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BAILLIEU HOLST QUANT RESEARCH

04 April 2016 INTERNAL ONLY

Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report.

RESEARCH ANALYST Mathan Somasundaram

+612 9250 8947 [email protected]

Equity Market Engineer ENGINEERING GUIDE TO EQUITY STRATEGY

US market and commodity risk to offer another buying opportunity

Global market outlook: Slowing global growth, weak commodity prices and rising US inflation ahead of the US reporting season remain potential catalysts set to drive profit taking in early April. US Fed has locked its path to interest rate normalisation to the rising inflation band wagon. First mover advantage in the currency war has delivered stable albeit lower than expected growth for the US. The inability of central banks to pull their economies away from stimulus dependency has created an inefficient distribution of resources. The central bank effectiveness is running into a “law of diminishing marginal returns”. Economies relying on stimulus and low interest rates will run into trouble as the US rate cycle moves higher with inflation pressures. Despite weak expectations, the US reporting season is likely to drive up volatility and risk of profit taking in early April before recovering on central bank dovishness. We continue to see low global growth outlook and falling domestic currency to support our equity market recovery on the chase for yield.

Local market outlook: Equities will continue to benefit from global demand for better than bond yield income streams from the rising older demographic. A tidal wave of unemployment, falling real wages, falling living standards, housing bubble, rising taxes and falling disposable income are expected to keep local consumer sentiment and business capex down. Australia went through credit, population and mining boom over the last 20 years. The lack of policy planning post boom cycles have delivered asset bubbles and cyclical low growth risks. Innovation and dining boom are mainly motherhood statements that require generational change, cultural change and scale. Australia will continue to attract recession fears as the country sleepwalks through a low growth global economic transition. Corporates are expected to protect their balance sheets, cut costs, buy-back shares, drive industry consolidation and maintain yield to deliver share price performance. We expect global investors to buy into Australian equity dividend yield as the currency pulls back to mid-60’s.

Market view: We maintain a bullish long term view on the Australian equity market with the 12 month index target level of 5850. The RBA rate cuts and the end of the housing boom has made equities the preferred risk/return option for investors wanting better than bond yield return in a rising cost environment. We maintain our positive long term view on the yield trade (i.e. Banks, Div Financials and Telecommunication services) while Health Care looks the best growth/currency pick. We continue to favour the new economy (i.e. MITCH Universe – Media, Information, Telecom, Consumer and Health) over the old economy on the long term view. We continue to favour Small Caps over Large Caps due to better growth and yield to value outlook. Small Cap MITCH universe offers the best risk to return profile over the next 12 months. We see a substantial risk of profit taking in the short term with US market and commodity weakness. We see substantial upside for the markets as RBA moves to cut rates as the economy weakens. The likely profit taking in early April will bring investors back to the market. They are expected to reinvest their substantial dividend payments (i.e. $13b over two weeks) to support late April recovery.


04 April 2016


Contents Global Outlook – Top Down 3 Global Outlook – Bottom Up 7 Macro Summary - Global 12 Market Summary - Local 13 Major Sector Outlook – Market 15 Major Sector Outlook – Resources 17 Major Sector Outlook – Industrials Ex Financials 19 Major Sector Outlook – Financials 21 Performance Analysis 23 Market and Sector Multiples 25


04 April 2016


Global outlook – top down Major indices around the world in USD shows that emerging markets and commodity

based countries were the worst performers in the recent global sell-off. Australia has gone from performing above the world index in mid-2014 to be one of the underperformers.

FIG.2-1: MSCI INDICES AROUND THE WORLD SINCE 2005

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MSCI Euro Index (US$) MSCI World Index (US$) MSCI China Index (US$)

MSCI Australia Index (US$) MSCI US Index (US$) MSCI India Index (US$)

MSCI Japan Index (US$)

Source: ASX, Baillieu Holst, Bloomberg, IRESS, Thomson

FIG.2-2: MSCI INDICES AROUND THE WORLD SINCE GFC LOW

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MSCI Euro Index (US$) MSCI World Index (US$) MSCI China Index (US$)

MSCI Australia Index (US$) MSCI US Index (US$) MSCI India Index (US$)

MSCI Japan Index (US$)



04 April 2016


GDP growth outlook shows pecking order starts with India and ends with Japan. The recent downgrades to China puts a gap below India while US downgrades have put a gap below Australia. Australia is likely to see more downgrades as the major trading partners remain in a downgrade cycle. The common trend around the world is for a declining growth outlook.

