\n\tBy Greg Peel<\/p>\n
\n\tAustralia’s major equity brokers are bullish. Not that they aren’t always bullish – it’s a bit hard to make a dollar by telling clients not to invest – but after five years of GFC<\/span> gloom, successive years of earnings forecast downgrades, and a sharp rally beginning late last year, the general feeling is that the dust is now settling and things are quietly returning to some sort of normal.<\/p>\n \n\tThe search for yield in a low global interest rate environment, an apparent recovery in the US economy, a lack of hard landing in the Chinese economy, and an increasingly more ho-hum attitude toward Europe have all conspired to provide risk-takers with the green light they’ve been looking for, at least so far. For four years the major risks were double-dip in the US, a crash landing for China, and implosion in Europe. Even in Australia, in which the non-mining economy has been hard hit while mining has driven the train, a quiet shift towards greater equilibrium is reducing overall risk.<\/p>\n \n\tThe consumer sentiment survey published earlier this month showed a “noticeable uptick”, declares Citi<\/span>, from December to March in equities as a place for Australians to put their savings. The data confirm anecdotal evidence from financial executives and retail brokers, Citi<\/span> notes, of an increase in retail flows and trading. New money is entering the market.<\/p>\n \n\tIt’s early days, Citi<\/span> warns, and we must bear in mind the uptick represents only a slight blip off a very low post-GFC<\/span> base, but with bank term deposit rates likely to stay low there’s little reason why the trend cannot continue. On Citi’s<\/span> numbers the average market multiple (price\/earnings) has returned to a “normal” 14x<\/span>. Bull markets in the past have featured investors pushing PEs<\/span> beyond normal and into “bullish” levels, ahead of expected earnings growth. The rally to date has transpired despite any real sign of earnings growth in FY13<\/span>, but the forecast numbers for FY14<\/span> suggest the catch-up can still eventuate, believes Citi<\/span>.<\/p>\n \n\tCIMB<\/span> notes the ASX<\/span> 200 has been one of the better global performers in the rally into 2013, well outperforming the Asia Pacific ex-Japan index. Financials, staples and consumer discretionary, including a strong move from News Corp ((NWS)), have driven the Australian result. Large caps have performed “strikingly well”, suggests CIMB<\/span>, compared to the rest of the world in which small caps have been the significant outperformers<\/span>. Defensive sector valuations are now stretched, particularly food & beverage, the strategists suggest.<\/p>\n \n\tThe CIMB<\/span> strategists are retaining some defensive yield in their preferred portfolio, through National Bank ((NAB)), Westpac ((WBC)) and Transurban<\/span> ((TCL<\/span>)). The rest of the portfolio leans towards “value” as opposed to yield. Overvalued defensives have been exited or shorted. Telstra ((TLS)) is now out, while the healthcare sector has been shorted. In industrials, CIMB<\/span> is long Downer EDI ((DOW)), Fairfax Media ((FXJ<\/span>)) and Seven West Media ((SWM<\/span>)).<\/p>\n \n\tCIMB<\/span> sees the resource sector as a “second derivative” investment opportunity. Investors sitting on underperforming miners are no doubt bemoaning that while China may have turned around its economic trajectory, its new growth path is less inspiring than it used to be, and in the meantime it is the US economy which is apparently firing along. Australian industrials with US exposure have provided strong returns. Do not fear, says CIMB<\/span>. If the US economy is growing, demand for Chinese exports will grow, and hence demand for Australian raw material exports will grow indirectly.<\/p>\n \n\tCIMB<\/span> has added miner Rio Tinto ((RIO)) to its portfolio along with mining service provider WorleyParsons<\/span> ((WOR<\/span>)), and has increased exposure to a knocked-down copper market with investments in OZ Minerals ((OZL<\/span>)) and Sandfire<\/span> Resources ((SFR)).<\/p>\n \n\tCIMB<\/span> also runs a high conviction “long-short” portfolio. A long-short portfolio implies a degree of “pairs trading”, in which one stock is shorted to provide funds to purchase another, preferred stock in a similar business or at least similar sector. Long-short portfolios are not the domain of the small retail investor, but CIMB’s<\/span> pairs at the very least provide readers with an idea of the strategists’ preferences on a relative basis.<\/p>\n \n\tCIMB<\/span> is long Oil Search ((OSH<\/span>)) and short Woodside ((WPL<\/span>)), long Fletcher Building ((FBU<\/span>)) and short Boral<\/span> ((BLD<\/span>)), long Downer EDI and short Leighton Holdings ((LEI)), long Goodman Fielder ((GFF<\/span>)) and short Metcash<\/span> ((MTS<\/span>)), long Starpharma<\/span> Holdings ((SPL<\/span>)) and short Ramsay Healthcare ((RHC<\/span>)), long Transurban<\/span> and short Australian Infrastructure ((AIX)), and long Suncorp<\/span> ((SUN)) and short Perpetual ((PPT<\/span>)).