Tag Archives: Weekly Reports

article 3 months old

The Wrap: Online, Wealth Mgmt, Automotive

Domestic online media; Amazon in Australia; regulatory oversight of financial advisers; risks for automotive dealerships; booming electric vehicle sales.

-Are returns on invested capital sustainable for Australia's online media sector?
-Amazon entering Australia with a retail offering considered negative for incumbents
-Independent investment admin platform providers positioning as threats to incumbents
-Caution prevails as automotive dealer lending practices under scrutiny
-Lithium in strong demand in electric vehicles but excess supply still likely
 

By Eva Brocklehurst

Online Media

UBS is seeking answers to the question of investing in the online classifieds sector. The issue is about whether domestic online businesses are ex-growth and whether returns on invested capital are sustainable. Is there upside from international expansion?

REA Group ((REA)) may disappoint the market in FY17, UBS asserts. Performance versus expectations relies on second half volume outcomes, which are difficult to predict. The broker believes investors may not fully appreciate the potential for Australian residential revenue to re-accelerate in FY18, even without a rebound in volumes. UBS upgrades to Buy from Neutral and elevates the target to $56 from $52.

The broker notes Carsales.com's ((CAR)) domestic business is perceived as well entrenched, offsetting a lower earnings growth profile. Core domestic revenue growth has slowed to 5% in FY13-16 from 21% in FY10-13. The broker envisages incremental headwinds from retreating dealer profitability pools and competitive threats, and suspects recent initiatives may only be a partial offset. Rating is upgraded to Neutral from Sell with a $10.50 target.

The broker retains a Sell rating for Seek ((SEK)) and a $14.00 target. Drivers of domestic growth include yield, volume and new investments. UBS envisages limited near-term financial contributions from new earnings streams and, instead, expects initiatives will bolster the company's value for its two key stakeholders: hirers & applicants.

A strengthening of the network potentially adds placements but monetisation of a greater market share will be long-dated and the broker suspects consensus expectations for an expansion in margins of 8% in FY18 are unrealistic.

The broker believes, if the three companies could replicate their domestic models overseas, upside would be material, given the penetration of smart devices and rising wealth and urbanisation. On the other hand, market structures are also less favourable elsewhere and competition fiercer.

Amazon

There is speculation that Amazon will enter Australia. Citi believes the probability has increased albeit this could be 2-3 years away, but the impact on Australian retailers could entail more than a 20% cut to earnings. The broker notes more detailed information has been forthcoming about the company's entry to Singapore in early 2017, with reports signalling Amazon is looking for a retail CEO.

Reports suggest more than 250 trademark applications across a wide range of retail categories have been made by Amazon. This could relate to the export of Australian brands to Asian markets. The broker conceives an entry in 2019 as more probable, given the need to build distribution centres and secure branded supply in Australia.

Citi expects electronics will be the most affected, with earnings declines of 23% predicted for JB Hi-Fi ((JBH)) and 19% for Harvey Norman ((HVN)). This would be closely followed by Myer ((MYR)) at 18% and Super Retail ((SUL)) at 17%.

Wealth Management

Shaw and Partners notes the consequences of increased regulatory oversight has meant Australian financial advisers need to evaluate their business models and, most probably, implement a fee-for-service, and annuity-style business model rather one based on transactions. The main beneficiary from the changing landscape is the customer, with cheaper fees, upgraded transparency and improving advisor education for giving retail advice.

The broker notes a number of independent investment administration platform providers which generate revenue through fees, such as HUB24((HUB)), Praemium ((PPS)), OneVue ((OVH)) and the unlisted Netwealth have experienced notable growth in recent times, positioning as competitive threats to the incumbents such as the banks, AMP ((AMP)) and Macquarie Group ((MQG)).

The broker believes their success has been driven by regulation favouring independent financial advice, competitive pricing and the growth in separately managed accounts (SMAs). Most importantly, their nimble technology has resonated with the advisor community. Nevertheless, the broker believes future growth will be hard to come by, as competitive pressures intensify and pricing models evolve.

The broker believes administration fees will evolve to a flat structure as platform technology becomes commoditised. As well. regulatory burdens will weigh on profit margins and achieving economies of scale will be hugely important for the longevity of the business and industry. The broker initiates coverage of Fiducian ((FID)) with a Buy rating and $4.60 target, Managed Accounts Holdings ((MGP)) with Hold and target of $0.33 and HUB24 with a Sell rating and $4.10 target.

Automotive Dealerships

Further data has reinforced some of the risks facing automotive dealerships. Morgan Stanley also notes BMW Finance will pay $77m to compensate customers for lending failures, which should act as a warning to other finance companies. VFACTS data has shown further underperformance in Western Australia, which is a negative for Automotive Holdings ((AHG)).

Concerns about lending practices have been underscored by the update from Carsales.com at its AGM, where the company indicated its financial services arm sustained borrowing capacity reductions in the fourth quarter of FY16 which continued into FY17. While this is mainly from BMW Finance, which provides finance through Strattons, Morgan Stanley suspects other lenders have been more cautious as well.

The broker believes tightening consumer credit will pose a headwind to new car sales, which are normally financed. The broker is uncertain of the outcome from the pending update on regulation changes from ASIC (Australian Securities and Investments Commission) but believes it will change the way finance is sold at dealerships, which will result in a period of instability as changes are implemented.

Electric Vehicles

Macquarie observes electric car sales are booming and will soon enjoy a large market share. This will have implications for a range of commodities. In 2015, China, North America, Japan and Europe, where the vast majority of such cars are purchased, accounted for 664,000 electric vehicle purchases, more than double the number of 2014. Between January and October this year Macquarie estimates year-on-year growth was another 48%.

The broker believes such sales growth can only be maintained with some difficulty. In 2015 in Europe the increase owed a lot to customers buying ahead of the expiration of generous subsidy schemes in markets such as the Netherlands and Sweden. This year, although many incentives remain, some appear to be expiring at the end of the year. Still, the impact of the burgeoning market is expected to be felt over a long period.

What are the commodities being impacted? So far electric vehicles are pitched at the small end of the market, with limited range or, as with Tesla, a decent range at a higher price point. None are cost-effective compared with standard vehicles as yet. Macquarie estimates around 14% of global lithium demand will be accounted for by electric vehicles this year. Over the long term, average battery capacity should grow.

