\n\tBy Greg Peel<\/p>\n
\n\tAs the strategists at Deutsche Bank have oft noted, the re-rating of the Australian stock market to an average price\/earnings (PE) of 12.8x over the past few months has seen several sectors now priced above the two-year average and the ten-year market average is now in sight. Hence stocks appear as well priced (on average) as they have been in 2010-12 and are approaching the 2002-12 average which encompasses the pre-GFC<\/span>, China-and-cheap-money-led boom.<\/p>\n \n\tTo drill down deeper into the PE comparison, one can go a step further and consider the PEG ratio, or price earnings to earnings growth. PE is today's price divided by the forward earnings forecast and earnings growth is the earnings increase from last reported to forward. Using this measure, and comparing specifically to the FY03-06<\/span> boom period, Deutsche's assessment is that the market looks “cheap” on a median price basis and “cheap to fair” on market cap-weighted basis.<\/p>\n \n\tThe strategists are quick to point out PEG comparisons have an implicit flaw, being that they assume forward earnings forecasts to be achievable. In FY03-06<\/span>, earnings forecasts were gradually being increased. In 2012, earnings forecasts have been downgraded on a net basis, and the greater perceived risk is for further downgrades. So bearing that in mind, but using static PEGs<\/span> at this point, Deutsche has made the following sector observations.<\/p>\n \n\tBanks and miners look expensive. Defensives appear to be fair value. Energy stocks and cyclical industrials look cheap.<\/p>\n \n\tSplitting up the defensives, Deutsche notes property, utilities and telcos look more appealing than expensive consumer staples and healthcare. Cheapest amongst the cyclical industrials are steel, building materials and media but beware the “value trap”. Deutsche notes these sub-sectors require a very big turn around in earnings not to remain “cheap”.<\/p>\n \n\tThose stocks which look good on a PEG basis and have reasonable relative earnings momentum, according to Deutsche's analysis, are Westfield ((WDC)), AGL ((AGK)), Suncorp ((SUN)), CFS Retail ((CFX)), Primary Health Care ((PRY)) and Stockland ((SGP)) among the defensives and Fletcher Building ((FBU)), News Corp ((NWS)), Aristocrat ((ALL)), Sims Group ((SGM)) , James Hardie ((JHX)) and Qantas ((QAN)) among the cyclicals.<\/p>\n \n\tSpeaking of defensives, while Deutsche has been focused on historical PEs for some time the UBS strategists have been trying to decide whether indeed “defensive yield” stocks have now run too far. Such names did ease off a bit in August-September but outperformed once more in October.<\/p>\n \n\tUBS applauds this resilience while at the same time retaining a “moderate underweight” on high yield areas of the market. This is based on the strategists' view of improving global growth, which would suggest an investor switch out of defensive names, however they acknowledge that there is a risk the low yields available for bonds and cash (particularly offshore) will continue to make high yield stocks well sought after.<\/p>\n \n\tTrying to sort through that conundrum, UBS has come up with a list of stocks it finds most attractive on a yield to dividend growth basis. It includes DUET ((DUE)), IAG ((IAG)), SP Ausnet ((SPN)), Sydney Airport ((SYD)), Telstra ((TLS)), Transurban ((TCL)) and Westpac ((WBC)).<\/p>\n \n\tShifting now to the energy sector specifically – one of Deutsche's “cheap” sectors – Macquarie has had a look at mid-cap energy stock performances over the September quarter (following quarterly production reports).<\/p>\n \n\tIt was a strong quarter for production growth, Macquarie notes, and this was reflected in share price strength. However value is still evident, and in particular Macquarie likes Horizon Oil ((HZN)) and Karoon Gas ((KAR)).<\/p>\n \n\tEven more specifically, Goldman Sachs has had a look at how the “tight gas” (which is not something relieved with Quick-Eze) and\/or shale gas aspirants are doing. Currently very active in the Cooper Basin are Beach Energy ((BPT)), Santos ((STO)) and Senex ((SXY)).<\/p>\n \n\tSenex may have the most upside surprise potential, Goldman suggests, given low expectations following problems at the Sasanof well which the analysts do not see being replicated at the Kingston Rule and Skipton wells.<\/p>\n \n\tIn the Perth Basin, AWE ((AWE)) is having some early success, while ROC Oil's ((ROC)) prospects in Malaysia look exciting but more clarity is required before Goldman can be more enthusiastic. For overall energy sector value, nevertheless, the analysts' preference continues to be Beach Energy, which trades at an 18% discount to their valuation.<\/p>\n \n\tZooming back out to the general market again, Goldman has also updated its Conviction List. In goes SAI Global ((SAI)) as a Buy post the company's AGM and out goes Westfield Retail Trust ((WRT)) due to share price outperformance.<\/p>\n \n\tIn resources, in go Fortescue ((FMG)) and OceanaGold ((OGC)) as Buys and Western Areas ((WSA)) as a Sell. Independence Group ((IGO)) leaves the Conviction List as a Sell.<\/p>\n \n\tMacquarie runs an Emerging Leaders portfolio and after the release of a scoping study has added Papillon Resources ((PIR)) to that list.<\/p>\n \n\tMeanwhile Citi's Pan Asia strategists have updated its Focus List of the thirty best stock picks out of 1200 listed Pan Asian stocks. Included in Citi's preferences are Australian stocks Commonwealth Bank ((CBA)), ResMed ((RMD)), Rio Tinto ((RIO)), Santos and Stockland.
\n\t <\/p>\n