Weekly Reports | Mar 18 2016
This story features BORAL LIMITED, and other companies. For more info SHARE ANALYSIS: BLD
-Global economy vulnerable to shocks
-Central banks likely to ease further
-Resource equities lag general market
-Morgan Stanley more optimistic on Boral
-Gaming stocks below Deutsche's valuation
-Strong outlook for JBH and HVN
By Eva Brocklehurst
Morgan Stanley is no longer looking for an acceleration in global growth in 2016. The risk of a global recession has increased and the broker attaches a 30% probability to the event. Solid spending, subdued oil prices and expansionary monetary policy counter the likelihood of recession, but the global economy in a low-growth environment remains vulnerable to shocks as well as a broad range of geopolitical risks, in the broker's opinion.
A stable growth rate of 3.0% on downwardly revised forecasts reflects a slowing in developed markets, led by the US, and a stabilisation in emerging markets, led by Russia and to a lesser extent India. The broker does not expect a recession but the declining impact of lower oil prices and easier monetary policy is becoming a concern.
The broker now only expects one rate hike from the US Federal Reserve in late 2016, an additional 10 basis points cut from the European Central Bank (ECB) and a 20 basis points cut from the Bank of Japan before the July elections. Both the Chinese and Indian central banks are expected to ease later than previously envisaged.
AllianceBernstein is of the view that the global economy is still growing modestly. Developed economies are expected to expand slightly faster this year at 2.2% compared with 1.6% last year. Developing economies are expected to grow 3.8% in 2016 versus 3.4% in 2015.
Nevertheless, the lacklustre environment and low inflation is likely to force central banks to ease further, with the analysts highlighting the experiment in several cases with unconventional policy and negative interest rates. Both the ECB and Bank of Japan are expected to push rates deeper into negative territory.
The wild card is China. The analysts note strong capital flows point to more currency weakness, while increases in credit use and the rebound in spot commodity prices for industrial materials suggest that the economy might be in the process of bottoming. AllianceBernstein expects that China will overcome this soft patch in its economy and post growth of over 6.0% this year.
Pengana Capital asks whether the recent rally in resources is sustainable. First glance suggests commodity prices have run too hard, too fast. Prices could fall back but the analysts are mindful that prices are now equivalent to levels seen in 2004, some 12 years ago. This generates the observation that the Chinese economic boom, which drove prices higher, could be construed as never taking place.
However, resource equities have lagged in the run-up in commodities. Industrials, financials and technology sectors have outperformed resources by nearly 100% over the last few years, the analysts contend. Hence, much of the pessimism appears to be priced into resource stocks and much of the optimism priced into general equities.
The analysts suggest it may be time for the relationship to normalise. Moreover, structural shifts in the US economy, with market expectations going from a potential for four US rate hikes in 2016 to just one, suggest that the undervalued resources sector could be a beneficiary.
Current conditions in south east Queensland appear robust to Morgan Stanley. Price growth in the Brisbane apartment market is slowing and interstate investors remain dominant, given the attractive entry point and strong yields.
Underlying demand, nonetheless, is weak, and the job market relatively poor, so this comes with risks on a 24-month view. The Gold Coast is strong ahead of the Commonwealth Games construction program.
Morgan Stanley expects concrete volumes to remain at high levels and while apartment activity may slow nationwide, some major projects such as the Kingsford Smith Drive upgrade and northern NSW Pacific Highway are expected to sustain activity for the next 2-3 years.
Morgan Stanley is incrementally more positive on the outlook for Boral ((BLD)), given the likely sustainability of the strengthen in south east Queensland. Queensland account for 22% of the company's revenue from construction materials and cement. Morgan Stanley forecasts a 10 basis point improvement in margins across FY16-18.
Deutsche Bank is positive on the gambling sector, given its robust earnings forecasts and sound balance sheets. The broker expects expenditure on gaming domestically will continue to benefit from low interest rates, high property prices and stable employment. Casino operators are also benefitting from Chinese tourism.
All gaming stocks are below the broker's valuations although Aristocrat Leisure ((ALL)) and Star Entertainment ((SGR)) remain preferred exposures. Value is also seen emerging at Tabcorp ((TAH)) and Tatts Group ((TTS)).
CrownResorts ((CWN)) is boosted by the prospect of a corporate restructuring which could involve a bid for the remainder of the company by James Packer. Deutsche Bank retains a Hold rating on the stock.
Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) are both enjoying sales momentum in Australia. Deutsche Bank expects this to persist, with housing volumes and the wealth effects a tailwind. Relative to the population, housing starts are not seen at record levels and the broker believes the recent surge in construction is merely a catching up after decades of limited growth.
The exit of both Dick Smith and Masters should deliver meaningful benefits as well. The broker estimates Masters will vacate $120m in appliance market share as a complete shutdown is the most likely scenario. Apportioning the sales by existing market share suggests Harvey Norman is the largest beneficiary, with a boost of 0.7% expected to Australian sales.
In terms of Dick Smith's closure, JB Hi-Fi is expected to benefit with a 10% sales uplift, Harvey Norman 6.0% and Officeworks ((WES)), 3.6%.
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For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED
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For more info SHARE ANALYSIS: CWN - CROWN RESORTS LIMITED
For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: SGR - STAR ENTERTAINMENT GROUP LIMITED
For more info SHARE ANALYSIS: TAH - TABCORP HOLDINGS LIMITED
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