FIG.2-3: GDP GROWTH RATES AROUND THE WORLD

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US Real GDP QOQ SA Growth (%) China Real GDP QOQ SA Growth (%)

Euro Real GDP QOQ SA Growth (%) India Real GDP QOQ SA Growth (%)

Australia Real GDP QOQ SA Growth (%) Japan Real GDP QOQ SA Growth (%)


Manufacturing PMI shows the slowdown of manufacturing is a global phenomenon despite the stimulus programs. Slowing global growth will continue to put pressure on commodity prices in the short to medium term. Overall, the growth pie is shrinking while currency wars and stimulus plans only offer short term rebalance.

FIG.2-4: MANUFACTURING PMI AROUND THE WORLD

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US PMI China PMI Euro PMI India PMI Australia PMI Japan PMI



04 April 2016


Unemployment rates around the world show that the US and India have managed to recover better than Australia; while Europe is recovering from double digits. Europe is potentially looking at a lost generation of young people that may remain unemployed for over a decade. Australia is also looking at prolonged high unemployment due to government inaction and slowing population growth.

FIG.2-5: UNEMPLOYMENT AROUND THE WORLD

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Australia Unemployment (%) China Unemployment (%) India Unemployment (%)


Consumer sentiment around the world shows that US recovery started in 2011 Q2 and Australia started to decline in 2013 Q3. The rest of the major regions have been stagnating with consumer sentiment trending sideways for at least the past 18 months. Chinese consumer sentiment remains a worry as its economy transitions.

FIG.2-6: CONSUMER SENTIMENT AROUND THE WORLD

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US Consumer Sentiment China Consumer Sentiment Euro Consumer Sentiment

Australia Consumer Sentiment India Consumer Sentiment Japan Consumer Sentiment



04 April 2016


Bond yields around the world show that the decline trend over the past 18 months is still intact. We continue to expect to see yield trend lower as governments keep cutting interest rates. Australian equity dividend yields with franking are substantially higher than all in the developed market bond and equity dividend yield. Japan has moved into negative territory while Europe is not far from there.

FIG.2-7: BOND YIELDS AROUND THE WORLD

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Australia Bond Yield (10 Year) % China Bond Yield (10 Year) % India Bond Yield (10 Year) %

Japan Bond Yield (10 Year) % Euro Bond Yield (10 Year) % US Bond Yield (10 Year) %


Volatility indices show the link between Australia and the US, with overall volatility beginning to rise in both countries after hitting the lowest point in mid-2014. The expectations for both volatility indices to recover as US growth worries start to materialise before the reporting season.

FIG.2-8: VOLATILITY INDICES IN AUSTRALIA AND US

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Australia Volatility Index (XVI) US Volatility Index (VIX)



04 April 2016


Global outlook – bottom up

Australia: The Australian market experienced PE expansion since 2012, while earnings and sales declined. We continue to expect the market to look for a quality growth/yield thematic in a low growth outlook. Falling commodity prices, a housing bubble and US rate cycle will keep the market in check for the short term. Australian equity dividend yield offers the best risk/return yield option compared to all the major markets.

FIG.2-8: AUSTRALIA - CONSENSUS AGGREGATE MULTIPLES FIG.2-9: AUSTRALIA - CONSENSUS AGGREGATE YIELD

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PE (x) EPS GROWTH (%) SALES GROWTH (%) INDEX (RHS)

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DIVIDEND YIELD (%) EARNINGS YIELD (%) INDEX (RHS)


US: US earnings growth is showing signs of stable broad based growth after the economy recovered on stimulus. The US market has moved past QE but slowing global growth, rising rates and rising USD are beginning to take effect. The dividend yield is substantially lower than Australia and under pressure from rising US bond yields and currency. The growth outlook will be tested with higher currency and global growth downgrades. US Fed rate rise cycle may be delayed but rising inflation will force the rate cycle higher in 2016H2.

FIG.2-10: US - CONSENSUS AGGREGATE MULTIPLES FIG.2-11: US - CONSENSUS AGGREGATE YIELD

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04 April 2016


Europe: Europe needs to see sustained sales growth recovery to maintain earnings growth. Europe continues to have uncertainty driven by each country’s internal political volatility due to austerity and refugee plans. The Euro needs a federation type overall government to manage the inequalities of the structure or continue to face break away threats. The dividend yield is comparable to Australia but the sustainability and sovereign risk are higher. The hope of QE based recovery will drive markets higher while countries like Greece will struggle balancing growth and austerity. The biggest refugee influx since the last world war could deliver a spending stimulus to help growth but will also deliver political instability. The Brexit worries will be an overhang with UK going to a vote in June.

