\n\tBy Andrew Nelson<\/p>\n
\n\tEurope held the bulk of brokers' attention last week, with the implications for currency rates and their flow through to Australian marketplace being pondered. The mining sector featured prominently, as always, while Goldman Sachs turned a little more optimistic on Media.<\/p>\n
\n\tAnalysts at Bank of America – Merrill Lynch note that the Australian macro economic landscape has been deteriorating of late, with the broker pointing to a combination of weak domestic and external news and data. Chief amongst these negative stimuli is the increasing likelihood of the dissolution of the eurozone<\/span> post the fallout from the recent – and soon to happen again – Greek elections. A downturn in China macro data hasn't helped either.<\/p>\n \n\tThe broker has taken a look at recent foreign bank claims data in order to predict the most likely response of Australian markets, given the AUD tends to weaken as yield spreads widen. However, the team from BA-ML warns the underlying dynamics this time around could well be different.<\/p>\n \n\tOn historical terms, a $1bn<\/span> extra reduction of foreign banks' claims on Australia sees an 11bp<\/span> decline in the RBA’s<\/span> trade-weighted AUD index. The flow through to rates tends to see Australian semi-government spreads widen by 1.8bp for every $1bn<\/span> reduction of foreign claims, notes Merrills.<\/p>\n \n\tBack in the second half of 2011, the broker notes European banks reduced their claims by $29.6bn in 3Q and another $18bn in 4Q, which equated to about 98% of the total reduction by all countries. However, Japanese banks increased claims by $6.7bn over the same time frame, and in the 4Q alone the increase was $6.5bn, or almost twice the historical average change.<\/p>\n \n\tHowever, this isn’t 2011 anymore, and the team from Merrills points out that while deleveraging of European banks will probably continue, it sees a good chance Japan won’t be increasing its claims this time around. Thus, there will be little to offset Europe’s decline.<\/p>\n \n\tIn fact, the broker cites some preliminary data from Japan, which suggest Japan has already started to sell Australian assets, especially in the public sector. In March alone, Japan’s Australian sovereign bond holdings dropped by $3.25bn, the largest monthly decline since 2005, notes the broker.<\/p>\n \n\tWhy is this important? The broker explains foreign banks provide funding for Australia. Thus, when these banks deleverage their local assets and reduce investments, the AUD tends to weaken. Yet while the broker admits current positions on the AUD seem to be bearish, it believes any reversals will be shallow and temporary. The broker sticks with its AUD\/USD target of 0.98 and predicts that if the euro zone crisis gets really ugly, we could see drop toward 0.95.<\/p>\n \n\tWith the Aussie down to a point it hasn’t seen in a while, analysts at JP Morgan have taken a look at stocks that tend to outperform when the dollar is sliding. However, the broker warns that you need to be careful to not oversimplify, as while a falling AUD can be positive from an earnings translation view, it can also be negative given the AUD is traditionally seen as a risk proxy for global growth.<\/p>\n \n\tSo the real key, points out the broker, is determining why the Aussie is falling, or rising. Or rather, is the current course due to domestic or international drivers and what will be the likely influence on the perception of risk?<\/p>\n \n\tThus, if you expect the AUD to continue to trend lower, and if you have some risk appetite, then the broker notes global cyclicals tend to outperform. Look at: News ((NWS)), James Hardie ((JHX)), Macquarie ((MQG)), Billabong ((BBG)), QBE ((QBE)), Woodside ((WPL)), Lend Lease ((LLC)), ERA ((ERA)), United Group ((UGL)), AWE ((AWE)) and Aristocrat (( ALL)).<\/p>\n \n\tHowever, if you are risk averse and also expect the AUD to trend lower, then defensive stocks with foreign earnings are the place to be. Stocks that fit this case include Resmed ((RMD)), Cochlear ((COH)), SAI Global ((SAI)), Woodside ((WDC)), Ansell ((ANN)), Brambles ((BXB)) Platinum Asset Management ((PTM)), CSL ((CSL)), Sonic Healthcare ((SHL)), Toll ((TOL)), Dexus (( DXS)), Cockatoo Coal ((COK)) and Computershare ((CPU)).<\/p>\n \n\tOn the other hand, if you expect the AUD to reverse, then importers would stand to benefit. Thus, the broker notes a positive skew to risk would suggest cyclicals should do well. Namely: Qantas ((QAN)), Virgin ((VAH)), Seven West ((SWM)), Fleetwood ((FWD)), Sydney Airports ((SYD)), Aust Infrastructure ((AIX)) and Filght Centre ((FLT)).<\/p>\n \n\tBut if you hold little risk and you still expect the AUD to rise, then the broker says defensive importers are the way to go. Look at: Coca Cola Amatil ((CCL)), Campbell Brothers ((CPB)), Goodman Fielder ((GFF)), Wesfarmers ((WES)), Boral ((BLD)) and Orica ((ORI)).<\/p>\n \n\tLast week, Goldman Sachs made some cuts to its AUD\/USD forecasts, pencilling in parity for the next 3 months, with the rate dropping to 0.98 for the nine months after that. The slight reductions to forecasts has had a minor, but positive effect on A$ reporting companies.<\/p>\n \n\tThe earnings changes range from no change up to 25% earnings increases, while valuations pretty much remained within 2%-3% of previous forecasts. FY12 EPS forecasts for OZ Minerals ((OZL)) were lifted by 20%, while Iluka ((ILU)) was lifted nearly 11%. FY13 increases were more widespread, with Newcrest ((NCM)) and Evolution ((CAH)) up 22%, Western Areas ((WSA)) up 33%, while OZ Minerals, Sandfire ((SFR)), Lynas ((LYC)), Kingsgate Consolidated ((KCN)) and St Barbara ((SBM)) all ended up more than 10% higher.<\/p>\n \n\tGoldman Sachs also took a look at the mining sector last week, but with macro glasses on in order to gauge the impact that current activity will likely have on Australian jobs numbers. The broker notes that aside from businesses in the sector, construction, transport, and manufacturing tend to be the three sectors that benefit most from a mining boom. Together, these sectors account for nearly 25% of Australian employment, notes the broker.<\/p>\n \n\tBased on an assumption of a 60% increase in mining investment, the broker expects we’ll see around 60,000 additional jobs in FY12. However, given employment in these three sectors is flat or falling, the broker thinks that mining’s current contribution to the broader economy is far less than what we’ve seen in the past. The broker notes this means one of two things: either there is a higher import component from current activity, or there is even more weakness than thought outside the mining sector.<\/p>\n \n\tCredit Suisse took a look at the media sector last week and came away with just a little optimism, noting growth in the advertising market. The uptick came from an expected rise in digital, but also saw a return to growth for free to air TV spend as well. That makes its three straight positive monthly reads and leads to CS seeing signs of stabilization.<\/p>\n \n\tOn the other hand, print advertising continued to slide, matched only by the rise in digital as advertisers continue to switch. The broker notes the real surprise came from retail advertising, with what amounts to being the largest category up 7%. Performance amongst other major categories was mixed, notes the broker.<\/p>\n \n\tThe broker continues to like Carsales ((CRZ)), Seek ((SEK)) and STW Communications ((SGN)) given their exposure to digital advertising. Among the more traditional players, the broker thinks that Fairfax ((FXJ)) is responding well to the shift from print to online, given both its focus on costs and its push to better monetise digital content.<\/p>\n