Deutsche Bank Summarises The Australian Economic Recovery In Two Words: Buy Cyclicals

Getty/Sandra Mu

There’s a great note from the Equity Research team at Deutsche bank in Sydney which summarises the recovering Australian economy nicely.

Under the title “Four reasons to buy cyclicals” Deutsche Bank neatly picks out the improvement in growth which has seen the RBA change its stance on monetary policy to neutral recently.

The 4 reasons Deutsche Bank gives are:

  • EPS forecasts holding up nicely, and valuations look reasonable for cyclicals
  • Businesses are reporting the best conditions in 2½ years
  • The turn in the labour market should boost household income & spending
  • Chinese growth should get a boost from exports

It really is a snapshot of a recovering economy.

Here are some of the relevant charts from their note:

Earnings Forecasts Resilient

Earnings forecasts had been very stable since the middle of last year, standing in stark contrast to the two previous years. This provides evidence that the earnings cycle has (finally) turned.

Earnings Normalisation = Cyclical Rally

Cyclical industrials don’t look cheap on a PE basis, but with earnings rising from cyclical lows, growth should be solid for several years. Interestingly, notwithstanding their PE re-rate, cyclical industrials still comprise a smaller part of the equity market (18%) than they have on average. Further earnings normalization should lift this share in time.

Business Conditions Suggest Improving Non-Resource Economy

Businesses have reported the best conditions since mid-2011. This measure has proven to be a good leading indicator of the nonresources economy, and suggests a return to trend growth, which would support domestic cyclical earnings.

Employment To Improve Aiding Household Incomes

Leading indicators suggest strength in employment, which would boost household income

Chinese Export Weakness Overstated

Our analysis suggests Chinese exports continue to grow, though the rate has moderated in 2014, partly due to US weather affected activity. With the US & European recovery expected to resume, we look for a good pick-up in Chinese export growth.

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