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Published by: David4564654 on Nov 09, 2011
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 Strategy Update
8 November 2011
Australian Equity Strategy
Be selective withconsumer exposure
Tim Baker
Strategist(+61) 2 8258-1376tim.baker@db.com
David Jennings
Strategist(+61) 2 8258-1630david.jennings@db.com
Deutsche Bank AG/SydneyAll prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from localexchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DeutscheBank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P) 146/04/2011.
DB forecasts
8-Nov Dec-11 Jun-12
ASX200 index 4294 4550 4950RBA cash rate 4.50 4.50 4.2510-year bond yield 4.22 3.75 4.50
   C  o  m  p  a  n  y
   G   l  o   b  a   l   M  a  r   k  e   t  s   R  e  s  e  a  r  c   h
Even with the RBA cut & low valuations, we are wary of domestic cyclicals
Previous rate-cutting cycles have been 200bp+, but even the most dovishforecasts are for only half of that. The risk is of fewer cuts (DB expects another25bp), which is unlikely to spark a surge in household spending.
Households seem more interested in spending on services than goods.Unfortunately, the market has more exposure to goods (retail,transport,media).
Areas of opportunity amongst domestic cyclicals/consumer exposure
Get exposure to services spending. Air travel is growing solidly, and fares arerising domestically. Casino spending is also growing at a good pace.2.
Retailers with exposure to recreational activity and home improvement areseeing considerably more momentum than clothing/footwear/electrical retail.3.
Food retailers look attractive. Defensiveness seems prudent in the currentenvironment, and our analysis suggests food inflation could pick up.4.
Buy stocks with exposure to the whole economy, rather than specific sectors,given growth overall is solid. SEK and the banks fall into this category.
Our model portfolio contains Virgin, Crown, Seek, Woolworths &Wesfarmers. DB analysts also like Flight Centre, Qantas, Kathmandu,Premier, Dominos, Collins, Tatts.Figure 1: Growth in services & recreational goods, clothing/f’wear lagging
-15 -10 -5 0 5 10 15
FootwearClothingNewspaper/booksDept storesTakeaway foodElectricalTotalFoodO/S tourismPersonal goodsHardwareFurnitureLiquorSpecialised foodCafes/restaurantsSporting/toys/media
Retail trade, values
mom% trend,annualised
Note: Data is Henderson trend, as calculated by the ABS, which is a moving average process. ‘Specialised food’ is fruit stores, butchers, bakers etc.Overseas tourism spend is from trade data, not retail trade survey Source: ABS, Deutsche Bank 
8 November 2011 Strategy Australian Equity StrategyPage 2 Deutsche Bank AG/Sydney
Domestic cyclicals are trading cheaply relative to history
Domestic cyclicals (ie, retailing, transport, media, gaming, building materials) are trading verycheaply, on a median PE of ~11x. This is on par with the depths of the financial crisis, andthey appear quite cheap relative to defensives. Still, the relative valuation case rests upon thereliability of forecast earnings, and recent data raises concerns that an earnings rebound mayremain elusive.
Figure 2: Domestic cyclicals are as cheap as they were in the financial crisis
8101214161820810121416182003 04 05 06 07 08 09 10 11
PE ratios on 12m forward earnings*
Domestic cyclicalsDefensivesBanksx
*Domestic cyclicals is the median of TAH, TTS, EGP, CWN, CSR, BLD, HVN, DJS, MYR, JBH, SWM, FXJ, AUN, SXL, TEN, APN, SEK, AIO, TOL, VBA, QAN. Defensives is the median of stocks in the consumer staples, healthcare, telcos, utilities, property and general insurance sectors Source: IBES, Datastream, Deutsche Bank 
Non-discretionary spending (eg, housing, food, utilities) has far exceeded growth indiscretionary spend (7% on pcp, vs 4%), due to inflation. Further, on a volume basisdiscretionary spend has been quite solid; 4.4% growth on pcp, compared to historicalaverage of 4.8%, and non-discretionary spend at 2.4%. This suggests that price deflation hashurt companies, rather than the actual volume growth of purchases.
Figure 3: Discretionary spending is certainly lagging non-discretionary spend, but this is largely a deflation story
-3036912-303691290 92 94 96 98 00 02 04 06 08 10Prices Volumes Valueyoy%
Non-discretionary household spending
-3036912-303691290 92 94 96 98 00 02 04 06 08 10Prices Volumes Valueyoy%
Discretionary household spending
Note: Non-discretionary spending comprises food, tobacco, alcohol, housing costs, utilities, healthcare, operation of vehicles, communications, education & financial services. Discretionary spending comprises clothing & footwear, furnishings & household equipment, vehicle purchases, transport services, recreation & culture, cafes & restaurants and other Source: ABS, Deutsche Bank 
8 November 2011 Strategy Australian Equity StrategyDeutsche Bank AG/Sydney Page 3
Households’ preference for services over goods is not helping arange of listed companies
Looking in more detail at discretionary spending, there is a further problem for domesticcyclicals. Spending on discretionary goods, where listed companies have more exposure, hasbeen quite poor, falling 3% over the year to June. All of the strength has been concentratedin services, where the equity market has comparatively less exposure (eg, householdspending money overseas on holidays, spending at cafes/restaurants that aren’t listed).
Figure 4: Spending on discretionary services has been very strong, while spending on goods is going backwards
-8-404812-8-40481290 92 94 96 98 00 02 04 06 08 10 12GoodsServicesyoy%
Discretionary household spending -values
Discretionary household spending -values
Note: Discretionary spending comprises clothing & footwear, furnishings & household equipment, vehicle purchases, transport services, recreation & culture, cafes & restaurants and other Source: ABS, Deutsche Ban
This is also evident in the NAB survey, where in the September quarter retailers reportedconditions to be not much better than in the financial crisis, while companies in recreationreported above average conditions. The survey suggests that companies expect theseconditions to persist.
Figure 5: The Sept qtr NAB survey shows retailers continue to find it tough, while the recreation sector is doing well
-40-30-20-100102030-40-30-20-10010203090 92 94 96 98 00 02 04 06 08 10 12
Business conditions -NAB survey
Recreation industryRetail industryDev fromLR avg
-40-30-20-100102030-40-30-20-10010203090 92 94 96 98 00 02 04 06 08 10 12
Expected profitability -NAB survey
Recreation industryRetail industryDev fromLR avg
Source: NAB, Datastream, Deutsche Bank 

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