<\/p>\n \n\tThe strategists are also long Seek ((SEK<\/span>)) and short Ten Network ((TEN)), long Perseus<\/span> Mining ((PRU<\/span>)) and short OceanaGold<\/span> ((OGC<\/span>)), Long Rio Tinto and short BHP<\/span> Billiton<\/span> ((BHP<\/span>)), long iiNet<\/span> ((IIN<\/span>)) and short Telecom NZ ((TEL)), long Qantas ((QAN<\/span>)) and short Brambles ((BXB<\/span>)), long Programmed Maintenance ((PRG<\/span>)) and short Navitas<\/span> ((NVT<\/span>)), long Hills Holdings ((HIL<\/span>)) and short Imdex<\/span> ((IMD<\/span>)), and long Transpacific ((TPI<\/span>)) and short Oakton ((OKN<\/span>)).<\/p>\n \n\tUBS agrees with its peers that the “value” space is now the most compelling area of the Australian market, despite some stocks now looking fairly valued. UBS’ preferences for taking advantage of the value push involve those value stocks that have proven laggards to date, those with operational turnaround momentum, those with mid-cycle return on equity (ROE) upside, and those which are priced for growth.<\/p>\n \n\tHence the strategists like Incitec<\/span> Pivot ((IPL<\/span>)) and Origin Energy ((ORG)) as laggards, Lend Lease ((LLC)), Primary Health Care ((PRY)), Harvey Norman ((HVN<\/span>)) and Boral<\/span> ((BLD<\/span>)) as those offering turnaround momentum, Sims Metal Management ((SGM<\/span>)) and Macquarie Group ((MQG<\/span>)) for ROE upside, and Asciano<\/span> ((AIO<\/span>)) and Qantas for priced-for-growth upside.<\/p>\n \n\tMacquarie is also rotating its preferred portfolio out of stocks with “bond-like characteristics” and into stocks with domestic cyclical exposure to housing and consumer demand. The analysts believe the Australian reporting season just passed “strongly” suggested a bottom to the earnings cycle. They also believe a reversal in US long bond yields is a “critical” signal suggesting a shift away from “fear” and into “greed”.<\/p>\n \n\tLocally, Macquarie has added DuluxGroup<\/span> ((DLX<\/span>)), Mirvac<\/span> ((MGR<\/span>)), JB<\/span> Hi-Fi<\/span> ((JBH<\/span>)) and Toll Holdings ((TOL<\/span>)) to its portfolio while reducing an overweight position in Telstra and exiting positions in GPT<\/span> Group ((GPT<\/span>)), Investra<\/span> Office ((IOF<\/span>)), Transurban<\/span> and Sydney Airport ((SYD<\/span>)).<\/p>\n \n\tMacquarie also considers Dulux<\/span> to be one of its “counter consensus” calls, given the broker rates the stock Outperform when market consensus is neutral. The broker’s other counter consensus calls, for which an Outperform rating is ascribed when the market is neutral, are Echo Entertainment ((EGP<\/span>)) and IOOF<\/span> Holdings ((IFL<\/span>)).<\/p>\n \n\tGoldman Sachs has introduced a new approach to recommendations for the longer-term investor by launching its SUSTAIN focus list for Australian and New Zealand stocks. The list comprises of 15 stocks which the broker believes are best positioned to sustain industry leading returns as “long-term leaders”. This approach varies from other broker recommendations, such as those above, in terms of time horizon.<\/p>\n \n\tGoldman’s SUSTAIN list includes ANZ<\/span> Bank ((ANZ<\/span>)), Ausbroker<\/span> Holdings ((AUB<\/span>)), BHP<\/span> Billiton<\/span>, Brambles, Commonwealth Bank ((CBA<\/span>)), Coca-Cola Amatil<\/span> ((CCL<\/span>)), Cochlear ((COH<\/span>)), Computershare<\/span> ((CPU)), CSL<\/span> ((CSL<\/span>)), Domino’s Pizza ((DMP<\/span>)), DuluxGroup<\/span>, Insurance Australia Group ((IAG<\/span>)), Super Retail ((SUL<\/span>)), WorleyParsons<\/span> and Woolworths ((WOW)).<\/p>\n \n\tMoving into small caps, and back to a nearer term time horizon, Citi<\/span> notes the results season just passed could have been worst for Australia’s small caps given reported earnings were only marginally softer than expected. Given the smalls<\/span> have materially underperformed<\/span> the large caps in this recent rally, the broker believes value is beginning to appear. Relative valuations remain compelling, although a trigger for the catch-up is hard to identify, the broker concedes, while the market is keen on chasing more liquid stocks.<\/p>\n \n\tNevertheless, Citi<\/span> has listed its top industrial small cap Buys as Forge Group ((FGE<\/span>)), G8<\/span> Education ((GEM)), iiNet<\/span>, Miclyn<\/span> ((MIO)), McMillan Shakespeare ((MMS)), M2<\/span> Telecommunications ((MTU<\/span>)) and Southern Cross Media ((SXL<\/span>)).<\/p>\n \n\tFor small resources, Citi<\/span> likes AWE ((AWE)), Gryphon<\/span> Minerals ((GRY<\/span>)), Mt Gibson Iron ((MGX<\/span>)) and Medusa Mining ((MML<\/span>)).<\/p>\n