Consumer, health and industrials in 2013

Nicholas Grove  |  21/12/2012Text size  Decrease  Increase  |  

Nicholas Grove: The Morningstar equities research team recently released the Huntley's Forecast 2013 sector reviews. Here to give investors an idea of what to expect from the consumer, healthcare, industrials and telco sectors in the coming year, I'm joined by Morningstar's Peter Rae. Peter, thanks very much for joining us.

Peter Rae: Thank you, Nick.

Grove: First of all, Peter, what are the key issues, trends and risks that you think investors should bear in mind when it comes to both the consumer discretionary and consumer staple sectors in 2013?

Rae: Nick, in the consumer sector there are a number of issues and trends that have been playing out for some time. We've got cyclical conditions facing the sector at the moment and we've got weak consumer sentiment that's been around for some time. We've had interest-rate cuts. It's probably more than 12 months since the first interest-rate cut was put in place, but that doesn't seem to have made a lot of change to consumer sentiment at this stage. People are looking to pay their down debt, people are a lot more frugal, so that's had an impact on the consumer discretionary space, retail, and media, with advertising down. We expect that that trend will probably continue. We don't see any signs at this stage of any change in that trend, but we are hopeful that the interest-rate cuts, including the latest one in December, starts to have an impact early in the new year. But we think it will probably be a little while before we start to see that flowing through to the outlook for many other players in the consumer cyclical or consumer discretionary space in particular.

Grove: Peter, broadly speaking, where do you see earnings and dividends heading for healthcare companies in 2013?

Rae: Well, the healthcare sector is very defensive sector, earnings are resilient. Sure, the sector can be subject to regulatory issues some times, but we are seeing a fairly positive outlook for that sector for 2013. CSL recently came out with earnings guidance upgraded and they are looking for pretty strong growth next year. I think most of the major players, the narrow-moat firms in particular that we cover in that sector, are expected to perform fairly well next year. So, we are looking for some good earnings and dividend growth from that sector. The only thing I would say, though, is that the share prices in that sector have run quite hard over the past year. And so, from a value perspective, there is not a lot there and most of the expectations are already priced into those stocks.

Grove: When it comes to the telco sector, what issues should investors keep front of mind and what do you expect in terms of earnings from this sector?

Rae: Look, there's a couple of big issues there. One is the potential for a change of government next year with an election due. Telstra has done a deal with the current government on the National Broadband Network. The opposition has made noises about not favouring the National Broadband Network. So, we don't really know what they would look to do if they were in government, but we think that, regardless, Telstra is fairly well-protected. There are clauses in there that would compensate them if changes may be made to the NBN legislation. So, the other big issue is the auction of mobile spectrum. We would be watching that to make sure that the bidders such as Telstra and the other networks don't pay too much for that spectrum. With the government under budgetary pressures, they'll be obviously looking to extract as much as they can from that auction. So, I would be hopeful that the participants don't pay too much because it would then have an impact on the cost base further down the track. And in relation to the earnings outlook for the sector - relatively stable. It is a mature sector, so we are certainly not expecting strong growth, particularly from the likes of Telstra, but should see good, moderate earnings growth come through. Some of the smaller players will probably achieve better earnings growth as they pick up market share and they've also got cost programs in place, which should help drive the bottom line.

Grove: Finally Peter, when it comes to the industrial space, which sub-industries do you expect to perform well and which do you not expect to perform so well?

Rae: Look, the industrials is a mixed bag. A lot of the subsectors in there have been hurt by the weak consumer environment and also the strong Aussie dollar, which has made it difficult for manufacturers in particular to compete. We are hopeful that there will be perhaps a pickup in the building sector, or with the signs there that we may start to see a pickup with interest rates now at fairly low levels, hopeful that there will be some pickup in activity in the housing and construction sector. But, again, a lot of that's already priced into the (shares). So we're sort of looking for some rebound in earnings growth from that sector through 2013. The transport sector is a sector that's also hit with weak consumer sentiment - goods not moving as fast, fewer goods moving. So it's a fairly weak sector, and again, unless we see a pickup in consumer activity, it's probably going to remain fairly weak in the short term.