FIG.2-12: EUROPE - CONSENSUS AGGREGATE MULTIPLES FIG.2-13: EUROPE - CONSENSUS AGGREGATE YIELD

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UK: The UK needs to sustain top line growth recovery while the rest of Europe remains in low growth. The dividend yield is at a slight discount to Australia, while the UK is trading around pre-GFC high level. The Euro needs a federation type overall government to manage the inequalities of the structure or continue to face break away threats. UK has been postponing the rate rise cycle and will have further reason to push back after recent global growth downgrades. UK votes on EU model in June and that will continue to be a source of risk.

FIG.2-14: UK - CONSENSUS AGGREGATE MULTIPLES FIG.2-15: UK - CONSENSUS AGGREGATE YIELD

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04 April 2016


China: Despite the devaluation of the Yuan and stimulus packages, China will remain in an overall decline trend - towards 5% growth outlook in the next 2-3 years. Given the big changes facing leadership, change has been slow and measured. China has created an equity bubble to support the struggling property bubble. China is now working towards stabilising both asset bubbles to build back confidence. We continue to expect multiple layers of stimulus and further devaluation of the Yuan. The services sector is becoming dominant part of the economy and gives hope that transition is showing signs of delivering change. The commodity prices are likely to remain at the lower equilibrium for a few years till another commodity cycle starts.

FIG.2-16: CHINA - CONSENSUS AGGREGATE MULTIPLES FIG.2-17: CHINA - CONSENSUS AGGREGATE YIELD

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Japan: Japan has experienced remarkable market recovery driven by ‘Abenomics’. The government’s policies are designed to deliver the country from relatively low growth. The early signs are positive with sales growth outlook showing signs of moving higher, albeit still flat. Recent economic data points to slowdown and will require further stimulus to keep the momentum. The easy steps are finished while the big structural moves are still to be delivered. The latest move to negative interest rates shows the desperation to keep the transition on the recovery path. The likelihood of more stimulus in 2016 is rising after recent weak sentiment from corporates.

FIG.2-18: JAPAN - CONSENSUS AGGREGATE MULTIPLES FIG.2-19: JAPAN - CONSENSUS AGGREGATE YIELD

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04 April 2016


India: India continues to be a strong growth market still not delivering the big global growth push and demand for commodities as expected. The current leadership is seen as the catalyst to open the economy and drive more growth and consumption. Global investors see the upside but expect this turnaround to take time while risk remains high.

FIG.2-20: INDIA - CONSENSUS AGGREGATE MULTIPLES FIG.2-21: INDIA - CONSENSUS AGGREGATE YIELD

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New Zealand: NZ’s economy has held up better than most commodity countries, but the decline in global growth outlook and a weaker China is taking its effect. NZ has made structural changes and will benefit with the global economic recovery. NZ has returned to rate cut cycle to stimulate its economy in the face of a slowing global economy.

FIG.2-22: NZ - CONSENSUS AGGREGATE MULTIPLES FIG.2-23: NZ - CONSENSUS AGGREGATE YIELD

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04 April 2016


Canada: The Canadian economy has taken a substantial hit with a dominant exposure to the energy sector amid a declining global growth outlook and a weaker China taking effect. Canada will be banking on an oil price bounce late this year and an eventual global economic recovery.

FIG.2-24: CANADA - CONSENSUS AGGREGATE MULTIPLES FIG.2-25: CANADA - CONSENSUS AGGREGATE YIELD

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Brazil: The Brazilian economy has been taken apart by political instability, corruption, a decline in global growth outlook and a weaker China. Brazil will hope for a commodity price bounce in the short term and global economic recovery in the long term.

FIG.2-26: BRAZIL - CONSENSUS AGGREGATE MULTIPLES FIG.2-27: BRAZIL - CONSENSUS AGGREGATE YIELD

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04 April 2016


Macro summary – global US: The US economy is in a stable economic recovery trend albeit in lower growth than

expected. We remain of the view that global growth downgrades, the European refugee crisis, China’s slowdown, a strong USD and benign inflation will give it enough scope to maintain a slow path to normalisation of US interest rates. US corporate earnings season ahead will drive short term profit taking despite the overall economy showing solid performance.