Chinese lithium spot prices have been falling since May following a substantial rally. Inventory overhang has been blamed. The broker does not believe growth in the electric vehicle market will be fast enough to absorb a wave of supply coming from Australia and elsewhere over the next few years. Nickel, unlike lithium, is used in two of the five prevailing lithium ion battery chemistries.

The demand case for nickel is much less compelling. Assuming that around 50% of electric batteries contain nickel, nickel demand could grow to 38,000t in 2021 from around 10,000t in 2016. Macquarie expects strong growth, but from a low base.

Cobalt is more tied to consumer electronics and China's moves to secure raw material. Given a dependence on Democratic Republic of Congo for supply, there are challenges for its use in electric vehicles and the broker suspects substitution risk is high. Macquarie assumes global cobalt demand for batteries grows at around 5% compound to reach 53,000t by 2020.

Platinum group metals derive most of their demand from autocatalysts, which are found in vehicles with internal combustion engines. The situation is bleak for these metals as both platinum and palladium are expected to experience significant declines in volumes, as autocatalysts from scrapped cars are recycled.


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Australian Corporate Bond Price Tables

PDF file attached.

Corporate bonds offer an alternative to equity investment in providing a fixed “coupon”, or interest payment, unlike equities which pay (or not) non-fixed dividend payments, and a maturity date, unlike equities which are open-ended.

Listed corporate bonds can be traded just as listed shares can be traded. Bonds bought at issue and held to maturity do not offer capital appreciation as an equity can, but assuming no default do not offer downside capital risk either. Pricing is based on market perception of default risk, or “credit risk”, throughout the life of the bond.

Bonds do offer capital risk/reward if traded on the secondary market within the bounds of issue and maturity. Coupon rates are fixed but bond prices fluctuate on perceived changes in credit risk and on changes in prevailing market interest rates.

Note that the attached tables offer three “yield” figures for each issue, being “coupon”, “yield” and “running yield”.

If a bond is purchased at $100 face value and a 5% coupon, and face value is returned at maturity, the running yield is 5% and the yield, or “yield to maturity” is 5%.

If a bond is purchased in the secondary market at greater than $100, the running yield, which is the per annum yield for each year the bond is held, is less than 5% because the coupon is paid on face value. The yield to maturity is also less than the coupon as more than $100 is paid to receive $100 back at maturity.

If a bond is purchased in the secondary market at less than $100, the running yield, which is the per annum yield for each year the bond is held, is more than 5% because the coupon is paid on face value. The yield to maturity is also more than the coupon as less than $100 is paid to receive $100 back at maturity.

Note that if a bond is trading on the secondary market at a price greater than face value the implication is the market believes the bond is less risky than at issue, and if at a lesser price it has become more risky. Bonds trading on yields substantially higher than their coupons thus do not offer a bargain per se, just a higher risk/reward investment. In all cases, bond supply and demand balances will also impact on secondary pricing.

Note also that while most coupons are fixed, the attached table also provides prices for capital indexed bonds (CIB) and indexed annuity bonds (IAB).

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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The Short Report

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 December 1, 2016

Last week saw the ASX200 rise up to kiss the 5500 resistance level twice, and fail twice. It is in this week we’ve seen the rapid Italian referendum sell-off and rebound, and we have now pushed through 5500.

Last week saw telco Vocus Communications ((VOC)), which had already fallen sharply, tank once more on weak guidance. Shorters were not yet prepared to take profit however, given Vocus shorts increased to 9.5% from 8.7%.

It was in the current week infant formula exporter Bellamy’s Australia crashed over 40% on a profit warning. There’ll be some disappointed shorters out there, given last week Bellamy shorts fell to 11.4% from 12.8%.

As Bellamy’s moved slightly down the 10% plus table, SaaS company Aconex moved up, rising to 13.9% from 12.5% to take the position of third most shorted.

I noted in last week’s Report that plumbing supplier Reliance Worldwide had made a debut appearance into the bottom of the 5% plus table. Last week Reliance shorts moved up to 6.2% from 5.1%.

And last week we saw building materials supplier Boral leap up into the 5% table from nowhere, to 6.0% shorted. However in Boral’s case we can look to the company’s announced capital raising as a reason the shorters have moved in.


Weekly short positions as a percentage of market cap:

10%+

MYR   16.7
WSA   14.4
ACX   13.9
WOR   11.8
NEC    11.6
MTS    11.5
BAL    11.4
TFC     10.7
MND   10.2

No changes

9.0-9.9%

SYR, VOC, ORE
 
In: VOC, ORE                        Out: AWC, HSO       

8.0-8.9%

AWC, HSO, GEM, JHC, MTR, NWS

In: AWC, HSO                       Out: VOC, ORE                                

7.0-7.9%

FLT, IGO, DOW, MYO, EHE, BEN, NXT, CVO, GTY, IVC

In: EHE, NXT, GTY                          Out: IFL

6.0-6.9%

IFL, OFX, SGH, BKL, SEK, MSB, RWC, PRY, ILU, RIO, OSH, AWE, BLD

In: IFL, OFX, RWC, BLD                 Out: GTY, EHE, NXT, WOW, ORI

5.0-5.9%

WOW, ORI, BGA, GOR, CAB, SUL, MLX, PDN, CSV, CSR, SPO, DMP

In: WOW, ORI, CSV             Out: OFX, RWC


Movers and Shakers

It’s been a wild old year for dairy products company, and most specifically infant formula producer, Bellamy’s Australia ((BAL)). When the Chinese started buying every can of formula they could get their hands on last year, Bellamy’s share price flew. When at the beginning of the year Beijing jumped in to implement restrictions, the share price tanked.

When peers such as a2 milk Company and Blackmores (a peer in selling dietary supplements to the Chinese) suggested the impact of new restrictions were not proving material, Bellamy’s share price rose again. But last Friday, when the company issued a profit warning on the basis there was indeed an impact on sales to China, the shares fell 43% in one day.

In the week leading up to last Friday, Bellamy’s shorts fell 1.4 percentage points to 11.4%. There’ll be a short trader or traders out there ruing that decision.

Software-as-a-service company Aconex ((ACX)) has not said or done anything for a couple months that has prompted Australia’s major broking houses to update forecasts, yet it seems the stock appears in either the ASX top ten gainers or decliners list almost daily. The trend has been down since the company’s AGM, but daily moves are often all over the shop.

