Weekly Broker Wrap: Equity Strategies And High Conviction Stocks

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-Transition to non-resources accelerates
-Lower oil benefit to key industrials
-High conviction matters in low growth
-Oz housing exposure attractive
 

By Eva Brocklehurst

Australian Industrial Opportunities

Morgan Stanley believes, while lower oil prices can support global growth, Australia's position is more subtle, the declines in oil only a mild offset to more meaningful growth headwinds. The broker forecasts Brent prices to fall to US$57/bbl in the second quarter of 2015 before rebounding to US$82/bbl by the end of the year. Morgan Stanley considers this is a self inflicted "crisis" in the oil market and the envisaged oversupply is grossly exaggerated. The lower oil price is expected to accelerate the transition from resources boom to non-mining growth in Australia. This does not change the fundamentals for Australia's bulk commodities, in the broker's view, despite lower production costs for miners.

The broker finds opportunities in the broader industrial sector include Ansell ((ANN)) as it benefits from lower oil prices as an input cost and a stronger US dollar via the translation in earnings. Incitec Pivot ((IPL)) screens well as a beneficiary from the same two features. As the company currently contracts for gas uptake, timing on the possible earnings impact of lower oil on gas prices is important. With lower petrol prices there is more money available to boost discretionary spending. Morgan Stanley prefers Tabcorp ((TAH)) in the gaming sector, driven by a growing margin profile on the back of lower taxes, fees and commissions with more regulatory certainty versus its gaming peers.

High Conviction Stocks

Morgans observes the strengthening of the US dollar and fresh lows in the euro, amid falling commodity prices, has brought renewed volatility to Australian equities. While these factors have largely played out, the recent fall in the oil price is now amplifying concerns. Morgans considers oil prices are unsustainable at current levels. For Australian share market volatility to abate the currency need to reach fair value at around US80c or below. The broker argues that high conviction stocks continue to outperform when the markets are offering little in the way of positive momentum and, therefore, such confidence in these Buy ideas is more valuable than the ideas themselves.

The broker's high conviction stocks, those which offer the highest risk adjusted returns over a 12-month period, include CSL ((CSL)), Transurban ((TCL)), Stockland ((SGP)), Brambles ((BXB)), Seek ((SEK)), Origin Energy ((ORG)) and Oil Search ((OSH)), among the ASX-100 stocks to which Ramsay Health Care ((RHC)) has now been added. Ex-100 stocks include 360 Capital ((TIX)), Shine ((SHJ)), National Storage ((NSR)), NextDC ((NXT)), GBST ((GBT)), Admedus ((AHZ)), to which ImpediMed ((IPD)) has now been added.

Equity Strategy

Deutsche Bank's profit pulse indicator suggests moderate earnings growth in Australia, with the drag from commodity prices offset by improving credit growth, a lower Australian dollar and solid US growth. Easy monetary policy should continue to benefit equities, as while the US Fed is likely to be tightening rates the European and Japanese central banks are still easing. Australia has some green shoots in the non resource economy, in the broker's view, and the trend, while not strong, is still positive. Cost cutting stories remain attractive while waiting for revenue growth to improve. The broker continues to back housing exposure and notes offshore cyclicals have performed well, with the growth to support valuations. Yield is likely to remain attractive, given the low interest rate background, but the broker is wary that pure yield stocks have re-rated a great deal already.

Deutsche Bank observes there are some stocks offering only slightly lower yields with some reasonable growth prospects that should be considered. The broker suspects the Australian dollar correction may have run its course for now, while commodity prices should soon stabilise and trims the energy overweight position, adding this to banks. Orora ((ORA)), BlueScope ((BSL)), JB Hi-Fi ((JBH)), Sonic Healthcare ((SHL)) are added to the model portfolio while AMP ((AMP)), Lend Lease ((LLC)), Toll ((TOL)), Primary Healthcare ((PRY)) are removed.

Small Caps And Buy Ideas

Citi's big ideas in small caps include industrials AWE ((AWE)), Charter Hall Group ((CHC)), Flexigroup ((FXL)), iiNet ((IIN)), Karoon Gas ((KAR)), McMillan Shakespeare ((MMS)), Nine Entertainment ((NEC)), Spotless ((SPO)) and Veda ((VED)) and resources such as Regis Resources (RRL)), Resolute Mining ((RSG)) and Western Areas ((WSA)). Top sells include G8 Education ((GEM)), GUD Holdings ((GUD)) and Paladin Energy ((PDN)). The broker's proprietary Australian residential housing survey this month suggested Australian builders of detached homes remained confident about the outlook, maintaining solid order books. Hiring of more staff appears to have largely run its course while the builders expect to put through price rises of up to 5%.

On the basis of a weakening of the Australian dollar those benefiting with significant offshore earnings include Aristocrat Leisure ((ALL)), Iluka Resources ((ILU)), Macquarie Group ((MQG)), Newcrest Mining ((NCM)) and ResMed ((RMD)). Those companies the broker expects can underwrite future earnings growth through acquisitions include Aristocrat, Amcor ((AMC)), Carsales.com ((CRZ)), iiNet and Veda. 
 

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