Grove: Peter, thanks a lot for your time today.

Rae: Okay. Thank you.

Video Archive...

Big bank dividends are sustainable
29/04/2016  Westpac, ANZ and National Australia Bank report half-year earnings in the week commencing 2 May and Morningstar's David Ellis gives investors a taste of what to expect.
Don't expect iron ore rally to continue
26/04/2016  Investors are underestimating how much steel demand could decline, says Morningstar's David Wang.
Japan running out of options to boost growth
26/04/2016  Japan's is into its second lost decade. Have central bankers run out of policy tools? JPMorgan's London-based Talib Sheikh says investors should be wary of further easing.
China businesses are unattractive to investors
20/04/2016  China may be the biggest player in the emerging market universe, but there are far more compelling investment opportunities in Africa and South America, according to a UK-based fund manager.
Where should you invest in Australian media?
15/04/2016  MandA fever may be building towards a "Groundhog Day" ahead of a potential relaxation of media ownership laws in Australia, as structural headwinds continue to intensify.
Where should you invest in Australian media?
15/04/2016  M&A fever may be building towards a "Groundhog Day" ahead of a potential relaxation of media ownership laws in Australia, as structural headwinds continue to intensify.
China's debt is not a problem
15/04/2016  The International Monetary Fund has expressed concerns about China's debt levels but Doug Turnbull of the UK-based Neptune Investment Management says the debt is concentrated and not a problem.
Value investing in a low growth environment
07/04/2016  Morningstar's Daniel Needham explains how to buy an equity or bond at less than its intrinsic worth in a world where the reward for risk investing is diminished.
5 demographic trends driving investment profit
06/04/2016  What is the influence of workers and consumers on stock markets? Dr Amlan Roy explains the implications for asset prices and capital flows, emerging markets and sustainability.
The Morningstar Economic Moat Rating
01/04/2016  The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company with an economic moat can fend off competition and earn high returns on capital for many years to come.
Why you should shun popular stocks
31/03/2016  Investors cannot all buy the same stock at the same price--popularity affects price and leads us to buy high and sell low, obliterating any profit we could have gained.
How to break from the crowd and be a successful investor
31/03/2016  Sir John Templeton stated that: "It is impossible to produce superior performance unless you do something different from the majority." James Montier from asset manager GMO explains how.
Is it too late to invest in Japanese equities?
22/03/2016  The easy money has already been made in Japan, the UK-based Polar Capital's James Salter says, but look for those cyclical stocks with depressed prices and you can still make a profit.
Don't lose the overconfidence game
22/03/2016  Investors who are overconfident in their abilities may trade more often and hurt themselves in the end, says UC Berkeley professor Terry Odean.
What's in store for Telstra shareholders?
18/03/2016  Morningstar's Brian Han talks investors through Telstra's half-year result and why the telecoms giant has been trailing the market since the start of 2016.
Preparing for lower long-term returns
10/03/2016  Investors may not be rewarded for risk-taking during the next several years, so they should tweak their spending and saving patterns instead, says US-based financial-planning expert Michael Kitces.
Hyperion named Fund Manager of the Year
07/03/2016  Hyperion Asset Management has received the top award as Morningstar's Australian Fund Manager of the Year.
Why you should not fear a US recession
03/03/2016  The S&P 500 is back into positive territory for the year, although losses in the UK and Europe are still in the high-single-digits, but investors should stay positive.
Are markets overreacting to China?
02/03/2016  Considering the global importance of China's economy, the country's troubled growth prospects are likely to weigh heavily on the world for years to come.
Earnings season better than expected
26/02/2016  Morningstar's Peter Warnes shares his views on the latest batch of results from the likes of QBE Insurance, BHP Billiton and Wesfarmers.