Suffice to say, Aconex shorts last week rose 1.4ppt to 13.9% to make the stock the third most shorted on the ASX.

Plumbing supplier Reliance Worldwide ((RWC)) is well liked by analysts but there is some disagreement on a rich valuation. This probably explains why Reliance, which again has issued no new news lately, snuck into the bottom of the 5% plus table the week before and last week rose another 1.1ppt to 6.2%.

Building materials supplier Boral ((BLD)) last week announced the acquisition of a US fly ash company and a subsequent $2 million capital raising at an attractive discount to the prevailing share price. From nowhere, Boral has appeared in the table at 6.0% shorted.

Nothing sinister, just a typical hedge fund play of attempting to arbitrage the discount by shorting the shares and buying the rights issue.

 

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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Share Buybacks – Who’s Doing It?

International research suggests shares in companies that buy in their own equities are more likely to respond positively through share price appreciation. Investors should note, however, buying back own stock is not a guarantee for significant share price gains ahead.

For local research about investor benefits from capital management, including companies buying in their own shares, FNArena subscribers can read "Buy Capital Management"

Below is an incomplete overview of companies buying in their own shares this year. We very much appreciate all feedback, contributions and suggestions at info@fnarena.com

See attached excel file for more details (paying subscribers only)

8IH 8I Holdings 21/09/2016
ACQ Acorn Capital Inv Fund 10/10/2016
AFA ASF Group 26/04/2016
AGL AGL Energy 13/10/2016
AHY Asaleo Care 01/10/2015
AIB Aurora Global Income 14/12/2015
AIV ActivEX Ltd 01/11/2016
ALR Aberdeen Leaders Ltd 27/02/2015
APW AIMS Property Securities Fund 07/09/2016
AQF Australian Governance Masters 29/11/2016
ARA Ariadne Australia 21/08/2014
ARG Argo Investments 01/01/2016
AUF Asian Masters Fund 23/11/2016
AUI Australian United Investments 14/05/2015
AUP Aurora Property Buy-Write Trust 14/12/2015
BWF Blackwall Property Fund 15/03/2016
BWR Blackwall Property Trust 07/07/715
CAM Clime Capital. 21/12/2015
CAMPA Clime Capital Preference 15/08/2016
CGO CPT Global 27/08/2015
CHN Chalice Gold Mines 30/06/2016
CIM Cimic Group 29/12/2015
CIN Carlton Investments 29/11/2015
CIW Clime Investment Management 16/12/2015
CLT Cellnet Group 09/09/2015
CMC China Magnesium Corp 28/10/2014
CMI CMI Ltd 25/11/2016
CNI Centuria Capital 24/12/2015
CSL CSL Ltd 27/10/2016
CSR CSR Ltd 21/03/2016
CSV CSG Ltd 12/03/2016
CVC CVC Ltd 07/12/2015
CVW ClearView Wealth 19/12/2013
CYG Coventry Group 23/11/2015
DUI Diversified United Investments 01/06/2016
EAI Ellerston Asia Investments 27/09/2016
EMF Emerging Markets Masters Fund 21/12/2015
EMF Emerging Markets Masters Fund 21/12/2016
EZL Euroz Ltd 14/01/2016
FID Fiducian Group 03/03/2015
FRI Finbar Group 08/12/2014
GOW Gowing Bros 20/06/2012
GPT General Property Group 06/05/2016
HHY HHY Fund 24/08/2016
HOT HotCopper Holdings 02/11/2016
IAG Insurance Australia Group 21/11/2016
ICN Icon Energy 26/02/2015
IFT Infratil 24/08/2016
IPE IPE Ltd 12/11/2016
ISU iSelect 30/03/2016
ITD ITL Ltd 28/11/2016
JBH JB Hi-Fi 12/09/2016
KAT Katana Capital 30/12/2014
KAR Karoon Gas Aust 17/09/2015
KBC Keybridge Capital 07/12/2015
KKT Konekt 15/11/2016
LGD Legend Corp 24/12/2015
LLC Lend Lease Corp 28/08/2015
MEL Metgasco 04/02/2016
MFF Magellan Flagship Fund 13/08/2015
MGP Managed Accounts Holdings 14/08/2015
MHM MHM Metals 17/02/16
MIN Mineral Resources 04/12/2015
NVT Navitas 16/02/2016
OCL Objective Corp 26/02/2016
OPG OPUS Group 09/12/2016
ORL Oroton Group 26/04/2016
OZG Ozgrowth Ltd 30/12/2015
OZL OZ Minerals 14/03/2016
PME Pro Medicus 01/04/2016
PTM Platinum Asset Management 04/10/2016
QAN Qantas 08/09/2016
REY Rey Resources 24/05/2016
RCR RCR Tomlinson 21/12/2015
RND Rand Mining 12/12/2015
RUL RungePincockMinarco 07/12/2015
SGM Sims Metal Management 07/12/2015
SIP Sigma Pharmaceuticals 13/10/2014
SMX SMS Management & Tech 15/06/2015
SVW Seven Group Holdings 12/03/2016
SVW Seven Group Holdings 17/08/2016
SWK Swick Mining Services 14/12/2015
TBR Tribune Resources 28/09/2015
TGG Templeton Global Growth Fund 26/02/2016
TLS Telstra Announced 11/8/16
TOF 360 Capital Office Fund 02/05/2016
TOT 360 Capital Total Return 28/03/2016
VSC Vita Life Sciences 13/05/2016
WAT Waterco 07/04/2016
WIC Westoz Investment Co 30/12/2015
XPD XPD Soccer Gear Group 20/09/2016
YBR Yellow Brick Road Holdings 20/11/2015

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Uranium Week: Still Falling

Supportive news on both the demand and sell sides has not prevented the uranium spot price falling further still.

By Greg Peel

While the US was taking a break for Thanksgiving and markets were largely unattended, the spot uranium price fell a further US75c to end November on a new low of US$17.75/lb, based on industry consultant TradeTech’s price indicator. That price was unchanged as of last week despite a reasonable level of activity.

TradeTech reports seven transactions in the spot market last week totalling one million pounds U3O8 equivalent. The dip under US$18/lb did encourage some buying interest from utilities and even producers were in buying at low prices, but still the trajectory remains to the south.

