Weekly Broker Wrap: Equity And Bond Strategies

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Outlook for equities and key stock picks; Bell Potter reviews Helloworld; Canaccord Genuity initiates on Appen; the global bond outlook.

-Lack of conviction noted amount equity analysts and "Buy" ratings at record lows
-Whether Clinton or Trump the impact on Australian stocks likely to be minor
-Volatility over the next few months may provide trading opportunities
-Probability of substantial bear market in bonds remains low
 

By Eva Brocklehurst

Equity Strategy

Deutsche Bank observes a lack of conviction among analysts, with the number of “Buy” ratings at record lows. The broker notes high price/earnings stocks have softened, yet several health care names such as Cochlear ((COH)), Healthscope ((HSO)) and Ramsay Health ((RHC)) have been upgraded and may be at risk of becoming crowded trades.

Among housing stocks, Fletcher Building ((FBU)) and Harvey Norman ((HVN)) have done well, with a risk they are peaking. The broker believes the cycle will continue for a little longer and Stockland ((SGP)) may potentially benefit, although acknowledges this is the contrarian choice.

Deutsche Bank envisages value on offer in mining services names Aurizon ((AZJ)) and Incitec Pivot ((IPL)) which have lagged the sector's outperformance. Despite the fact analysts have become more upbeat about Vocus Communications ((VOC)) and TPG Telecom ((TPM)), Deutsche Bank prefers Telstra ((TLS)) for now.

In terms of yield stocks the broker likes Sydney Airport ((SYD)) while noting analysts have upgraded ratings for Spark Infrastructure ((SKI)) and GPT Group ((GPT)) as well. Despite the bounce in several UK exposed stocks – Computershare ((CPU)), Iress ((IRE)), Treasury Wine ((TWE)) and Ansell ((ANN)) – the broker is concerned about currency and capex weakness.

Regardless of whether Hillary Clinton or Donald Trump win the US presidential election, Macquarie suspects both represent a shift from the current political consensus of austerity and globalisation, with Trump a little more dramatic and with less qualification.

The effect on Australia is likely to be relatively minor as the US accounts for less than 10% of exports. US infrastructure spending may drag Australia's US-exposed building and construction names higher, such as Boral ((BLD)), James Hardie ((JHX)) and Reliance Worldwide ((RWC)) but, outside of a growth slowdown which produces a legislated response, the broker suspects little impact.

The potential repeal of “Obamacare” by Trump adds downside risk to Sonic Healthcare ((SHL)) and Sirtex Medical ((SRX)) while the creation of free market drug pricing could drive upside for CSL ((CSL)), the broker believes.

Stock Picks

Severe swings over the next few months in the market could be trading opportunities for companies with sound fundamentals in otherwise subdued economic conditions, Morgans believes. The broker does not under-rate the implications of a medium-term shift in interest rate markets but expects this to occur gradually.

The stocks with the right qualities include Evolution Mining ((EVN)), which the broker observes has potential from the Ernest Henry deal while being favourably placed against the current spot price of gold and the global cost curve.

Others on the high conviction list include Orora ((ORA)), Westpac ((WBC)), Healthscope, Sydney Airport, Corporate Travel ((CTD)), GBST ((GBT)), Catapult ((CAT)), Ardent Leisure ((AAD)), Bellamy's ((BAL)), Impedimed ((IPD)), Kina Securities ((KSL)) and PWR Holdings ((PWH)).

Morgans removes BHP Billiton ((BHP)) from its high conviction list as, while still attractive value, the easy gains have been made. The broker also takes profit in Megaport ((MP1)), which has rallied strongly and now exceeds the price target.

Helloworld

Bell Potter has reviewed its investment thesis on Helloworld ((HLO)) and believes the company is on track to deliver $17.1m per annum in synergy and cost savings by June 30 2017 and this should be the driver of short-term earnings growth.

The AOT business also appears to add a growth element in the inbound component of the business. Revenue margin improvement is likely to be an important feature of future results as some commercial contracts are re-based. While agent numbers in the retail network are showing some stabilisation this is an ongoing challenge in the broker's view, given the level of competition.

Bell Potter maintains a Buy rating and the target is raised to $5.00 from $4.60 to incorporate an upgrade to earnings per share estimates of 7% for FY17 and 1% for FY18.

Appen

Appen ((APX)), a specialist in language technology, has delivered consistent earnings upgrades during its period as a listed company. The development of conversational user interfaces, particularly on mobiles, is considered a strong driver of future growth.

Canaccord Genuity estimates that, on average, consensus forecasts have increased by 10% following the release of either half or full year earnings results since the IPO almost two years ago. This has sustained a strong share price performance and the broker initiates coverage with a Hold rating and $3.50 target.

While the elevated valuation and low forward revenue visibility means the price looks full, for those seeking exposure to a key trend in technology the broker considers the stock worthy of attention.

Bonds

The probability of a substantial bear market in bonds is low, global asset manager AllianceBernstein contends. Bond investors are nervous as they sense the fact that central banks have run out of fire power in monetary policy to boost growth. Yet the analysts envisage there is some chance that fiscal policy will revive activity.

With negative interest rates in some countries it was hoped that liquidity would be diverted into the productive economy where it would create jobs and stimulate growth. Instead this has found its way into non-productive assets such as housing, equities and bonds, creating potential bubbles in those markets.

AllianceBernstein does not expect any move towards aggressive fiscal policy expansion in Europe until after 2017 elections in France and Germany. Moreover, one thing investors are advised not to expect is further significant easing of monetary policy, as its impact to date had been negligible and further easing might have adverse consequences, especially for weaker European banks.

At the same time the analysts do not envisage a significant rise in US rates believing the Federal Reserve is likely to wait a long time before making a substantial move.

In sum, AllianceBernstein believes it is more important than ever for bond investors to take an active approach to portfolio returns. The analysts consider emerging market currencies attractive for the short and medium term, amid the potential for higher inflation in the US and Japan, with attractive yield spreads on corporate bonds where central banks are protecting the downside.

AllianceBernstein is underweight on commodity related developed market currencies and the analysts are also capturing high real yields in select emerging market government bonds and securitised assets.
 

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