Euro: The ECB has stepped up QE on the face of further slowdown and geopolitical risks. We expect there will be a few more stages of QE similar to the US in a bid for substantial recovery. Austerity countries will continue to re-adjust debt payment deals to help keep recovery plans in check, while Russia is expected to fall into recession in 2015 and remain a drag on the Euro. Unrest in the Middle East remains another growth killer, while the Iranian deal could flood the commodity markets further. The UK is the next exit candidate to rock the Euro boat and this is unlikely to be resolved quickly. The refugee crisis could deliver spending stimulus despite political road blocks. The refugee crisis will remain a political topic with election cycles, while overall growth outlook will benefit from the refugee spending.

China: Chinese leadership continues to manage the transition with measured stimulus actions, while easing the economy out of the credit and bubble issues. The older demographic and the lack of innovation will be long term issues for growth in China. China is trending down towards a lower (i.e. 4-5%) steady growth rate in the next two to three years like most developed countries. China has moved from a property bubble to an equity bubble and is working to support and manage both down in the medium term. We continue to expect China to deliver multiple layers of stimulus and devaluate the Yuan as the economy slows down. The transition of the economy seems to be headed in the right direction as the services/consumer segment takes over as the dominant growth driver.

Japan: The easy steps in regards to stimulus have driven spending and boosted the share market. The government will have to move on the structural changes after the snap election. Doubts remain if the economy is strong enough to withstand the changes and maintain the recovery path. The latest negative rates policy shows how desperate the state of the Japanese economy is.

India: The sleeping giant seems to be moving with new leadership, but unlike China, every step is slow with a myriad of historical, political and structural impediments. The lower average age compared to China offers huge upside to growth while the historical rate of change suggests this will take time and risk will remain high. The recent data out of Japan suggests that we will see more stimulus in 2016H2.

Commodities: We expect iron ore to average below US$60 over the next year with rising supply and falling demand. Energy prices are unlikely to average below US$40 in the short term while Oil Producing finance minister get together in April likely to set the tone for medium term outlook. The longer term outlook for the fossil fuel and utilities sectors are likely to be challenged by improving battery technology supporting alternative clean energy sources in five to ten years’ time. The next commodity up cycle will require a large emerging country like India or Indonesia to ramp up a substantial building-up phase like China. We struggle to see that happening in the next five years.


04 April 2016


Macro summary – local Unemployment outlook: The accumulated unemployment tidal wave from technological

improvement, automation, car industry, airline industry, ship building industry, telco industry, media industry, retail industry, finance industry, manufacturing industry, M&A job cuts, outsourcing to emerging markets, government job cuts, housing slowdown and the ever shrinking mining/energy and related services industry cuts will create a vacuum for jobs and drive unemployment close to 6.5% in the next 12 months. We do not see any government policy adjustments or global macro changes that can create jobs in the next 12-18 months to limit this damage. Infrastructure job creation is still stuck in policy status and unlikely to materialise in the next 12-18 months. The transition in the employment market from full time to part time and high paying to low paying jobs will start to have a structural effect on the retail spending and big asset purchases over time. We expect unemployment to stay above 6% well into 2017. Similar to the US, the jobs we are losing are high paid, high skilled full time jobs while the majority of jobs being created are low paid, low skilled part time jobs. FTAs will further hinder a new industry build up or an old industry recovery process given the competition from mature technological and manufacturing giants like South Korea, Japan and China. The employment market outlook has held up better than expected due to sample testing limitations, lower population growth and short term government subsidies to declining industries to carry them until the next federal election. The housing market rolling over will further add to the economic transition woes. The risk of technology and automation will decimate the job market in the low income manufacturing and service sectors in the next decade.

Consumer confidence: Tidal waves of unemployment coming in the next few years, rising cost of living pressures, falling real wages, budget worries and a lack of a growth agenda from the government have all culminated to hurt consumer confidence. We continue to be negative on local cyclicals and consumer spending related sectors with a slowing domestic economy. A continued lack of long term planning, real policy reform, election volatility and party politics will keep sentiment low well into 2016. Property bubble worries in light of banks raising interest rates out of cycle will further damage any consumer confidence recovery. Irrespective of who wins the election, tax burdens will increase into the future years and that will come from the disposable income of the low to middle income earners, directly or indirectly.

Infrastructure outlook: The technological advancement in infrastructure projects, FTA allowance of global cheap labour and loosening of the 457 visa will limit any substantial job creation to cover the unemployment tidal wave that is expected domestically. The government preference to spend money on roads with toll gates over railways continues to hurt overall economic growth. History shows domestic road infrastructure projects always bites the majority and benefits the minority. Developers will be the main beneficiaries while the large scale job creation and multiplier effects are unlikely to live up to expectations.

