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ASX poised for 'mid-year swoon': Deutsche Bank

Canberra Times logo Canberra Times 26/05/2014 Patrick Commins
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Analysts at Deutsche Bank have chopped 5 per cent off their end-of-year forecast for the ASX 200 and become more cautious on mining stocks amid fears that a strong local dollar and weakening commodity prices will hurt corporate earnings in the coming months.

In a note to clients this morning, the broker said it was "taking some risk off the table" in response to what they see as a "mid-year swoon", although they are quick to add they "are not moving outright defensive" as they "continue to expect a stronger earnings environment to emerge later in the year".

The catalyst for this more defensive stance is a softening in the broker's "profit pulse" (see chart below), a "timely" measure of earnings. And the next few months could stay soft due as:

Chinese momentum remains muted; Europe has disappointed; and sentiment in Australia (both consumer and business) has weakened, partly due to the federal budget.

That has resulted in their year-end target for the benchmark index dropping to 5700, from 6000, and to 5900 for mid next year, from 6200.

The DB strategy team has moved their positioning in mining from overweight to "a small underweight", but kept energy at overweight and banksunderweight.

Mining stocks "do look cheap", but could stay that way in coming months – not a concern for the longer term investor, although it suggests there may be some better entry points ahead.

"Newsflow from China's steel and property sectors is weak, and macro data has not improved," they write.

Energy is a favoured theme thanks to LNG projects coming on line, while the oil price is holding up.

They stay underweight banks – earnings outlook is "fine", but they are "well priced": "we prefer to get defensiveness and yield elsewhere".

The defensive sectors they like – and are adding to – are general insurers, real estate and healthcare. They stay overweight utilities.

The DB strategists keep their exposure to Australian housing.

They add Suncorp, Westfield Retail, Sonic and Westpac to their model portfolio. They remove Orica, Nine Entertainment, Macquarie Group and NAB.

Deutsche Bank's sees a "mid-year swoon" in the market on weaker corporate earnings. © Provided by Canberra Times Deutsche Bank's sees a "mid-year swoon" in the market on weaker corporate earnings.

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