Weekly Broker Wrap: Tight Budgets And Loose Money

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-Oz federal fiscal austerity to continue
-Oz business borrowing plans improve
-Oz retailers restructuring asset bases
-Global equities allocation highest in 2 years
-Global growth improving
 

By Eva Brocklehurst

There may be an election in September which will change the government but there's a federal budget due in May. In the current economic climate, the government will have no choice but to hand down a fiscally conservative budget. BA-Merrill Lynch believes, if the Coalition takes over the reins from September, it will run a tight fiscal policy as well. Key policies will probably include abolishing the carbon and minerals resource rent taxes and abolishing the 'School Kids' bonus. A modest cut to the company tax rate may be proffered when circumstances allow. The analysts at BA-Merrill Lynch do not expect GDP or cash rate forecasts will change much under a Coalition government.

In terms of the impact on a sector basis, a Coalition government is likely to be positive for healthcare, BA-Merrill Lynch contends. The analysts expect less frequent reform/more certainty or consultation would be a positive for operators in the industry such as Sonic Healthcare ((SHL)), Primary Health Care ((PRY)), Sigma Pharmaceuticals ((SIP)) and Ramsay Health Care ((RHC)). On the telecommunications side the Coalition could replace the NBN with a lower cost fibre-to-the-node proposition. This may accelerate lines migrated to the NBN and a de-commissioning payment in FY16 and could be seen as positive for Telstra ((TLS)).

BA-Merrill Lynch views abolishing the carbon tax as a longer-term positive for AGL Energy ((AGK)), for a lack of carbon tax compensation would reduce earnings in FY15 and FY16. It would also modestly support Boral ((BLD)), Adelaide Brighton ((ABC)), Arrium ((ARI)) and BlueScope ((BSL)), in the analysts' view. The implications of a Coalition government for banks, insurers and others are a bit more mixed. The Coalition intends to initiate a banking review and this may culminate in a deposit guarantee levy. The Coalition's preference for privatising Medibank Private could impact on the health insurance market.

Macquarie's first report from collaboration with East & Partners shows business borrowing intentions are on the rise in Australia. The key question revealed the majority of sampled firms (58%) are not expecting a significant increase in stress levels over the next six months. On that basis, Macquarie believes the environment is improving enough to warrant an increase in business lending. Those banks lending to the small-medium enterprise and corporate sector should be able to finance the demand.

In detail, corporate and institutional respondents which expect stress levels to stay the same or decline total 61-75%, while the micro and SME sectors have a much more muted response, 48-50%. Those that were expecting to continue being stressed were less confident in the outlook and maintained concerns about availability of debt. Despite a slowdown, investment in mining and demand for equipment finance continues and, with a broader recovery in the economy, Macquarie believes this warrants the banks driving the next leg of growth. On the back of the survey, Macquarie has upgraded earnings forecasts for the banks by 1-3% and put National Australia Bank ((NAB)) at the top of the ranking among the big four, given a strong SME customer base.

The latest results from David Jones ((DJS)) reaffirmed Macquarie's view that the retail sector is undergoing a structural resetting of its base. The broker expects store roll outs will slow, rents will generally decline on renewal and space will be cut back. David Jones has six expiries in FY15-17 and this will allow the company to review its leases. Macquarie believes, despite an improving environment for retailers, a re-evaluation of poor performing stores will occur as leases expire. This will result in above-average store closures over the next couple of years. This is already revealed in the lower tenant retention rates that real estate investment trusts are reporting. It is possible landlords can re-lease the space at more attractive rents. Macquarie is of the view that international retailers still want space at the larger regional shopping centres.

Macquarie notes that in September 2012, Cushman & Wakefield valued DJS' Sydney and Melbourne CBD properties at $612m. David Jones is exploring options to unlock value at these properties. If these assets were indeed brought to market, Macquarie believes demand would be strong, factoring the relatively attractive yield spreads still on offer. Nevertheless, David Jones has stated a preference to realise value via development rather than to sell and lease back the Sydney stores.

BA-Merrill Lynch has found, through the monthly Global Fund Manager Survey, that a net 57% of investors globally are overweight equities, the highest allocation in two years. Investors are long on assets which are being driven by US growth, such as consumer discretionary, banks, equities, real estate and the US dollar. Investors are short on those assets driven by inflation and China such as cash, energy, materials and commodities. So, the biggest downside risk to positions is anything weakening the US domestic demand story, or a rise in commodity prices and interest rates. The favoured currency is the US dollar and a record number are bullish on the greenback. For the first time in six months, investors are most worried about the EU sovereign debt crisis.

Merrills notes investors believe liquidity is the best it's ever been. When asked how soon the Fed would exit quantitative easing, only 3% expected a sale of all the Mortgage Backed Securities, while 24% believed some sales would occur and 42% believed the Fed would never sell. Technology is now the world's favourite sector again. There was a big monthly rise in exposure to banks and a drop in materials. The lowest weightings are energy, utilities and telcos. If you were a contrarian what would you do? For BA-Merrill Lynch that would be selling US financials and buying resources and commodities. You'd be long on telcos and short on technology, long on energy and short on banks, long on materials and short on industrials.

Citi has taken a look at global growth forecasts and expects growth of 2.7% in 2013 and 3.1% in 2014, rising to 3.6% in 2015. China appears to be stabilising at around 8% year-on-year. At the same time, the uptrend of inflation appears to have become a concern for China's central bank and Citi expects broad money growth will be brought down to about 13% year-on-year. While the easing bias of monetary policy will be removed gradually, the policy stance is not likely to turn tight and should be supportive of the 7.5% growth target. Meanwhile, the analysts find US private spending is improving and at a rate to offset the domestic impact of federal fiscal tightening. The US Fed is expected to probably start tightening monetary policy in 2015.

On Australia, Citi has a mixed outlook but believes the RBA is unlikely to enact further monetary easing in the near term. The analysts find widespread forecasts of a rise in the jobless rate to 6% as too pessimistic and a peak around 5.5% is considered more likely. There remains a notable disconnect between consumers and business. Consumer sentiment has rebounded but business confidence is weak. Citi suspects another rate cut is still possible, given the high Australian dollar and if inflation remains as low as forecast, but notes markets have priced out another cut.

On a more sombre note, the euro region remains in recession and Citi does not believe the crisis is over in the European Monetary Union. This is not just because of the recent stand-off over Cyprus. Revenues have been hit by economic weakness in Greece, Italy, Spain, Portugal and Ireland. These countries should all continue to have rising general government debt/GDP ratios for the next couple of years. Citi expects that some form of restructuring of sovereign debt and/or official loans and/or bank debt will eventuate but a euro crisis could re-emerge. Citi expects the UK will likely be downgraded from AAA in coming months in response to the stagnant economy and weak fiscal position.
 

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