Weekly Reports | Apr 21 2017
Equity strategy; food inflation; banks and mortgages; Amazon the company killer; Afterpay.
-Equity markets still offering value versus very low competing interest rates
-Food inflation returns but more difficult to push with weak income growth
-Crackdown on mortgage financing practices expected to affect bank loan growth
-Morgan Stanley flags looming Amazon threat for retailers
By Eva Brocklehurst
UBS notes Australia's current market price/earnings (P/E) multiple of 15.3x is modestly above average but not out of line with the current global multiple. The broker notes the Australian market is still trading at a modest discount to its long-run price to book ratio. Nevertheless, the market ex resources is now around its post-tech bubble highs.
As is the case globally, while the P/Es are on the high side UBS argues the market could still be considered cheap compared with what are still very low competing interest rates. The broker increases its ASX 200 target because of higher earnings estimates for 2017 and 2018 but remains aware that this is mostly driven by the mining sector.
The broker believes that the upside in a 6-12 month view is limited as a central case, although global conditions for equities should stay reasonably positive. With a 5% dividend yield and bond and cash rates still unattractive, equities appear the superior option in the broker's opinion.
Anaemic growth in household income and the rolling out of Aldi stores is likely to dampen supermarket earnings and, while food inflation is returning, Morgan Stanley recommends not getting too excited. The broker's observation of Woolworths ((WOW)) pricing data shows that a number of products on discount have reduced considerably in the March quarter and more prices are rising than are falling.
Rising levels of food inflation have historically led to faster sales growth for the supermarkets and margin expansion for both Woolworths and Coles ((WES)). The broker suspects that the food inflation this time will be more difficult to push through to consumers, and consumers will downgrade to lower-priced and private-label products.
Morgan Stanley also warns of costs growth accelerating over the next year given higher energy prices and labour costs.