Tip your hat to the year's top tipsters
The winners of the annual East Coles Best Broker survey hold out cold comfort for investors hoping for a return to the double-digit earnings of a few years past, writes Stuart Washington.
The winners of the annual East Coles Best Broker survey hold out cold comfort for investors hoping for a return to the double-digit earnings of a few years past, writes Stuart Washington. BANK profits are about to fall off a cliff, the fortunes of the coal industry after the resources boom are looking far from secure, and watch out for that shaky retail sector.Don't look to the current crop of top-rated research analysts for any comforting words about some of Australia's largest and most successful companies. Investors used to bank profit growth coasting above 10 per cent annually are in for a nasty shake-up when profit growth drops to below 5 per cent a year, on the forecasts of UBS. And resource stocks that look so good now especially coal are in for a sharp fall in profitability (albeit some years away) when the heat comes out of the boom, according to Craig Sainsbury at Citi.Those looking for silver linings in the retail sector better stick to Coles and Woolworths rather than their speciality shop counterparts as the challenges of online shopping continue, in the view of JPMorgan's Shaun Cousins.Big calls from research analysts are driving a fundamental reassessment in the Australian market about where professional investors can make their money.Australia's fund managers pay big dollars for these calls by top-rated analysts, using them to guide the way they invest their money with the aim of making lots more of it.Today investors can share in the insights enjoyed by the professional fund managers as BusinessDay exclusively publishes results from the annual East Coles Best Broker survey.The boutique financial research firm's analysis reveals the best analysts as voted by funds managers of the likes of Maple Brown Abbott, BT, Macquarie and Blackrock.The funds managers represent more than 40 per cent of actively invested money in Australia, and contributed 1000 votes over 33 different sectors covered by analysts.The results offer the best and brightest from the hyper-competitive investment banks who have offered the insights most valued by professional investors.Top-rated analyst: Shaun CousinsFirm: JPMorganSector: RetailIn June last year, Shaun Cousins saw the storm clouds gathering for consumer spending. He put an "underweight" (or "sell") recommendation on the discretionary retail category he covers for investment bank JPMorgan.As its name suggests, "discretionary" is a description of retailers that sell things consumers want but probably don't need right now. It differs from the retailers selling "staples" fruit and veg, meat and milk such as Coles and Woolworths.Fast-forward 12 months, after collapses (Colorado and Borders) amid a prevalent gloom, and the call by the top-rated retail analyst in the East Coles Best Broker survey looks decidedly prescient.Cousins was also ahead of the curve last December when he published a piece outlining the challenges posed by online retailing, just before the first cry of outrage from billionaire Gerry Harvey made its way into print.Cousins' views on a challenged consumer and what he believes to be structural changes in the way people do their shopping leads to some pretty grim forecasts for discretionary retailers. (Leading examples are David Jones, Myer, JB Hi-Fi and Harvey Norman.)In contrast, Cousins believes benefits accrue to those selling staples that are more difficult to sell over the internet: JPMorgan has a "buy" on both Woolworths and Coles owner Wesfarmers.On Cousins' view, the global financial crisis altered consumer behaviour in a double whammy for traditional bricks-and-mortar retailers.Whammy one was consumers' unwillingness to spend as much or, looked at another way, their willingness to save more.Cousins sees consumers who, on paper, are benefiting from strong household incomes. But they are being knocked around by higher utility bills, rising interest rates and the shadow of the global financial crisis.Whammy two was the rise of the internet as the destination of value-conscious shoppers."Online helps because they are value-seeking," he says. "The consumer has learnt lessons from the GFC they are seeking to reduce price where they can."Cousins sees these broad themes a cautious consumer, a rising role for online retailers and the resulting impacts on discretionary retailers continuing for six months at least. But even "staples" retailers have their challenges from online. Cousins flags Woolworths' recent acquisition of Cellarmasters, with part of its attraction the ability to offer alcohol over the internet.Top-rated analyst: Craig SainsburyFirm: CitiSector: Metals and miningThe outlook for Australia's big iron ore producers looks strong, even when the boom turns to bust. But for that other great Australian export, coal, the post-boom future is not nearly so bright.Craig Sainsbury from investment bank