Weak market conditions have forced the world’s biggest corporate uranium producer, Canada’s Cameco, into offering its workers extended paid vacations in the upcoming northern summer of 2017. In order to reduce costs in the low price environment, Cameco will halt production at its MacArthur River and Cigar Lake mines and Key Lake processing mill for several weeks.

On the demand side, there was much relief when the State of Illinois passed a landmark energy bill which will make it commercially viable for energy provider Exelon to maintain operations at its Clinton and Quad City reactors. In short, the bill recognises nuclear energy as carbon-free, alongside subsidised alternative energy sources.

While restricted to Illinois, the bill should provide hope legacy reactors in other US states may not be forced into closure if other state legislatures follow Illinois’ lead.

But what has to happen to turn the uranium price around?

Two transactions were reported in the uranium term markets last week, each totalling less than 1mlbs U3O8 equivalent. TradeTech reports several utilities are currently evaluating term contracts but yet the consultant was once again forced to drop term price indicators at the end of last month.

The mid-term indicator has fallen US$1.50 to US$19.00/lb and the long-term indicator has fallen US1.00 to US$34.00/lb.
 

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Australian Listed Real Estate Tables

PDF file attached.

Investors looking to diversify away from straight equity can invest in property as an alternative via direct investment, or by investing in units of listed or unlisted real estate investment trusts (REIT) or the shares of property developers.

Typically a REIT will purchase a number of similar properties, maintain those properties and collect rent from tenants, and pay a distribution (dividend) to the unit holder net of maintenance costs and management fees. REITs are primarily attractive to investors for their dividend yield but also offer capital upside on property value appreciation. The bulk of listed REITs fall into three property categories: office, being office blocks usually in a CBD; retail, being shops and shopping centres; and industrial, being warehouses, logistics centres and so forth. Other variations exist.

Property developers typically purchase land, build office, retail, industrial or residential complexes, and sell those properties. Developers offer a higher risk/reward investment than REITs given the lag time between construction and sale, and the capital committed to a project. Dividend yields are typically lower but capital up/downside typically greater.

The tables in the attached PDF list Australian REITs and developers and and calculations for dividend yield and valuation, including share price to earnings, price to net asset value (market value of property) and price to book value (property valuation on the company's/trust's books) for the purpose of investor assessment.
 

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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Weekly Ratings, Targets, Forecast Changes

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 November 28 to Friday December 2, 2016
Total Upgrades: 7
Total Downgrades: 12
Net Ratings Breakdown: Buy 42.97%; Hold 42.18%; Sell 14.85%

The lag effect between share price movements and stockbroking analysts adjusting their ratings became visible last week. Despite the Australian share market clearly running into headwinds as the week progressed, the number of downgrades for individual ASX-listed stocks still clearly outnumbered the number of upgrades.

For the week ending Friday, 2nd December 2016, FNArena registered seven upgrades and twelve downgrades. Four of the upgrades didn't reach higher than Neutral. Alumina Ltd and Investa Office were the only stocks to receive fresh Sell ratings.

As a result, the gap between total Buy ratings and Neutral recommendation has narrowed considerably. Total Buy ratings for the eight stockbrokers monitored daily now stand at 42.97% versus 42.18% on Neutral/Hold and the remaining 14.85% on Sell.

Positive adjustments to price targets were few and minimal, with REA Group topping the table (+2.6%), followed by Metcash (+2.4%). In a share market dominated by disappointing market updates, it should not surprise the numbers look a lot higher on the negative side. Vocus Communications saw its price targets tumble by no less than -24.6%. Next one to follow is Amcor (-4.8%), then follows Fairfax Media (-4.1%).

This was not the situation for earnings estimates. Mount Gibson's forecasts received a boost of +69%, easily beating Aristocrat Leisure (+29%) and Western Areas (+15%).  Most stocks enjoying upward adjustments to profit forecasts are commodity producers these days.

Stocks with downward adjustments to estimates include Vocus Communications (-9.7%), News Corp (-8.7%), Programmed Maintenance (-7.6%) and, yes indeed, gold producer Newcrest Mining (-4.5%).

Underlying, the new trend has become resources versus the rest of the market.

Upgrade

HUB24 LIMITED ((HUB)) Upgrade to Buy from Accumulate by Ord Minnett .B/H/S: 1/0/0

The company will acquire Agility Applications, a financial services technology provider, which will broaden broker relationships and enhance Hub24's non-custodial reporting on offer.

Ord Minnett notes Agility counts 40% of the broking market as clients and reports on $200bn of client assets, providing a rich cross selling opportunity with the Hub24 platform.

The broker reassesses its valuation methodology and includes Agility in its estimates. Rating is upgraded to Buy from Accumulate and the target is raised to $6.46 from $5.00.

JB HI-FI LIMITED ((JBH)) Upgrade to Neutral from Underperform by Credit Suisse .B/H/S: 3/3/1

The company has completed the acquisition of The Good Guys on November 28, earlier than expected. Credit Suisse consolidates profit from that date having previously assumed it would occur on January 1 2017.

This results in a $16m increase in EBIT for the first half and a 5% upgrade to earnings per share  for FY17. The broker's target increases to $26.43 from $26.16 and, because of recent share price weakness, the rating is upgraded to Neutral from Underperform.

PACT GROUP HOLDINGS LTD ((PGH)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/3/0

Pact's rigid packaging end-markets are finally showing signs of life, UBS notes, and dairy prices have recovered some 55% from their lows. This should provide for a better domestic outlook from the second half of FY17 once contract losses have been cycled through.

Acquisitions could provide further underpinning, leading UBS to consider risk/reward to now be more evenly balanced at the current valuation. Upgrade to Neutral. Target rises to $6.20 from $5.60.

TOX FREE SOLUTIONS LIMITED ((TOX)) Upgrade to Outperform from Neutral by Macquarie .B/H/S: 1/3/1

Tox Free's AGM revealed new contract wins at Ichthys and GLNG. Add in the retention of the Fortescue and ALNG contracts and the core business is on a strong footing heading into FY18, Macquarie suggests. There was no update on the Chevron contract, but this is becoming less of an issue, the broker believes.

With the core business winning contracts, the earnings outlook is solid and valuation is inexpensive, leading Macquarie to upgrade to Outperform. Target rises to $2.79 from $2.65.

VITA GROUP LIMITED ((VTG)) Upgrade to Add from Hold by Morgans .B/H/S: 1/0/0

The company has agreed new commercial terms with Telstra ((TLS)), with changes to the remuneration structure. No specific earnings impact was provided, although the company stated it expects to see volume improvement, offset by some margin compression.

