-Trends best in domestic leveraged stocks
-3PL & AUB key performers in February
-Food imports surge with private label
-Uncertainty results from tax debate
-Strong apartment pipeline for 12 months
By Eva Brocklehurst
So far, there are 42 large cap stocks which have reported this month, with UBS noting the season is around half way in terms of large caps and less than half way so for small caps. Reactions in share prices, despite the downturn in markets over the month, have been larger than the revisions suggest, but also skewed to the positive side, the broker observes.
In essence, there has been a number of large rises in share prices on results that were better than feared. The broker notes the trend has been reasonable for stocks leveraged to the domestic economy, particularly housing and consumer related stocks. Small caps have performed marginally better than large caps.
The performance from foreign currency earners has been mixed . UBS believes the market has oversold versus the earnings backdrop, particularly as far as the big banks are concerned.
The strongest results so far, in terms of the combination of share price reactions, earnings revisions and the broker's quality matrix, came from Boral ((BLD)), Cochlear ((COH)), Domino's Pizza ((DMP)) Star Entertainment ((SGR)) Amcor ((AMC)) and Orora ((ORA)). Most disappointing were Computershare ((CPU)), Tabcorp ((TAH)), Henderson Group ((HGG)), Aurizon ((AZJ)) and Ansell ((ANN)) (pre-announced).
Small and Mid Caps
Goldman Sachs removes MYOB ((MYO)) and Sai Global ((SAI)) from its Australian Small & Mid Cap Focus list following suspension of coverage. Fisher & Paykel Healthcare ((FPH)), Flexigroup ((FXL)) and Sky City Entertainment ((SKC)) are added.
The list is down 10.1% in February to date while the Small Ordinaries Accumulation index is down 4.8%, implying underperformance of 5.4%.
In the month to date the key performers were 3P Learning ((3PL)) and Austbrokers ((AUB)), which outperformed 10.1% and 5.1% respectively. Main detractors were amaysim ((AYS)), McMillan Shakespeare ((MMS)) and Blackmores ((BKL)), which underperformed 16.6%, 11.8% and 11.0% respectively.
Australia is increasingly relying on importing food. Food imports by value have risen at an 8.4% compound rate since 1988, with an acceleration to 10.2% since 2008, as supermarkets look overseas for cheap privately branded products. Morgan Stanley estimates that imports now represent around 19% of supermarket sales at retail levels.
A high Australian dollar and the increase in private label products is the driver of the acceleration, in the broker's view. Historically, the link between dry grocery inflation and the AUD/USD is strong but as the Australian dollar has weakened recently dry grocery inflation has declined, rather than increased.
This suggests to the broker that the industry is more competitive, with Aldi's share of the market now at 7.0%. Given low demand elasticities and low volume growth, the broker suspects pressures from declining dry grocery prices will be difficult to offset.
Labor has outlined plans to limit negative gearing to newly built properties from July 2017, with any deduction from investment in established properties limited to investment tax liabilities. In addition, the capital gains tax discount would be halved for all investments.
Morgan Stanley believes the positives under the Labor proposal could include a pull forward of volumes as investors rush to beat the deadline, driving up prices and expanding margins. Also, the differentiation between new and established property would be a material new tax distortion which should incentivise higher construction volumes.
The debate is likely to continue until the government's position on negative gearing and the outcome of the federal election (at the latest January 2017) are known.
The Labor proposal challenges the government to deliver on its promised broad-based tax reform, Morgan Stanley asserts. Either way, change is coming and the impact on markets and at the macro level could be meaningful.
Oppositions over the past nine years have not been proactive in terms of policy. Labor's move may put the focus on tax in the government's re-election plans. It appears a rise in the Goods & Services Tax is now unlikely and the broker suspects the policy battle will be around the broad collection of investment tax.
The uncertainty is likely to weigh on financial services and housing related sectors. If the polls deteriorate for the government the broker observes the potential for another hiring and investment hiatus, as industry awaits to see what is actually implemented. In the context of already low growth, Morgan Stanley suspects this can only hinder second half earnings momentum.
Australian dwelling approvals signal a strong pipeline of construction projects for Boral and CSR ((CSR)) and various other building product suppliers, Credit Suisse contends. Looking at apartment approvals in isolation these are around 48% above the 10-year average.
The broker notes around half of the apartment style dwellings in the pipeline are in NSW, presumably Sydney. While there is little incentive for the major home builders to slow down, the broker notes that home builder pre-sales could be harder to achieve against a slowing Australian population and tighter capital controls in China.
The broker's base case for housing related building product volumes continues to be well supported for the next 12 months. A more protracted downturn is modelled for thereafter.
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