Investment bank JPMorgan has released the latest edition in its Asian Year Ahead series for 2014, which includes a series of Australian stock picks from Paul Brunker, the managing director of research at JPMorgan Australia.
Amid a global, liquidity-driven rally, Australia’s high-yield status places it in a bit of a sweet spot.
However, Brunker notes the market has “recovered only a fraction of its sharp underperformance” from midway through the year when markets were in a spin about the taper.
The broker’s primary concern is a lack of credible earnings growth among big-cap sectors is weighing on the S&P/ASX 200, as low rates also push price-earnings ratios into “uncomfortable territory”.
The line that has been trotted out previously is that P/E multiples can expand ahead of actual earnings delivery, but Brunker says he can’t see the macro or micro-level support for such an outcome.
“Earnings for most sectors are not at cyclically low levels and industry structure support for margins can’t get much better in most cases,” he says.
Consensus forecasts are for earnings-per-share growth of 9 per cent in financial year 2014 on a median basis, or 12 per cent when cap-weighted. Brunker thinks this is optimistic, but by no greater extent than forecasts usually are.
JPMorgan takes the view that a weak labour market is likely to have “the final say”, which would counter any “green shoots” in economic data that might otherwise lead to earnings upgrades.
When it comes to stocks, Brunker has a pretty punchy list of favourite stocks and not so favourite stocks.
Three of the top picks – ResMed, Brambles and Sims Metal Management – reflect the broker’s expectations for a weaker Australian dollar as domestic growth fades. Brambles and Sims offer exposure to any pick-up in developed world growth.
Coca-Cola Amatil is a contrarian pick, based on a view that concerns about structural market change are overdone. Crown is favoured for its emerging market growth angle (Macau), as well as the secular rise of Asian consumer spending power.
Then there are the stocks to avoid.
Stay away from Fletcher Building; it’s a case of valuation getting too far ahead of recovery prospects.
ALS is seen as being vulnerable to a still-weakening economy and commodities capex cycle.
Cochlear’s growth expectations face a lot of pressure, and the stock is already very highly rated at present.
Read the full version of this story at afr.com.au