Morgans suspects, overall, the remuneration changes reflect Telstra's cost pressures and this could see increased measures from Telstra to control the growth of the retail licensee channel.

The broker suspects the new deal reduces the medium/longer term growth opportunity in the company's retail channel but, that said, Vita Group has multiple growth drivers. Morgan upgrades to Add from Hold. Target falls to $4.00 from $5.20.

WESTFIELD CORPORATION ((WFD)) Upgrade to Neutral from Sell by Citi .B/H/S: 5/1/0

Citi analysts still believe market consensus forecasts are too high. They also believe news flow has been largely negative since their last update on the company in late August, with both Brexit and Trump occurring in core Westfield operating markets.

But... the share price pull back that has occurred since seems to provide sufficient compensation, hence why the rating moves to Neutral from Sell. Citi analysts have reduced estimates and their valuation. Target drops to $9.19 from $9.58.

WHITEHAVEN COAL LIMITED ((WHC)) Upgrade to Neutral from Sell by UBS .B/H/S: 2/4/2

UBS has upgraded its coking coal price forecasts by 9-27% in FY17-18 and thermal coal by 4-17% leading to earnings forecast increases for Whitehaven of 53-163%. The broker's new prices still remain well below current spot.

While Whitehaven remains beholden to Chinese policy, the recent share price pullback sees UBS upgrade to Neutral. Target rises to $2.90 from $2.60.

Downgrade

AMCOR LIMITED ((AMC)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 3/4/1

Credit Suisse downgrades to Neutral form Outperform because of changing macro conditions. The company's defensive revenue streams suggest it will be unlikely that the stock will outperform as investors seek growth.

The US dollar appreciation against the euro has induced downgrades to earnings per share forecasts of about 5%. First half EBIT is likely to be flat, in the broker's opinion, affected by the acquisition of Alusa. Target is reduced to $15.10 from $16.90.

ALUMINA LIMITED ((AWC)) Downgrade to Sell from Buy by UBS .B/H/S: 0/4/3

2016 was a big year of change for Alumina Ltd, UBS notes, given alterations to the AWAC JV with Alcoa. If the alumina price holds at its current US$320/t, the company should be able to increase returns to shareholders.

But this is not UBS' base case. The broker has lifted its alumina forecast to US$280 from US$260, resulting in 67-75% earnings forecast increases in FY17-18. The broker nevertheless suggests alumina is overbought and will retreat once Chinese restocking ends. 

This view, and a solid share price run, sees UBS downgrading to Sell. Target rises to $1.50 from $1.45.

BHP BILLITON LIMITED ((BHP)) Downgrade to Hold from Add by Morgans .B/H/S: 3/4/1

Morgans downgrades to Hold from Add following the recent strength in the share price which has meant its target has been achieved. Target is raised to $25.82 from $25.54.

The broker still considers the stock a key pick in the sector but expectations have cooled amid a belief that Chinese steel consumption will ease heading into the new year.

That said, the broker has increased confidence in its long-held view that the bottom of the resources cycle was hit in early 2016.

The main risk to its call on BHP is the ongoing legal process surrounding Samarco and short-term uncertainty in commodity prices.

INVESTA OFFICE FUND ((IOF)) Downgrade to Lighten from Hold by Ord Minnett .B/H/S: 1/3/1

Ord Minnett considers the Investa Commercial Property Fund's acquisition of Morgan Stanley's 8.9% stake in IOF is aimed at protecting its ownership of the Investa business by reducing the potential for IOF to be acquired by a third party.

The broker believes this is a negative for the share price in that the stock is trading at a premium that reflects the increased probability of being acquired. The broker also envisages Cromwell ((CMW)) is now likely to exit its 9.8% stake post the December distribution ex date, which raises the possibility of a discounted sale to third-party investors.

As a result, Ord Minnett reduces its rating to Lighten from Hold and maintains a $4.23 target.

METCASH LIMITED ((MTS)) Downgrade to Hold from Accumulate by Ord Minnett .B/H/S: 3/2/2

First half net profit of $82.8m was ahead of Ord Minnett forecasts, but was driven by gains at the corporate line, with core EBIT for food & grocery below expectations.

The broker downgrades to Hold from Accumulate and reduces the target to $2.00 from $2.30. Ord Minnett believes the competitive environment is challenging and likely to remain so, and this will consume much of the company's cost savings.

 While the company is executing well, the position of its customers in aggregate is not strong, which weighs on the competitive position of the wholesaler, in the broker's opinion.

RCG CORPORATION LIMITED ((RCG)) Downgrade to Hold from Add by Morgans .B/H/S: 0/2/0

Like-for-like sales were reasonably subdued in the year to date, with the exception of Accent. The company has announced a material increase to the roll out of stores and a stronger-than-expected margin performance for Accent.

Morgans makes slight upgrades to forecasts of earnings per share and moves to a 50-50 PE/DCF weighting. As a result, valuation falls to $1.62 from $1.94. Rating downgraded to Hold from Add.

TRANSURBAN GROUP ((TCL)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/3/0

The company's share price is up 12% from the November low, as fundamental value has re-asserted, Morgan Stanley notes.

The broker believes the growth projects will create value over time but there is some short-term risk to valuation, in terms of bond yields, and earnings, in terms of ride sharing.

The broker considers ride-sharing applications are positive in Australia, reducing congestion, but a near-term risk for US roads where customers with three or more occupants pay no toll.

Thus, the rating is downgraded to Equal-weight from Overweight. Target is lowered to $11.22 from $11.96. Cautious sector view retained.

360 CAPITAL GROUP ((TGP)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

360 Capital Group has entered into a transaction to sell 360 Capital Investment Management its responsible entity along with co-investment stakes in most of its funds, including 360 Capital Industrial ((TIX)) and 360 Capital Office ((TOF)), subject to a number of approvals from various stake holders.

The remaining entity will be cashed up, Morgans notes, and funds will be used for a buyback and to pursue new opportunities. The broker adjusts its target down to 95c, or close to net tangible asset valuation, from $1.04. Rating moves to Hold.

360 CAPITAL OFFICE FUND ((TOF)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

360 Capital Investment Management, as the responsible entity, has entered into a conditional contract to sell the majority of its funds management platform and co-investments to Centuria Capital ((CNI)).

