-Cyclicals returning to favour
-Beware the second half, margin risks
-Asia needs an earnings recovery
-Shift to longs in US interest rates
By Eva Brocklehurst
Recent official rate cuts in Australia are still working their way through the economy and should underpin company earnings in FY14. That's the opinion of analysts at Deutsche Bank. Cyclical industrial stocks should benefit from current conditions and the valuations are attractive. Deutsche Bank notes the earnings revision ratio for cyclicals is now around neutral, after several years of heavy downgrades, and this should ensure superior growth vis-a-vis defensive stocks. The broker is also comfortable with US-exposed cyclical stocks. Transport companies should benefit from re-stocking while a recovery in housing should support related stocks. The soft sector is retail, and given spending has not been substantially weak the broker does not see scope for a large bounce there. Therefore, good price/earnings growth rates are envisaged for cyclical industrials, with the exception of retail and mining services.
In light of this Deutsche Bank likes Toll Holdings ((TOL)), Asciano ((AIO)), Boral ((BLD)), Stockland ((SGP)), BlueScope ((BSL)), Brambles ((BXB)), News Corp (NWS), Aristocrat Leisure ((ALL)), Westfield ((WDC)) and Crown ((CWN)).
Some caution is still required. BA-Merrill Lynch also suggests the risk of sizeable earnings downgrades is now low, but there are individual exceptions. With valuations nudging multi-year highs, there could be a disproportionate fall in share prices if the risks eventuate, the broker warns. In summary, there are two stock-specific risks the broker encounters. The first is relying too much on the second half, particularly if there are unusual expectations of a higher proportion of sales in the period. Stocks cited for a watch in this regard include Computershare ((CPU)), Harvey Norman ((HVN)), UGL ((UGL)), Ansell ((ANN)) and Sims Metal ((SGM)).
The second risk is margin. Some stocks received a reprieve in the latest reporting season but Merrills is cautious about extending the expectation of margin improvement too far. This is the case for domestic sectors where structural headwinds are intense and demand is soft. The broker finds consensus margin forecasts appear optimistic for Harvey Norman, Metcash ((MTS)), Echo Entertainment ((EGP)) and Toll.
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