Solid start to 2012
In Australia, the ASX200 rose 5.1% in January. Resource and Energy stocks were the best performers (all featuring in the ASX20 Top 5 Performers list), whereas the Healthcare index fell 1.2% as investors rotated out of the more defensive names.
While news locally on employment and retail sales came in below expectations, and consumer sentiment only recorded a small rise following two rate cuts at the end of last year, markets were still able to push higher on better news offshore, including a positive growth surprise in China, where GDP grew at 8.9% year on year in the December quarter (versus market expectations of 8.7%). Altogether though, a softening labour market, cautious consumer, and inflation of 2.6% year on year remaining within the mid-point of the Reserve Bank of Australia’s target range, does keep open the likelihood of further rate cuts in Australia.
Meanwhile, US equity markets rose amid improving signs in housing, manufacturing activity, consumer confidence and employment during December. The rally also extended after the Federal Reserve kept policy stimulatory by extending the period over which it will maintain exceptionally low interest rates (to “at least through late 2014”), and speculation re-emerged of further Quantitative Easing. Talk of the latter drove Gold prices up 11%, recovering some of their recent weakness.
Successful bond auctions in Italy and Spain at lower yields than recent history saw sentiment improve in Europe despite credit rating downgrades for several countries and fears of larger debt restructurings to emerge from talks between the Greek Government and private sector bond holders.
So far this year, it appears that our thesis of a stabilisation of credit markets in Europe, a China soft landing and moderate growth in the US is playing out. If this continues, we believe this can lead to a modest improvement in sentiment, valuation and growth expectations.
January Highlights from Research
Australian Banks: Profit Downgrades from Higher Funding Costs
Morgan Stanley Research, 20 January 2012
Funding costs have got worse: with the cost of covered bond issues having been far higher than expected. The indicative spread of major bank offshore 5-yr unsecured bond issues have increased by >100 basis points since June. Higher funding costs reduce our FY12 profit forecasts by ~6% on a stand-alone basis, but we expect home loan re-pricing to provide a ~3% offset. However, these factors are already leading to a greater cost focus at the major banks, and we have lowered our expense growth forecasts to reflect this.
Our forecasts now imply broadly flat EPS and dividends this year: We think the major banks can hold dividends under our base case, which assumes no recession over the next two years and just a modest increase in loan losses this year. We see little risk of dividend cuts under the base case scenario because capital positions are healthy and loan growth is modest.
Global Economic Outlook and Strategy - January 2012
Citi Investment Research and Analysis, 18 January 2012
We expect that overall global growth will slow from 3.0% in 2011 to 2.3% in 2012. With extra fiscal tightening announced or expected, plus drag from the weak banking system, we expect that Euro Area Real GDP will fall by 1.5% this year and fall by 0.4% in 2013. By contrast, we still look for US growth of about 2% this year, and gradual improvement in the jobs market. In China, with the domestic property market correction and euro area recession, growth is slowing in early 2012 and may drop to below 8% year on year in the first quarter.
We continue to expect sizeable further debt restructuring in Greece, as well as debt restructuring in Portugal and possibly Ireland. Italy and Spain are likely to need increasing support, probably including some kind of troika program. We continue to expect a long period of very low interest rates across advanced economies. We expect a string of further ratings downgrades for advanced economy sovereign debt, both in coming months and the longer term.
Five Stock Selection Themes for 2012
Morgan Stanley Smith Barney Portfolio Strategy & Research Group, 25 January 2012
We present 5 stock selection themes. From a more bottom-up level, we see some characteristics of the market that may find favour with most equity investors this year, including:
1. Look for Large Caps that are forecast to deliver similar growth to that in the Small Caps sector, but trade on less expensive multiples (e.g. IPL, BLY, SUN, FMG);
2. Reduce exposures to Expensive Defensives, which are not just trading at a premium to the rest of the market, but the premium is also higher than average (e.g. RHC, CCL, COH);
3. Look for quality yield in a low interest rate environment (e.g. NAB, SUN, BKN, ANZ);
4. We think that in the absence of M&A, companies will continue to chip away at share buybacks to utilize any excess cash and deliver mild earnings accretion (e.g. RIO, RMD, SUN, GMG);
5. Undervalued with potential for company transformational growth. A number of companies have continued to evolve over the past 3 years and progressed growth options without seeing this reflected in their share price. If successfully executed, these companies could deliver substantial growth (e.g. AMP, STO).
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Please contact Lachlan Cameron should you wish to obtain a copy of the full research reports listed or refer to our website at www.morganstanleysmithbarney.com.au. .................................................. Source: Written by Lachlan Cameron, Vice President, Financial Adviser, of Morgan Stanley Smith Barney Pty Limited, Sydney Research sourced from:
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