As part of the transaction, Centuria will purchase all the units 360 Capital owns in TOF for around $47.4m or $2.25 per unit. Centuria Is considering a merger  of TOF and Centuria Metropolitan REIT ((CMA)), if in the best interest of unit holders.

Morgans downgrades to Hold from Add and reduces the target to $2.26 from $2.35.

TATTS GROUP LIMITED ((TTS)) Downgrade to Neutral from Outperform by Credit Suisse .B/H/S: 4/3/0

Credit Suisse downgrades to Neutral from Outperform as the shares have rallied after Tabcorp ((TAH)) acquired a 10% equity stake via an equity swap. The broker envisages little chance of another suitor emerging.

At this stage, the broker believes Tabcorp offers a more compelling way to play the merger. The target is reduced to $4.50 from $4.85.

VOCUS COMMUNICATIONS LIMITED ((VOC)) Downgrade to Equal-weight from Overweight by Morgan Stanley .B/H/S: 4/2/0

Morgan Stanley observes investors have de-rated the Australian telco sector in recent months and the company shares are down 40% in the year to date.

The broker believes the stock offers the highest risk/return characteristics in the sector. While from an industry perspective there remain revenue growth opportunities for the company as a vertically integrated telco in the NBN, there are two changes in recent months which have changed Morgan Stanley's fundamental view.

These are increased telco competition, which is negative for margins and future growth trajectory, and, specific to Vocus, disappointing early results from the just-completed acquisition of Nextgen.

Morgan Stanley downgrades to Equal-weight from Overweight. Target is reduced to $5.00 from $9.55. Industry view is In-Line.

XENITH IP GROUP LIMITED ((XIP)) Downgrade to Hold from Add by Morgans .B/H/S: 0/1/0

The company will buy Griffith Hack for $152m. Morgan flags the transformational nature of the deal, given the sheer scale of Griffith Hack compared with the company's market capitalisation.

The broker believes Xenith has now reached its natural market share in Australia and may struggle to materially outgrow the broader market. Hence, future growth will need to be driven by offshore penetration.

Morgan Stanley downgrades to Hold from Add, until it is comfortable with how the integration is progressing. Target falls to $2.92 from $4.20.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating
 
Order Company New Rating Old Rating Broker
Upgrade
1 HUB24 LIMITED Buy Buy Ord Minnett
2 JB HI-FI LIMITED Neutral Sell Credit Suisse
3 PACT GROUP HOLDINGS LTD Neutral Sell UBS
4 TOX FREE SOLUTIONS LIMITED Buy Neutral Macquarie
5 VITA GROUP LIMITED Buy Neutral Morgans
6 WESTFIELD CORPORATION Neutral Sell Citi
7 WHITEHAVEN COAL LIMITED Neutral Sell UBS
Downgrade
8 360 CAPITAL GROUP Neutral Buy Morgans
9 360 CAPITAL OFFICE FUND Neutral Buy Morgans
10 ALUMINA LIMITED Sell Neutral UBS
11 AMCOR LIMITED Neutral Buy Credit Suisse
12 BHP BILLITON LIMITED Neutral Buy Morgans
13 INVESTA OFFICE FUND Sell Neutral Ord Minnett
14 METCASH LIMITED Neutral Buy Ord Minnett
15 RCG CORPORATION LIMITED Neutral Buy Morgans
16 TATTS GROUP LIMITED Neutral Buy Credit Suisse
17 TRANSURBAN GROUP Neutral Buy Morgan Stanley
18 VOCUS COMMUNICATIONS LIMITED Neutral Buy Morgan Stanley
19 XENITH IP GROUP LIMITED Neutral Buy Morgans

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Company New Rating Previous Rating Change Recs
1 PGH PACT GROUP HOLDINGS LTD 40.0% 20.0% 20.0% 5
2 WFD WESTFIELD CORPORATION 75.0% 58.0% 17.0% 6
3 JBH JB HI-FI LIMITED 21.0% 7.0% 14.0% 7
4 CAR CARSALES.COM LIMITED 63.0% 57.0% 6.0% 8
5 REA REA GROUP LIMITED 63.0% 57.0% 6.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Company New Rating Previous Rating Change Recs
1 FXJ FAIRFAX MEDIA LIMITED 36.0% 58.0% -22.0% 7
2 PRG PROGRAMMED MAINTENANCE SERVICES LIMITED 70.0% 88.0% -18.0% 5
3 VOC VOCUS COMMUNICATIONS LIMITED 67.0% 83.0% -16.0% 6
4 TCL TRANSURBAN GROUP 57.0% 71.0% -14.0% 7
5 TTS TATTS GROUP LIMITED 57.0% 71.0% -14.0% 7
6 AWC ALUMINA LIMITED -43.0% -29.0% -14.0% 7
7 BHP BHP BILLITON LIMITED 25.0% 38.0% -13.0% 8
8 AMC AMCOR LIMITED 25.0% 38.0% -13.0% 8
9 MTS METCASH LIMITED 14.0% 21.0% -7.0% 7
10 NWS NEWS CORPORATION 33.0% 40.0% -7.0% 6

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Company New Target Previous Target Change Recs
1 REA REA GROUP LIMITED 57.536 56.041 2.67% 8
2 MTS METCASH LIMITED 2.227 2.173 2.49% 7
3 PGH PACT GROUP HOLDINGS LTD 6.518 6.398 1.88% 5
4 BHP BHP BILLITON LIMITED 24.265 24.043 0.92% 8
5 AWC ALUMINA LIMITED 1.443 1.436 0.49% 7
6 CAR CARSALES.COM LIMITED 11.941 11.915 0.22% 8
7 JBH JB HI-FI LIMITED 29.714 29.673 0.14% 7

Negative Change Covered by > 2 Brokers

Order Symbol Company New Target Previous Target Change Recs
1 VOC VOCUS COMMUNICATIONS LIMITED 6.083 8.077 -24.69% 6
2 AMC AMCOR LIMITED 15.549 16.296 -4.58% 8
3 FXJ FAIRFAX MEDIA LIMITED 0.941 0.982 -4.18% 7
4 WFD WESTFIELD CORPORATION 10.152 10.400 -2.38% 6
5 TCL TRANSURBAN GROUP 11.689 11.916 -1.91% 7
6 PRG PROGRAMMED MAINTENANCE SERVICES LIMITED 1.940 1.975 -1.77% 5
7 NWS NEWS CORPORATION 18.414 18.693 -1.49% 6
8 TTS TATTS GROUP LIMITED 4.386 4.436 -1.13% 7

