Director’s Cut -- Opportunity knocks in resource stocks :: Macquarie Research,

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Director’s Cut
Opportunity knocks in resource stocks
The recent market falls were largely driven by concerns over growth in the US
and Europe, which has exacerbated their sovereign debt problems. In contrast,
the real engine of global growth, China, is in a much stronger position.
First and foremost, as a developing economy, China has much more scope for
growth driven by globalisation and income convergence. The medium term
outlook is also brighter, as Paul Cavey believes inflation is under control, and
while the economy is slowing, it’s likely to be a soft landing. Part of the reason
for this view is that Beijing has the scope to ease credit restrictions and cut rates
if need be to stimulate growth. Meanwhile the US has already fired their bullets,
monetary policy wise, with the Fed’s latest announcement effectively saying that
any new stimulus for the US economy will need to come from fiscal policy.
Coupled with the relatively bright outlook for China is the fact that ex-China
commodity demand is well below pre-GFC levels, with the developed world
construction sector already at rock bottom. As a result, we expect any slowing in
the US and Europe to have a lesser impact on commodity prices this time. In
short, while the commodity stocks are likely to remain volatile over coming
weeks, we believe the medium to long term fundamentals remain attractive.
Andrew Dale has screened for best buys among the Asian and Australian
commodity markets looking for low-cost operators, with cheap valuations and
that could attract M&A activity. Some of his preferred names include Rio Tinto
(RIO AU), Jiangxi Copper (358 HK) and POSCO (005490 KS). He also sees
Japan as a relatively defensive market when it comes to the trading houses and
would by a buyer of Mitsui (8031 JP) and Mitsubishi (8058 JP). Both stocks
offer large upside from here, with Mitsui on a forecast 12 month TSR of 99%.
On a separate theme, Mike Wood has initiated coverage on the US Electrical
Equipment Industry with four Outperforms and three Neutral rated stocks. He
favours stocks with strong content growth, high growth end-market exposure,
positive margin drivers, and upside to consensus earnings. After meeting
management both in and outside of his coverage sector, he says companies
appear committed to longer-term capital spending plans despite hiccups in the
economy. The favoured large cap in the group is Emerson Electric (EMR US)
which is the largest pure electrical equipment company in the US, and serves a
broad array of industrial end markets. Following the sell-off Mike sees a rare
opportunity to buy a highly rated management team that he expects to generate
attractive returns over the next five years. >> Read Report
Highlights
 Tanya Branwhite says the Australian market is unlikely to bottom until we
see a normal yield curve and lower earnings expectations.
 Venkat Eleswarapu says the US Macro Distance Model favours
momentum, growth and profitability, while underweighting value.
 Nathan Ramler has upgraded NTT DoCoMo (9437 JP) to Outperform on the
early stages of success it is having in driving profit growth.