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