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Company New EF Previous EF Change Recs
1 MGX MOUNT GIBSON IRON LIMITED 1.133 0.667 69.87% 3
2 ALL ARISTOCRAT LEISURE LIMITED 72.930 56.377 29.36% 5
3 WSA WESTERN AREAS NL -0.856 -1.013 15.50% 7
4 S32 SOUTH32 LIMITED 19.912 17.496 13.81% 7
5 BHP BHP BILLITON LIMITED 124.607 110.708 12.55% 8
6 GNC GRAINCORP LIMITED 48.567 44.733 8.57% 6
7 FMG FORTESCUE METALS GROUP LTD 55.923 51.575 8.43% 7
8 CYB CYBG PLC 32.648 30.735 6.22% 6
9 RIO RIO TINTO LIMITED 316.982 298.812 6.08% 8
10 MTS METCASH LIMITED 19.269 18.186 5.96% 7

Negative Change Covered by > 2 Brokers

Order Symbol Company New EF Previous EF Change Recs
1 VOC VOCUS COMMUNICATIONS LIMITED 34.737 38.505 -9.79% 6
2 NWS NEWS CORPORATION 58.404 64.011 -8.76% 6
3 PRG PROGRAMMED MAINTENANCE SERVICES LIMITED 18.368 19.892 -7.66% 5
4 NCM NEWCREST MINING LIMITED 89.158 93.449 -4.59% 8
5 SEK SEEK LIMITED 57.888 59.775 -3.16% 7
6 VRT VIRTUS HEALTH LIMITED 43.050 44.450 -3.15% 4
7 QUB QUBE HOLDINGS LIMITED 9.603 9.865 -2.66% 8
8 ILU ILUKA RESOURCES LIMITED 4.895 5.020 -2.49% 7
9 MVF MONASH IVF GROUP LIMITED 13.267 13.600 -2.45% 3
10 AMC AMCOR LIMITED 78.130 79.342 -1.53% 8

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Weekly Top Ten News Stories

Our top ten news from 24 November 2016 to 01 December 2016 (ranked according to popularity).

1 Weekly Ratings, Targets, Forecast Changes
Monday 28 November 2016 - 10:02 AM
Weekly update on stockbroker recommendation, target price, and earnings forecast changes.
2 The Yield Stocks You Shouldn't Miss
Wednesday 30 November 2016 - 11:24 AM
Peter Switzer of the Switzer Super Report highlights the beaten-down yield names that are worth owning.
3 Vocus Outlook Deepens Broker Concerns
Wednesday 30 November 2016 - 01:31 PM
The AGM update from telco Vocus Communications has weighed heavily on estimates and several brokers urge caution be applied to the stock.
4 Aussie Banks And The Yield Trade
Wednesday 30 November 2016 - 10:00 AM
In this week's Weekly Insights: - Aussie Banks And The Yield Trade - Rudi On Tour - Nothing Ever Changes, Or Does It? - Rudi On TV
5 Weekly Broker Wrap: Outlook, Strategy, OPEC And Airlines
Friday 25 November 2016 - 10:02 AM
Commodities and economic outlook; outlook for equities; OPEC production meeting; outlook for airlines; and Netcomm's NBN contract.
6 Material Matters: Outlook, Iron Ore, Steel And OPEC
Monday 28 November 2016 - 11:03 AM
Outlook for metals; iron ore outlook becoming more constructive; steel demand; the upcoming OPEC meeting.
7 New Highs Ahead For Orora
Tuesday 29 November 2016 - 10:28 AM
Michael Gable of Fairmont Equities suggests packaging company Orora can rebound strongly following its pullback.
8 ASX200: Resistance At 5600
Monday 28 November 2016 - 10:33 AM
Craig Parker of Moat Capital suggests having broken 5500, a run to 5600 is possible for the ASX200.
9 Make Or Break For Gold
Friday 25 November 2016 - 10:56 AM
The Chartist suggests Gold must hold US$1180/oz or face substantial downside.
10 The Short Report
Thursday 24 November 2016 - 11:54 AM
FNArena's weekly update on short positions in the Australian share market.
article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Tonight’s US jobs report might be highly anticipated, as all US jobs reports are, but it is all but certain the outcome won’t alter the assumption the Fed will hike this month. Something really bizarre would have to transpire, and already Wednesday night’s better than expected private sector result has economists upgrading forecasts.

Less certainty surrounds Sunday’s Italian referendum on constitutional reform. The polls currently suggest a rejection, which would lead to the prime minister’s resignation and again throw Europe into turmoil. The referendum itself is not a “Brexit” moment, but a loss would leave markets wondering if “Italexit” is not far away.

Australia’s September quarter GDP result is due next Wednesday. Earlier in the week we’ll see numbers for company profits and inventories and the current account, which includes the terms of trade. The question will be one of whether improvement in the trade balance, thanks to the commodity price rebound, will be enough to offset weakness implied by the previously released construction and capex numbers.

Next week also sees the first RBA meeting post-Trump. While no policy change is expected, the governor’s take on the New World will make for interesting reading.

Next week also brings ANZ job ads, the monthly trade balance and housing finance numbers. The services sector PMI is out on Monday.

The rest of the world will also release services PMIs on Monday. In a quieter data week for the US, trade, factory orders and consumer sentiment will feature.

Next week also sees trade and inflation numbers out of China.

While the AGM flow has now slowed to a trickle in the local market, Westpac’s ((WBC)) meeting next week will be the highlight.

Insurance Australia Group ((IAG)) and Santos ((STO)) will host investor days.


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Weekly Broker Wrap: Asset Managers, Media, A-REITs

Political shocks; asset manager performance; Oz online media; Morgan Stanley urges caution on A-REITs; China and oil prices; and Aurora Cannabis.