Citi, the top-rated analyst in metals and mining in the East Coles Best Broker survey, runs through some compelling maths about what may be starkly different futures for the two mining industries.Both coal and iron ore have what are known as equilibrium prices, when galloping global demand is eventually met by increased supply of the commodities.Sainsbury predicts this will occur at some stage in the second half of this decade, when China's booming economy starts to rely less on building things and more on consumers buying things.At that stage and without some severe global downturn the best guess is that coal and iron ore prices will fall to their long-term averages.Sainsbury said in the case of good-quality thermal coal, prices would fall from about $130 a tonne now to $100 a tonne in the future. In the case of iron ore, prices would fall from about $106 a tonne now to $80 a tonne in the future.The difference in the future health of the two industries lies in the relatively higher (and increasing) costs of the coal producers compared with the costs faced by the iron ore miners.Sainsbury refers to the world-class nature of the big iron ore miners' deposits and their operations, with costs of $40 to $50 a tonne.Even with the implementation of a mining resource rent tax (MRRT) which Sainsbury believes will come about the iron ore producers are in a position to remain globally competitive and make a decent profit.But for the coal producers, the situation is not so benign."The coal industry, that's going to be less certain, mainly because it's taxed harder than the iron ore market, and also primarily because, on an international basis, the quantity of production of our coalmines is not as sizeable as some on the international market," Sainsbury says.The coal industry incurs a cost of $60 to $70 to produce a tonne of coal.So, with royalties, the proposed carbon tax and company tax, coal producers will be facing a higher impost than their iron ore mining cousins, with Sainsbury estimating about 60 per cent of profits going towards tax bills. Therefore, relative to iron ore, the coal industry faces higher taxes and a less attractive international competitive position.Sainsbury found himself in the middle of the resource super profits tax debate when Citi released research ahead of the tax announcement showing Australia's miners at the time led the world with an effective 43 per cent tax rate.While Sainsbury predicts the big miners can live with the revised MRRT, he also forecasts, based on the experience with Britain's North Sea oil tax, that the rate of the tax will be progressively raised.Top-rated analyst: Scott HaslemFirm: UBSSector: EconomicsMore than six months ago, UBS was the only major investment bank that did not forecast an interest rate rise in the first half of this year.Making such a call which history has proved correct is the province of Scott Haslem, the top-rated economics analyst in the East Coles Best Broker survey. Haslem admits to only a small degree of late-night nervousness as he holds to such public forecasts in one of investment banking's real hot seats."We have held to that view in the face of an onslaught of apparently well-sourced journalists telling us the rates are going up and are going up tomorrow," he says.Now UBS has made another call, joining a minority of economists predicting an interest rate rise in October. The position forecasts a stronger economic position than is suggested by headlines stating: "Rates set to stay on hold all year as weak data keeps coming".Haslem gives the reasoning behind a position that embraces an economy so flat that the Reserve Bank could not possibly move interest rates up in the first half, yet allows that the same economy will bounce back strongly enough that there will be no choice but to move rates up in October.He attributes the flatness in the economy and failure to feel rich from the mining boom to two major factors.First, he points to consumers' "recessionary" perception of their own financial position. And he says that perception is partly based on the federal government's focus on reducing its deficit, resulting in an inability to pass on the benefits of the mining boom.Haslem contrasts the current state of play with the situation that existed before the GFC. "During the first phase of the mining boom the government accelerated the transmission of that mining boom into the broader economy by handing out very substantial tax cuts," he says. "That's where we got double-digit credit growth, double-digit house price [growth] and double-digit retail sales [growth] . . . that is not going on right now."From this perspective, the current fruits of the mining boom are being diverted by a double dose of saving: both consumers and the federal government are being more conservative and repairing their balance sheets.But Haslem also says it is inevitable that the continuing mining boom will be felt in the broader economy in the traditional way: large amounts of capital expenditure filtering through the manufacturing, transport