\n\tBy Greg Peel<\/p>\n
\n\tIt's been going on for a couple of years – not just in Australian equities, but everywhere – and it's all rather “strange”. That's the way JP Morgan sees it anyway, while at the same time quite understanding the reasoning. Mind you GFCs<\/span> don't come along every other year, and it is the GFC<\/span>, and its subsequent lengthy fallout, that has prompted such strangeness. We have seen a powerful rally in those stocks which are typically considered conservative, having a defensive quality and a low beta. The underlying factors are, of course, solid names with a high yield.<\/p>\n \n\tJP Morgan thus calls it the “granny rally”, reflecting the drive for reliable income over risky growth potential. Underpinning this rally is a macro view which JPM<\/span> calls “yieldilocks”<\/span><\/span>. It's not particularly neat, but JPM<\/span> is drawing upon the “Goldilocks” analogy of not too hot, not too cold but just right. Global growth has been weak, and hence kept bond and cash yields at low levels (notwithstanding good yields on Australian term deposits), yet not so weak as to amount to a crisis in which everything other than bonds or cash would tank. With just enough growth, solid yield stocks can perform relatively well. With a rush to yield, they can outperform significantly.<\/p>\n \n\tThis argument for what JPM<\/span> calls “mid-risk assets” is attractive, the analysts suggest, but the risk is it all gets carried too far. The risk is yield is over-emphasised<\/span> as a proxy for certainty, thus ignoring actual risk. Mid-risk would make more sense for investors in the US and Europe, the analysts believe, but not so much for emerging markets and Australia. An example is the strength in Australia's high-yielding banks, which on valuation are being treated like utilities without due consideration for their cyclical properties.<\/p>\n \n\tTime to ease off, says JP Morgan. The analysts recommend investors now look to increased exposure in “life goes on” cyclicals, being those with reasonably clear industry economics. In this group JP Morgan includes the large-cap miners. The analysts also like the less cyclical energy sector.<\/p>\n \n\tIn actual fact, UBS offers, investors have already begun to take profits from the yield stock rally and revisit greater risk once more. Outside of the highly favoured defensive\/yield plays, valuation attraction is quite compelling, UBS believes. Investors must look to quality names, nevertheless, given the ongoing tough earnings backdrop.<\/p>\n \n\tUBS has applied some maths to defensive\/yield stocks and created a table of those it feels are most vulnerable to profit-taking, on a score of one (least vulnerable) to four (most vulnerable). No stock scored a four, but those stocks scoring three include (in alphabetical order): CFS Retail ((CFX)), Cochlear ((COH)), CSL ((CSL)), GPT Group ((GPT)), Ramsay Health Care ((RHC)), ResMed ((RMD)), Sonic Health ((SHL)), Spark Infra ((SKI)), Sydney Airport ((SYD)), Tabcorp ((TAH)), Tatts ((TTS)), Westfield ((WDC)), Westfield Trust ((WRT)), and Woolworths ((WOW)).<\/p>\n \n\tOn the flipside, UBS echoes JP Morgan in recommending a switch to quality cyclicals. This includes resource sector names, including Rio Tinto ((RIO)), BHP Billiton ((BHP)), Woodside ((WPL)), Oil Search ((OSH)) and Newcrest ((NCM)), as well as the general industrial cyclicals Brambles ((BXB)), Seek ((SEK)), Orica ((ORI)), UGL ((UGL)) and Asciano ((AIO)).<\/p>\n \n\tBA-Merrill Lynch is another broker spotting a bit of a shift towards “risk on”, noting that after a rollercoaster ride for the index to date in 2012, we are currently back in rally mode. The analysts look to “tactical indicators” to assess this rally, and note that high beta stocks have outperformed low beta stocks by 7% over the last two weeks, the Aussie has appreciated 9% since early June, global credit spreads have narrowed by 125 basis points in the past eight weeks, and the copper price rallied 4% last week.<\/p>\n \n\tAll of these indicators together suggest to Merrills that risk is back in favour.<\/p>\n \n\tMeanwhile, back at the lab, the Macquarie quant boffins have been playing around with “revision clusters”, as you do. They have focused on stocks seeing their ratings either downgraded or upgraded by at least three different brokers in the space of three trading days. Downgraded stocks have typically underperformed the market for two months prior, and continue to “trend down heavily” for an average of 32 days thereafter, for an average return of minus 1.71%. Stocks enjoying upgrades pretty much do exactly the opposite. <\/p>\n \n\tThe problem is, the analysts admit, that one cannot identify a “revision cluster”, using Macquarie's definition, until day three, by which time a trader may have missed the jump. Thus to make themselves useful the boffins have applied some calculations to come up with those stocks which have a high downgrade or upgrade probability, in their view.<\/p>\n \n\tThose stocks Macquarie sees as having a high upgrade probability, from highest to least high, are Carsales ((CRZ)), Westfield Trust, FlexiGroup ((FXL)), ResMed ((RMD)), Graincorp ((GNC)), Super Retail ((SUL)), QBE Insurance ((QBE)), GPT Group ((GPT)), Lend Lease ((LLC)) and Australand ((ALZ)). <\/p>\n \n\tThe perceptive among you would have noticed a few stocks in there the Macquarie boffins favour in direct contrast to the arguments put forward above. <\/p>\n \n\tIn the downgrade probability list, from highest to least high, Macquarie has Intrepid Mines ((IAU)), Aquarius Platinum ((AQP)), Saracen Minerals ((SAR)), Iluka Resources ((ILU)), Boart Longyear ((BLY)), Ramelius Resources ((RMS)), Linc Energy ((LNC)), Imdex ((IMD)), Alumina ((AWC)) and Qantas ((QAN)).<\/p>\n \n\tEveryone of these stocks, bar Qantas, is either a resource sector stock or resource service sector stock. It must be noted, nevertheless, that none are the big cap names the earlier brokers were touting.
\n\t <\/p>\n