-Material changes in economic policies in UK, US and Japan likely to impact financial markets in 2017
-Tough job seen ahead for Reserve Bank in getting inflation back to target
-Citi initiates with Buy ratings on Carsales.com and REA Group
-A-REITs sector considered likely to underperform as bond rates rise
 

By Eva Brocklehurst

Global Outlook

The global economy has endured political shocks in 2016 and Commonwealth Bank analysts expect material changes to economic policies, with ramifications for financial markets. For example, the UK government, in response to grievances highlighted during the Brexit campaign, has announced a fiscal stimulus package equivalent to more than 6% of GDP over five years. US President-elect Donald Trump is expected to unleash a large fiscal stimulus and add demand to an economy that is already close to full employment.

The analysts expect the Japanese government will follow suit and unveil a fiscal stimulus package early next year. Meanwhile, the Eurozone is expected to be the centre of political risk in 2017 with the French presidential elections to be held in April and May.

While the National Front's Marine Le Pen is underperforming in the polls, the analysts cite the lesson of 2016: expect the unexpected. At the end of next year the five-yearly reshuffle of China's leadership will occur. Senior officials are expected to be highly risk averse with little appetite for economic weakness.

In the context of political risks, Citi notes investors have become focused on Italy's upcoming referendum. The broker maintains a view that a “No” vote is the most likely outcome as the populace rejects the reform proposals. Yet the broker concedes the probability of a “Yes” vote may be underestimated. The analysts stress that how/if the electoral law is modified is more important than the referendum in determining the chances of an anti-establishment, anti-euro party coming to power at the next election.

Italians will vote on constitutional reform of the parliamentary system which mainly envisages a reduction in the number of senators, a curbing of the legislative powers of the Senate, and centralisation of a number of functions with the central government. The analysts believe the future of the centre-left government is in question, raising the prospect of early elections in 2017.

The magnitude of moves to the downside are unlikely to be large or lasting as a “No” vote is priced into the EUR/USD. A “Yes” outcome could unwind some of the recent weakness in the euro, initially. The broker believes Italy's banking sector is the most vulnerable to a “No” vote because of potential delays in ongoing capital raising operations and high exposure to sovereign debt.

Over the next few years, if Commonwealth Bank analysts are correct in their forecasts, the balance of risks may start to shift to tighter monetary policy after a long period of very easy policy. The analysts expect Australia's inflation rate to be 2.0% in 2017 and 2.4% in 2018 versus the Reserve Bank's forecast for underlying inflation to remain below the bottom of its 2-3% target band. There is still plenty of spare capacity in Australia's labour market which signals wages growth is likely to remain subdued.

The current 1.5% cash rate is expected to be the bottom of the cycle but the analysts suspect the Reserve Bank will have a tough job getting inflation back to target. The link between monetary policy and financial stability has also become more direct, and RBA governor Phillip Lowe has stated he is not keen to lower rates further if it means households take on more debt.

Australian Asset Managers

Credit Suisse's analysis of asset managers indicates that Henderson Group ((HGG)) is under earning on performance fees and has medium-term upside from its compensation ratio. There is scope for the company to lower its compensation ratio as it shifts towards its aspirational target. In contrast, Magellan Financial ((MFG)) over earned on performance fees in FY16.

While Magellan Financial utilises performance fee structures more than most, its exposure is more moderate at 10% of normalised net profit. Henderson is more exposed to performance fees at 19% of normalised net profit. BT Asset Management ((BTT)) has a higher exposure too, at 17%.

Meanwhile, Perpetual ((PPT)) and Platinum Asset Management ((PTM)) offer downside risk because of cyclically low compensation ratios. Their exposure to perfomance fees is low at 2% and 1% respectively. The broker believes the return to fund performance could mean a rise in the compensation ratios of these two stocks and the low utilisation of performance fees will limit the ability of revenues to cushion the impact.

Credit Suisse believes there are qualities in both Magellan Financial and Platinum Asset Management which justify below-peer compensation ratios, such as large scalable strategies with over $30bn in capacity and simple operating models which imply lower back office costs.

Online Media

Citi initiates coverage of Australasian online media and publishing companies with Buy ratings on Carsales.com ((CAR)) and REA Group ((REA)), Neutral ratings on Seek ((SEK)), Trade Me ((TME)) & News Corp ((NWS)) and a Sell rating on Fairfax Media ((FXJ)).

The broker's preference for Carsales.com is based on solid core earnings growth with scope for upside and new products. REA presents good value now and a $68 valuation once a property market normalises. As much as the broker likes Domain, valuing it at $0.80 a share, newspaper closure costs are most likely going to exceed future earnings and the Fairfax group is valued as a whole at $0.70 a share.

A-REITs

Morgan Stanley observes that A-REITs (Australian real estate investment trusts) are caught between rising bond yields globally and low inflation domestically, historically a scenario that drives underperformance. The broker downgrades its industry view to Cautious and looks for a stabilisation of yields as the catalyst to turn more positive.

The broker expects this sector is unlikely to outperform, even if much of the expected yield expansion is now in the price. Morgan Stanley believes bond yields will remain relatively low and the risk of a significant correction in asset prices or earnings downgrades also looks low. The broker maintains a preference for active over passive stocks and quality over value add. Office and industrial segments are also preferred over retail.

The broker suggests weakness may provide better entry points for Goodman Group ((GMG)), Westfield ((WFD)), Dexus Property Trust ((DXS)), Lend Lease ((LLC)) and Scentre Group ((SCG)). The broker's view is contingent on the impact of the anticipated backdrop of rising bond rates and lower overall growth. The biggest risk is that Australian 10-year bond rates moderate against this backdrop and the benefits of earnings certainty outweigh fears of capital value downside.

Oil Prices

Longview Economics suggests a turn higher in oil prices in coming months, if forthcoming, should result in considerably weaker demand growth from China, as authorities scale back aggressive policies regarding stockpiling. Weak underlying Chinese oil consumption, as well as higher inventories, suggests the reduction in stockpiling activity could be reasonably sharp. This could undermine the key source of the world's marginal demand for crude and add to global inventory levels, the analysts suggest.

Aurora Cannabis

Aurora Cannabis' first-quarter results were in line with Canaccord Genuity estimates. The broker's own risk analysis of Aurora Cannabis suggests a valuation in excess of CAD5.00 a share if marijuana is legalised in Canada, supporting a Speculative Buy rating, as a pathway to the recreational market unfolds over the coming months.

Based on the current month's trends, the company is on track to sell more than 200g of cannabis for gross revenue of CAD1.6m in November alone. While still early in the production and patient acquisition story, the broker views these trends as a positive support for the company's medical cannabis strategy.
 

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