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Weekly Broker Wrap: QE3, LNG, Coal And iPhones
FNArena News - September 17 2012

By Andrew Nelson

On the eve of the Fed’s QE3 announcement, local brokers were pondering the likely impact such a move would have, as by Thursday afternoon Sydney time the odds were favouring that Bernanke would act. And as we all know by now, act he did.

We start this week’s wrap with some prognostications made by analysts at UBS, who, citing recent weak payrolls and PMI data were more or less confident some form of QE3 would be announced at the FOMC meeting Thursday night, Sydney time.  (For more detailed coverage of the Fed’s release, see FNArena’s The Overnight Report from Friday morning).

The broker notes that QE1 and QE2 were quite helpful for global equities and commodity prices, although QE2 was less so given the much lower, GFC inspired starting point QE1 enjoyed. The effectiveness of the latter stages of QE2 was also impacted by what started as a policy-induced slowdown in China and the latest round of the eurozone sovereign debt crisis sparked by issues in Greece. Remember Greece?

Turning back the pages to the US QE moves of yore, UBS notes Mining was certainly one of the industries that outperformed. Given recent underperformance in the same sector, UBS thinks there will be evident upside here from this latest round of US easing. Although, not to the extent seen during QE1. Conversely, Consumer Staples, Health Care and REITs, which are again boasting some pretty steep relative valuations, underperformed during QE1 and the broker thinks we’ll see the same again as QE3 starts to gain some traction.

However, UBS thinks the current strength of AUD will act as a headwind to Australian equity performance. In fact, the broker notes it’s the US’s need for these QE packages that is at the heart of the strong Aussie in the first place. UBS does see somewhat of a silver lining to this issue, as it feels if the AUD does remain resilient during the early phase of QE3, the RBS may well have to jump in with some easing of its own.

Goldman Sachs was also pretty confident of the FOMC outcome, last Wednesday putting out an assessment on the presumed impact QE3 would have on the domestic Mining and Metals sector. Where the brokers vary the most in their prospective assessments comes down to their views on the direction of the AUD. Where UBS sees a strong AUD likely remaining place, Goldman Sachs sees it weakening to benefit of Metals and Mining plays. The latter broker notes that there is less and less talk of the Aussie being a foreign reserve diversification play now that the peak of the capital cycle in the mining boom looks to have passed.

The broker also views these developments as being positive for gold prices, seeing a historically strong correlation with US real interest rates. With Goldman Sachs expecting a 4% annual contango until mid-2014, it then expects rates to turn upwards. This could be pushed out a year, the broker admits, which in turn extends the timing of the broker’s targeted peak in gold prices. Until then, the broker expects to see an annual price decline of 10%.

Now we get tom the meat of it, were the Aussie to weaken and gold to still perform as expected, there is massive upside for gold producers, especially those with AUD denominated production. The broker predicts 18% to 40% earnings increases and 20% to 30% rises in DCF valuations. Goldman Sachs notes this would mean mostly higher earnings that would be delivered in FY15 were interest rate rises be pushed out an extra year.

On the other hand, mineral sands producers and USD denominated companies would see the least amount of upside, given generally lower leverage and a lack of exposure to beneficial changes in currency.

Sticking with Goldman Sachs, the broker also took a look at the iPhone5 launch and the implications it has for the Australian wireless market.

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