Deutsche goes full bull on the ASX

Domainfax will love this. If there is an opposite to MB in the Australian market right now it has to be Deutsche Bank which is pumping out uber-bullish commentary on the ASX. Today’s offering is titled Six underappreciated developments:

1. Resources account for just 12% of Australia’s market cap. This is around a record low, and compares to 30% just four years ago. While Australia is still overweight resources vs global equities, the tilt has fallen by two-thirds, to sit at only 5%pts. The market is now more characterized by exposure to defensives and the domestic cycle (especially banks). The lower weighting of resources means less earnings drag – the rest of the market has notched ~5% eps growth for several years now.
2. It’s well known that tourism is important to Australia, especially when the currency is weak. The focus is often on overseas arrivals, given greater visibility and better data, but domestic tourism is more than twice as large. And for the first time in a decade, domestic tourism is growing faster than Australians holidaying overseas, supporting the local economy. Notably, Australians visiting Southeast Asia grew at an annual average of 10% over the decade to 2014, but have since flattened out.
3. A few months of house price falls in Sydney don’t de-rail our positive housing view. Sydney house prices have fallen year-on-year six times in the past thirty years – it’s not rare. We still characterize the construction cycle as underdone.
4. Selling prices of construction materials rose 4% over the year to December – the fastest pace in six years. And the historic relationship with housing activity suggests more to come. Housing plays thus have a margin story to supplement the volume growth from rising construction.
5. Growth has quietly snuck up above 6%, a six-year high. Our lead indicator suggests further upside ahead, consistent with below-average corporate gearing and firm business conditions. Available data suggest that the pick-up has been fairly broad-based across industries.
6. The banks PE discount to the broader market has hit a 13-year high – a 20% discount to the market, and a 30% discount to the market ex resources & banks. While eps growth has stepped down for banks, it has for other industries as well. And near-term earnings for banks have been under less pressure than other comparably cheap sectors.

With respect, here are the developments that Deutsche is missing:

1. The devastation of resources equity is the problem not the solution. It is a leading indicator for other sectors given it is the primary driver of income growth in the economy. So far other sectors have ridden through on the eastern housing bubble and a lower dollar but the first of these is now under pressure. For several years, Deutsche has also been championing a rise in productivity to drive income growth which is nowhere in sight.
2. Tourism is good but it is not big enough to offset the downdraft from resources. Mining represents 8.6% of GDP while tourism represents 2.4%. Why are we supposed to discount the headwinds of the first and celebrate the tailwinds of the second?
3. Come now, this is Straya, when house prices falls everything does.
4. The residential boom is clearly going to peak before mid-year and fall away quite sharply. There’ll be some offset in infrastructure but not enough.
5. The pick-up in business credit is still very weak in historical terms for this late in the business cycle. Usually we’re at 15-25% by now. Until very recently the growth was very narrow in commercial realty. See 3.
6. Banks are trading at 12x forward earnings as pressure mounts on all sides: funding costs, bad loans, higher capital, extended payout ratios. Typical cycle low P/Es are 8-9x.

No cigar.