and construction sectors.And that resurgence leads to the prediction of a rate rise in October.Top-rated analyst: Elaine PriorFirm: CitiSector: Environmental, social and governanceThree sets of Australian companies will face widely different impacts once the government introduces some form of carbon price.This is not a political statement, nor is it a rhetorical flourish. It is the considered view of Elaine Prior, the Citi analyst voted the best environmental, social and governance analyst in the East Coles Best Broker survey.Prior came into the then nascent field in 2006, when investment banks were not regularly employing what are now called ESG analysts.At the time Prior, a former analyst who covered BHP for many years, sought and received a commission from Citi to investigate the impact of climate change onS&P/ASX 100 companies.The landmark report led to a full-time role that has allowed Prior to poke into the varied areas under the ESG acronym: green buildings, industrial safety, how companies manage social issues, executive pay and, most recently, the issue of bribery.In the contentious areas she works in, and particularly in the area of putting a price on carbon, Prior says it is important to let the facts speak for themselves.She says three categories of companies are facing the impact of a carbon price.She says for many domestic companies with largely domestic customer bases, the impact of a price on their carbon emissions would be likely to be passed on to the end customer."In that sense we would not expect it to have an impact on profitability," she says.Emissions-intensive trade-exposed industries such as steel and cement makers are likely to receive significant transitional assistance until there is a worldwide carbon price to assist their competitiveness.Prior says these industries would not have to pay the carbon price for 95 per cent of their emissions through some form of offset, such as receiving free permits."Mostly it would suggest it is not a big value impact, although it would be some impact," she says.Third, and more seriously challenged in the era of a carbon price, are the coal fired generators. Essentially "dirtier" brown-coal fired power stations in Victoria and South Australia will pay more for their emissions than "cleaner" black-coal fired power stations in New South Wales and Queensland.But Prior says the overall effect will be to make gas-fired power stations and other sources of energy much more profitable and therefore attractive as an investment as electricity prices go up across the board.Top-rated analyst: Jonathan MottFirm: UBSSector: BankingInvestors who have enjoyed the galloping double-digit profit growth of Australia's banks, into and out of the financial crisis, need to think again.UBS head of research David Wilson pinpoints a conservative call by his banks team, led by Jonathan Mott, as offering a fundamentally different perspective on banks and the broader economy."Our banks team has predicted the days of doing double-digit credit growth is in the past," Wilson says.The argument is that in a patchy economy and with a longer-term reduction in debt by consumers, banks are boring. Or, as Mott, the top-rated banks analyst in East Coles Best Broker survey, wrote in a June 30 research note: "Banks revert to profitable, low-growth companies. Just like they should be."Mott's perspective means UBS is 6 per cent to 11 per cent below the consensus of other bank analysts' profit forecasts for the next financial year, with UBS shaving its forecasts for all four big banks in its most recent note.The scale of the change Mott is predicting is illustrated by his forecast of the sharp fall in credit growth, or the amount of lending banks do.In home loans, Mott predicts a fall from 14 per cent average credit growth to 6 per cent this financial year, 5 per cent next financial year and 4 per cent the year after that.The impact from lower amounts of loans being written is a lower amount of revenue for banks.Among the four big banks, he predicts profit growth will fall from the bumper 23.5 per cent bounce-back from the GFC experienced last financial year to a more subdued 9.6 per cent growth this financial year.But the real kicker is the forecast for 2012 and 2013: profit growth of 2.7 per cent and 3.7 per cent respectively.Another impact from Mott's prediction is that banks will focus on cost savings and trimming their bureaucracy to maintain their bottom line.Again, investors beware: sharp cost cuts will not reap anywhere near as much as when the amount banks were lending was still booming.Wilson said that, once the banks team had made the call on lower credit growth, UBS then pursued the ramifications of that call into the broader economy."It probably does mean that all areas of the economy that have benefited from consumer leveraging is going to be less of a tailwind than it has been historically," Wilson says.Those areas that benefited from a leveraged consumer, and therefore suffer when consumers reduce their debt levels, include retail, media and house prices.