Weekly Reports | Mar 12 2012
By Chris Shaw
With Australia's interim reporting season out of the way investment banks and equity brokers continue making adjustments to their recommended exposures and model portfolios. The week past saw Macquarie, Goldman Sachs, Citi and Credit Suisse update their views and macro-recommendations (top down), while JP Morgan and Deutsche Bank undertook in-depth reviews of companies in the building materials sector.
The general outlook in Macquarie's view is global economic growth won't be fast and will continue to be impacted by concerns such as Europe and Iran, but growth will continue on an upward trajectory. This suggests 1H12 will be broadly constructive for global equities, with the US market likely to lead the way.
Domestically, Macquarie suggests headwinds for the Australian market are greater than for most given the combination of a strong dollar, relatively high interest rates, negative productivity growth and an inflexible industrial relations framework.
This has left Australia uncompetitive across a wide range of industries and is likely to see corporate management teams look to cut costs in an attempt to restore cash flows. This leads Macquarie to suggest FY12 earnings per share (EPS) growth will be negative by around 5.0% (current consensus expectations are sitting around +4%).
Sectors where above average growth is expected are Energy and Mining Services, Macquarie's recommended portfolio being already overweight both. This position is being extended via the addition of Santos ((STO)), with this position being funded by a move to Underweight on BHP Billiton ((BHP)) given an expectation of negative earnings growth this year.
This means Macquarie's overall resource allocation is unchanged. Other resource and energy stocks in Macquarie's recommended portfolio include Rio Tinto ((RIO)), Atlas Iron ((AGO)), PanAust ((PNA)), Oz Minerals ((OZL)), Woodside ((WPL)), WorleyParsons ((WOR)) and Origin Energy ((ORG)).
Outside of the resource sector Macquarie continues to favour a defensive portfolio, with a concentration on a small number of stocks expected to deliver strong top line growth and companies expected to deliver stable and sustainably high dividend yields.
Among the industrial plays in the first category Macquarie's portfolio includes Campbell Brothers ((CPB)), Mineral Resources ((MIN)), WorleyParsons, Ansell ((ANN)) and Ramsay Health Care ((RHC)), while the second category includes of Telstra ((TLS)), Transurban ((TCL)), Wesfarmers ((WES)), Coca-Cola Amatil ((CCL)), CFX Retail Property ((CFX)) and GPT ((GPT)).
Commonwealth Bank ((CBA)) and Amcor ((AMC)) are also overweight holdings in Macquarie's recommended portfolio.
Goldman Sachs has made a similar review of its model portfolio and concluded now is an appropriate time to turn more cautious on resources, this given a tougher environment to outperform given volume growth rather than higher commodity prices is currently driving earnings.
Key investment themes for Goldman Sachs are a solid earnings profile, especially when combined with an attractive dividend yield, mining investment, energy and deep value plays where re-ratings are possible as market sentiment improves.
This has brought about some model portfolio changes, with Goldman Sachs reducing its exposure to BHP while exiting positions in Rio Tinto, Iluka ((ILU)) and Origin Energy. This created the issue of where to invest the funds being freed up, with major beneficiaries being Telstra and CSL ((CSL)) for the solid earnings theme and WorleyParsons for exposure to energy and the mining investment theme. Woodside and Oil Search ((OSH)) remain the preferred energy stocks.
Among the deep cyclical exposures, Goldman Sachs has switched out of Myer ((MYR)) and into Super Retail ((SUL)), this reflecting the latter's more attractive growth profile and lower execution risk in relation to growth strategies.
The MSCI AC World Index delivered a gain of 5.1% in February, which followed a return of 5.9% in January. But as Citi points out via its model portfolio, investing in the right market at the right time can deliver even better returns.
Citi's stock market country selection model, which is based on 22 global markets for which ETFs are available, outperformed the benchmark by 0.6% in February, mainly due to relative outperformance from the Austrian and South African markets during the month.
Austria retains its place at the top of Citi's rankings for the second month in a row, while Germany has moved up to number two position. Brazil has fallen out of that spot to position seven in Citi's rankings. Completing the top five are Korea at number three, Australia at number four and South Africa at number five spot.
At the bottom of the rankings Citi has replaced Hong Kong and Switzerland with Spain and the US, while Italy, Belgium and Mexico continue to hold their places in the bottom five rankings. The shift into this bottom five for the US reflects unfavourable valuation, while Citi points out Spain's inclusion is a reflection of poor short-term momentum and negative earnings revisions.
Market strategists at Credit Suisse used their final wrap of the February reporting season to warn investors not to get too excited about the short term prospects for Australian equities. The share market is merely "fair value", argue Atul Lele and his team, and there remain plenty of headwinds, the lack of any noteworthy growth in profits is only one of them.
Credit Suisse has decided to remain overweight defensives and USD exposures, neutral banks, slightly underweight domestic cyclicals and underweight resources.
JP Morgan has reviewed the outlook for the Building Materials sector, suggesting conditions remain tough given the Australian environment remains weak and the pace of recovery in the US is still slow. At least there are some pricing tailwinds in Australia, which compares to an expectation of further headwinds for prices in the US market.
In individual stock terms, JP Morgan sees some room for optimism with respect to prices for Boral ((BLD)), which would be a positive given the group's leverage to concrete and aggregate prices. This is enough for an Overweight rating to be maintained, a rating also extended to CSR ((CSR)).
For Adelaide Brighton ((ABC)) FY12 will be the key in JP Morgan's view, as a return to growth is needed after FY11 was the first year of no growth in net profit after tax for six years. Adelaide Brighton is currently rated as Neutral, as is Fletcher Building ((FBU)). This reflects a recent cut to full year earnings guidance and the lack of a significant enough lift in NZ data to drive any change to the broker's view.
James Hardie remains the only Underweight rating in the building materials sector for JP Morgan, this due to pricing headwinds that are offsetting any benefits from volume improvements that are starting to emerge. Prices are expected to remain under pressure in coming months while management attempts to retain or grow category share.
Deutsche Bank has conducted a similar review of the building materials sector, agreeing with the assessment of JP Morgan the current demand environment remains under pressure. Where Deutsche's view differs is it sees some upside potential for companies exposed to the US housing market, though any recovery is likely to be a cautious one given a still somewhat fragile economic recovery.
In terms of the outlook across the sector, Deutsche remains of the view market forecasts for Boral and Fletcher Building remain too high, while there is still some balance sheet risk for both companies at present.
A favourable exposure to mining and engineering projects sees Deutsche retain Adelaide Brighton as its top pick in the sector. The fact the company is significantly overweight Western and South Australia should see better than average demand growth relative to other states, which supports Deutsche's Buy rating. A further positive is Adelaide Brighton appears inexpensive relative to peers. In contrast, Deutsche rates Boral, Fletcher Building and James Hardie as Hold.
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