Goldman Sachs is out with a note describing a better year for EPS growth in stocks in FY14:
Weaker A$/improving global growth to offset domestic risks
Top-down we are more optimistic on the outlook for earnings than we have been in recent periods. We expect 10% EPS growth for the ASX 200 in FY14 (2% below I/B/E/S consensus) driven by 15% growth in Resources (9% below), 10% across Industrials (2% below) and 7% in Financials (in line). Risks remain skewed to the downside domestically, but we believe a lower A$ and improving global growth will more than offset these risks, driving an acceleration in earnings.Mining earnings to recover on volume growth and lower FX
Post a 35% cut to FY13 sector earnings this year, consensus expects a 20% fall in Resources FY13 EPS, before a 24% rebound in FY14 driven by rising mining volumes and a lower A$. While visibility remains low, we are encouraged by production reports highlighting the delivery of improved volumes at stabilizing prices.Offshore revenues to support industrial earnings growth
Consensus expects industrial earnings growth to accelerate from 6% in FY13 to 12% in FY14; half of this growth recovery is to come from firms with significant offshore revenues. Our 12-month A$ forecast of 85c and positive view on US growth should more than offset the downside risks for many domestic cyclicals which, as a segment, now only accounts for 6% of FY14 consensus index EPS growth. At 4% FY14 growth, consensus expects below-trend Bank earnings. Despite this, we remain concerned about the scenario where domestic growth weakens and unemployment continues to rise. With bad-debt charges still below mid-cycle levels, the risks appear skewed to the downside given weak loan growth and margins which we expect to come under pressure, if our forecast interest rate cuts occur.Stock ideas for reporting season and beyond
We expect domestic GDP growth for the June half to be unchanged on 1H. Given consensus expects top-line growth to pick up from 3.6% in 1H to 5.1% in the second half of FY13, we highlight that UGL, FXL, HVN, CAB, GWA, AIO, PBG and SEK could miss consensus 2H revenue forecasts. Looking toward the growth recovery we expect for FY14, SGM, ANN, CPU, FBU and AMC are exposed to sectors and regions that we are most confident will recover, yet they each trade at a below market P/E.
These are all the right themes. And there is actually a reasonable amount of hedging built into a mix of local building materials firms, as well as dollar exposed miners and industrials.
Mining earnings account for half of the expected EPS growth. It’s plausible that they can do so given the big iron ore deluge isn’t fully operational until mid 2014 so iron ore prices may hold up for the financial year ahead. However, the risk is that mining share prices do not follow any improved earnings upwards as the market continues to discount price falls as the deluge builds into Chinese rebalancing. Remember improved miner earnings are pretty much a bet on iron ore holding up (it accounts for 50% of BHP earnings, 85% for Rio and 100% for FMG). Coal is big too. Everything else is tiny by comparison.
And I won’t gloat but here’s the list of strongest consensus earnings upgrades dominated by, you guessed it, dollar-exposed industrials:
