolworths ((WOW)) are continuing to drive weaker prices through investment, particularly in packaged groceries. On balance, Deutsche Bank expects the RBA to ease the cash rate this year, with the risk around May in terms of timing.

Macquarie notes Australia's inflation outlook is in stark contrast to that of the US, where a tight labour market has meant wages have grown, housing rents are rising. The divergence is likely to persist into 2017 and reinforces the broker's outlook for monetary policies to diverge. The trimmed mean was in line with Macquarie's forecasts, which has diminished expectations for a reduction to official rates in February.

The broker expects the RBA will deliver two additional rate reductions in 2017, with May and August being the key months, while a shift in either the Australian dollar or fiscal policy could alleviate the need for further rate cuts.

UBS notes the 0.5% gain in the quarter shows a clear rebound from inflation in the first half of 2016, only in part because of volatile fruit, petrol & tobacco prices. With an improvement in the economy's macro drivers and fading headwinds across commodities, UBS believes the RBA could be on hold for an extended period and argues against any need to lift rates before mid 2018. Citi also does not expect to receive further weakness in yearly prints on the CPI.

Moreover, the first quarter result in 2017 should be boosted by the fall in the CPI in the corresponding first quarter in 2016, and beyond that even a continuation of soft quarterly growth - at around 0.5% - should be enough to keep headline inflation above the bottom of the target band for most of 2017.

Still, given the economic inertia and low inflation expectations, the broker acknowledges a risk that its forecast of a pick up in inflation to 2% by mid year may not be reached. Citi, therefore, believes any move to price in a partial rate hike by the end of the year is premature.

Housing

Housing activity is now peaking, UBS observes, with housing commencements falling in the September quarter to the lowest level since 2014. The broker believes a multi-decade low in the commencements-to-approvals ratio for multi-unit dwellings suggests developers have become cautious and/or credit has tightened. While a correction is expected, the broker still believes a soft landing will ensue and a typical cycle is now underway.

UBS expects around a -30% peak-to-trough drop in commencements, similar to prior cycles, and that it should not get much worse. Meanwhile, house prices keep rising faster than income, as the RBA's official rate cuts in mid-2016 helped lift loan demand and pushed auction clearance rates to a record high. While the broker expects both commencements and activity to turn down sharply until the end of 2018 the lack of official rate hikes reduces the likelihood this downturn in housing activity will evolve into a crash.

Gold

The yellow metal continues to find support from safe-haven buying along with some near-term weakness in the US dollar. Yet ANZ Bank analysts suggest weakness in the physical market and rising interest rates should keep upside limited in the near term. The economic policy uncertainty emanating from the UK's prospective exit from the EU and President Trump's trade policies should continue to attract investor demand for gold.

This is unlikely to be enough to negate the headwind from increasing interest rates in the US. As a US Federal Reserve becomes more hawkish, the analysts expect US 10-year yields to push towards 3% in 2017. Hence, gold prices are expected to trade in a tight range of US$1200-1240/oz over the next couple of quarters.

US dollar

CIBC analysts believe the US dollar has one more bout of strength available but after the first quarter the currency will underperform as, in the absence of aggressive trade restrictions or greater-than-expected fiscal easing, it should depreciate against a number of major currencies.

The analysts note the surge in the US dollar post the election of Donald Trump has transformed into a sideways trend over the past month. They believe President Trump's protectionist stance will square off against his desire for a weaker currency and, given that the two are incompatible, something will have to give.

At this point, the analysts suggest the more aggressive US rhetoric on trade policy is unlikely to become a reality while fiscal policy is not shaping up to be a major boon for the economy, as more conservative members of Congress are expected to keep a lid on the deficit. As long as Twitter remains the favourite medium for comments on protectionism, and fiscal easing is offset by spending restraint, the analysts look for the US dollar strength to ebb from the March quarter.

Commodities

Commonwealth Bank analysts expect supply-side factors to drive commodity prices this year. Demand should ease as Chinese property construction slows. Prices should also decline as the hype fades surrounding Donald Trump's infrastructure spending plans. The analysts make notable changes to forecasts, including an upgrade to thermal coal prices, as China is targeting a domestic price of around US$65/t. Forecasts for gold are downgraded as markets price in multiple increases in the US Fed Funds rate.

Overall, the analysts consider the picture mixed, as only a mild contraction in Chinese construction activity is forecast. Analysis suggests that nickel and thermal coal prices are exposed to upside risks if global demand surprises on the upside, while China's steel and aluminium sectors are the most vulnerable to supply cuts.

