From Deustsche:
Three months ago we wrote a report arguing the hand-wringing over recession risks was misplaced. We pegged maximum weakness for the economy as occurring back in 2013, with steady improvement since (see “It’s not 2013 anymore”, 22 Sept). The past few months have seen further improvement, which is evident in a range of indicators:
In 2013 hours worked fell, but are now growing at 3%. And the unemployment rate was rising in 2013, but is now trending down.
Discretionary consumer spending grew only 1% in 2013, the second worst year on record. But now it’s growing at a 4% annual pace.
Bonuses for workers were falling in 2013, now they’re rising.
Housing construction was starting to pick up from low levels in 2013, but is now growing at 10% yoy.
Business conditions (according to the NAB survey) have risen from below average in 2013 to well above average now.
Business credit growth has risen from 2-3% to 6½%, a six-year high. And business capex ex resources was falling in 2013 but has now stabilized.
Vehicle sales were flat in 2013, but have risen by 5% over the past year.
The tourism trade balance has switched from deficit to surplus – tourists to Australia are spending more than Australian tourists travelling abroad. So what’s the upshot for the equity market?
Our Profit Pulse (a real-time tracker of earnings) has increased markedly since 2013.
There were no equity market inflows from super funds in 2013 – over the past year they’ve come in at a $10bn per quarter pace. Challenges certainly abound, but they’re being dealt with
That’s not to say there aren’t challenges. Falling resource capex and commodity prices continue to weigh, and wages growth is very low. But the labour market strength (evident in non-ABS sources also) suggests the resources drag is being absorbed. And while wages growth is low, reduced savings (particularly by Qld and WA workers) is helping spending, as is record low essentials inflation (1½%, vs 3% historic average).
Investment implications – our model portfolio contains Wesfarmers, Harvey Norman, Star, Qantas, and is overweight housing exposure and banks
Market target
We forecast the ASX200 to reach 5300 by mid-2016 (previously 5800), 5500 by end-2016 (previously 6000), and 5800 by end-2017. Including dividends, this represents a little over 10% total return over the next year. We look for a PE rerate from 14¼x to 15½x. And we expect mid-single digit earnings growth in FY17-18. The non-resource part of the market is already delivering this growth – it only requires flat (rather than falling) earnings from resources.
We totally disagree of course which is what makes a market. Much of what Deutsche loves is just housing froth that is going to get blown off next year. I’ll note in closing that prefacing a dramatic slashing of your ASX target with a bullish drum beat doesn’t make a whole lot of sense.
