Time To Sell Australian Stocks, Says JP Morgan
By Shuli Ren
Asia ex-Japan stock markets have been more or less in a rally since touching their lows in February. Is it time investors take some profit off the table?
J.P. Morgan thinks the Asian region has another 12% upside before this year-end. But the bank has grown more cautious and downgraded Australia’s stock market from Neutral to Sell.
JP Morgan is worried about the downward trend we see in earnings revisions (and there are better markets elsewhere) and a weaker Aussie.
Strategist Adrian Mowat wrote:
Australia’s EPS forecasts continue to be revised down. The FY2 net revisions ratio is -20%. This is against a backdrop of improving revisions for EM Asia.
J.P. Morgan forecasts that the Australian dollar will weaken to 67USc/AUD by June 2017, as RBA rate cuts and Fed increasingly narrows the interest rate differential.
We cut industrials from neutral to UW on the back of sharp negative EPS revisions. Banks are downgraded from OW to neutral.
Jason Steed, J.P. Morgan’s Australia strategist, expects more earnings slippage for the banks.
He notes: ‘Reporting season brought about another round of minor downgrades to take the aggregate downgrade cycle to c.10% over the last 12 months.
While higher regulatory capital requirements and provisioning against large single name exposures were the culprits in recent seasons, they are making way for headwinds that are now more operational in nature – largely NIM pressure and ongoing issues managing costs in a low growth environment.
Specifically, downward NIM pressure remains evident from lower rates and competition despite backbook repricing, while banks seem reluctant to ‘go hard’ on costs – preferring to manage cost growth below revenue growth. Against this backdrop, we see no EPS growth across the sector for the next year or two’.
Australia’s big 4 banks comprise of over 30% of the MSCI Australia benchmark index, so if a broker has negative sentiments towards the banks, it can’t be positive on the entire Australian market.
Year-to-date, the iShares MSCI Australia ETF (EWA) rose 10.7%. The Australian dollar rose 5.5%.