The analysts note producer margins across most commodities currently signal deficit conditions. In some, such as iron ore and traded coal, nearly all suppliers are making cash profits. The analysts suspect a normalisation of margins would imply an end to these deficit conditions at the very least. The analysts expect commodity producer margins to decline throughout 2017 and normalise next year.

They observe there is still a great reluctance among producers to deploy risky capital, as suppliers are cautious about the outlook for the Chinese economy, which accounts for 40-60% of demand for most major mining commodities. While it is hard to call Chinese stimulus and producer reluctance to add supply temporary factors, they are acting to keep margins at elevated levels.

The analysts argue that, a producer's strategy to keep production stable and enjoy higher margins is fundamentally sound if most other producers are doing the same. As a result, a normalisation of margins will be driven by easing demand, an outcome that is dependent on slower Chinese consumption.

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Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending January 26, 2017

Last week saw the ASX200 on the slide from its highs, largely due to analyst calls on banks being overvalued, before rebounding on the renewed Trump rally on Wall Street.

Movements in short positions on the ASX were limited last week, with a couple of notable exceptions.

Super Retail Group has jumped into the table at 13.8% shorted from under 5% shorted the prior week. There has been no new news out of the company since its AGM in October. There is no capital raising on the cards, so I will reserve my judgement on whether this number is real, or a blip in the ASIC data, until next week. Unfortunately such blips are common.

Or does someone fear Amazon?

Aconex’ ((ACX)) stint at the top of the table has proven short-lived. The shares drifted lower last week and short positions fell to 15.4% from 16.6%, putting Myer ((MYR)) back into its familiar number one spot.

Shares in Vocus Communications ((VOC)) nevertheless continue to build, to 11.8% last week from 10.7%.

Shares in graphite prospect Syrah Resources ((SYR)) also drifted lower last week, and shorts fell to 9.6% from 11.0%.

REA Group has jumped into the table at 6.1% shorted from under 5% the week prior, and similarly Paladin Energy has jumped back in at 6.6%.

Weekly short positions as a percentage of market cap:

10%+

MYR   16.0
ACX   15.4
SUL    13.8
WSA   12.1
VOC   11.8
TFC     11.2
NEC    10.5
MTS    10.1

Out: SYR

9.0-9.9%

SYR, WOR
 
In: SYR          

8.0-8.9%

NWS, HSO, FLT, MYX

In: MYX                     Out: NXT, MND                               

7.0-7.9%

DOW, AWC, MND, NXT, BAL, MYO, EHE, ORE, ISD

In: MND, NXT           Out: MYX, IVC

6.0-6.9%

IVC, BEN, SGH, RWC, PDN, PRU, GTY, JHC, MTR, REA, CTD, CSV, BKL, SEK

In: IVC, PDN, REA               Out: ILU, OSH

5.0-5.9%

RIO, BGA, OSH, MSB, WOW, ILU, IFL, OFX, AAD, GEM, CSR, AWE, A2M, KAR, CAB,  SRX, IGO, AAC

In: OSH, ILU, KAR, SRX     Out: ORI, IPH, MLX

Movers and Shakers

Super Retail ((SUL)) held its AGM last October and has not given analysts any cause to update since. At the time, Credit Suisse suggested Bapcor’s ((BAP)) expansion may challenge Super’s supremacy in auto while similarly, the entry of Decathlon and JD Sports into the market will offer competition in the sports space. Another retailer planning to expand in Australia is Amazon.

Amazon likely has all retailers feeling uncomfortable. But as to whether this justifies a jump in shorts in Super Retail to 13.8% from oblivion in a week is questionable. This may just be a data blip.

REA Group ((REA)) sold its European assets late last month in a move that surprised analysts. This may explain why shorts in REA have risen to 6.1% from under 5% the week before.

Paladin Energy ((PDN)) is no stranger to the 5% plus shorted table, often appearing at the low end. With spot uranium prices continuing to wallow, and Paladin’s legacy supply contracts at higher prices now exhausted, the risk is the company will need to raise fresh capital in order to meet its upcoming debt repayment obligations.

Last week Paladin shorts rose to 6.6% from under 5%.
 

ASX20 Short Positions (%)

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position "naked" given offsetting positions held elsewhere. Whatever balance of percentages truly is a "short" position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, "short covering" may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to "strip out" the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option ("buy-write") position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a "long" position in that stock.

Another popular trading strategy is that of "pairs trading" in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a "net neutral" market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are "short". Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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