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Weekly Broker Wrap: More Model Portfolios Adjustments
FNArena News - March 12 2012

By Chris Shaw

With Australia's interim reporting season out of the way investment banks and equity brokers continue making adjustments to their recommended exposures and model portfolios. The week past saw Macquarie, Goldman Sachs, Citi and Credit Suisse update their views and macro-recommendations (top down), while JP Morgan and Deutsche Bank undertook in-depth reviews of companies in the building materials sector.

The general outlook in Macquarie's view is global economic growth won't be fast and will continue to be impacted by concerns such as Europe and Iran, but growth will continue on an upward trajectory. This suggests 1H12 will be broadly constructive for global equities, with the US market likely to lead the way.

Domestically, Macquarie suggests headwinds for the Australian market are greater than for most given the combination of a strong dollar, relatively high interest rates, negative productivity growth and an inflexible industrial relations framework.

This has left Australia uncompetitive across a wide range of industries and is likely to see corporate management teams look to cut costs in an attempt to restore cash flows. This leads Macquarie to suggest FY12 earnings per share (EPS) growth will be negative by around 5.0% (current consensus expectations are sitting around +4%).

Sectors where above average growth is expected are Energy and Mining Services, Macquarie's recommended portfolio being already overweight both. This position is being extended via the addition of Santos ((STO)), with this position being funded by a move to Underweight on BHP Billiton ((BHP)) given an expectation of negative earnings growth this year.

This means Macquarie's overall resource allocation is unchanged. Other resource and energy stocks in Macquarie's recommended portfolio include Rio Tinto (RIO), Atlas Iron ((AGO)), PanAust ((PNA)), Oz Minerals ((OZL)), Woodside ((WPL)), WorleyParsons ((WOR)) and Origin Energy ((ORG)).

Outside of the resource sector Macquarie continues to favour a defensive portfolio, with a concentration on a small number of stocks expected to deliver strong top line growth and companies expected to deliver stable and sustainably high dividend yields.

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