Corporate outlook: Businesses with strong cash flow and solid balance sheets in a falling consumer sentiment and a low interest rate environment are choosing to chase growth through cost cutting, share buy backs and M&A. The cost cutting cycle is coming to an end with further improvements requiring wage reduction or M&A. Wage cuts will take time to work through structurally and politically. The most likely path for corporates in 2015 will be another layer of substantial cost cutting through layoffs, buying back shares or consolidating industries to drive better earnings per share growth. Private equity is sitting on the side lines with substantial war chests built up by a floating number of stocks over the past 12 months. The lack of capex growth shows that corporates are not planning to increase employment substantially in the next year to buffer the rising unemployment.

Property prices: We continue to expect areas of substantial unemployment, areas with concentrated middle to low income earners and areas with over-supplied high density dwellings will experience property price decline in the next 6-12 month time frame. The top end should continue to stabilise with overseas investors from Europe and Asia continuing to look at Australia as a safer location to park wealth at low currency despite housing bubble worries. Recent housing finance data is beginning to show signs of affordability issues, rising interest rates, falling rental yield and consumer confidence taking effect. In a longer term thematic, we expect future generations to prefer renting than buying property and also choosing apartment living to houses. Oversupply of units being built in major cities in the next 12-18 months will drive down unit prices and force the new home buyers with middle to


04 April 2016


low incomes to high density living due to the unaffordability of stand-alone house prices. We likely expect the London/UK property price paradigm to come to Sydney and Melbourne. We expect inner suburbs in major cities like Melbourne and Sydney to support stretched house prices with China inflow, while the outer suburbs will suffer with affordability and unemployment worries. Rising unemployment, falling real wages, rising costs and an oversupply of units are headwinds the RBA can’t avoid whilst stimulating the economy, but they can buffer the risk to banks. The real structural solution is to limit negative gearing to new dwellings only or limiting number of negative geared properties to take the heat off low income and first home buyers. The latest move by investors classifying the home loans owner occupied to get lower rates will end up delivering even more risk to the investor and the financial system.

Taxation outlook: Due to the current fiscal policy of the government, we expect overall taxation to increase in the next few years to cater to falling tax revenue at federal and state levels. The structural decline in the budget has not been addressed as it is mainly a revenue problem. The current policy solutions are no more than nipping at the edges with minor spending cuts. Given the track record of the last two budgets, the public are unlikely to support any last minute tax raise with a minor income tax cut. The $80b cuts to education and health will starve the states into raising state taxes. Recent history does not hold well for middle to low income earners and consumer sentiment as a whole.

Currency outlook: We maintain our view that AUDUSD will track down to mid-60s in the medium term with global growth worries, domestic economy sliding, domestic government inaction, RBA rate cuts and commodity price falls. The short bounce back on US weakness expected to run out of support around the 76-79 cent range from 2015H1. US rate rise risk, China downgrade, China devaluating the Yuan, emerging market risks and falling commodities will help the devaluation. Substantial rate rise outlook for US or substantial devaluation of the Yuan can move the AUDUSD towards low 60s as it overshoots.

Interest rate outlook: We expect another 50 bps cut in the next 12 months to support the sliding economy with the government stuck in election mode. We see very little chance of any rate rise until late 2017. The RBA has made it clear that they also now see the risk to growth and unemployment and want to keep the currency and interest rates low. The surprise rate cut in February 2015 and results of the expected rate cut in May 2015 proved to be wasted on all fronts due to bigger global macro factors in play. The RBA is expected to move in Q2 and Q3 as the economy deteriorates.


04 April 2016


Market outlook Summary – Global growth is under pressure from political unrest, slowing China, US

interest rate cycle, deflation worries, currency wars and weak consumer sentiment. The protectionism policies of the central banks have created inefficient industries to carry on while better industries have struggled. The longer the central bank stimulus remains in the system the slower the recovery back to efficiency. Local consumer sentiment has showed signs of recovery with government leadership change while budget risk, rising cost of living, falling living standards, falling real wages and the expectations of the tidal wave of unemployment are expected to curb the recovery. Corporates and consumers are caught in a Mexican stand-off in terms of increasing capex to create jobs or waiting for higher consumer spending to drive growth. Fiscal policy outlook continues to provide corporates certainty and consumer uncertainty. We continue to see equities remaining the preferred investment option with low interest rates, low growth and house price bubble worries. The RBA has made it clear that they will act to keep the economy transitioning while US, China, EU and Japan are active participants in the currency war. We continue to see RBA cutting rates in Q1 and Q2 as the economy slows further.

Value – Market trading at a premium to fair value on long term basis.

Growth – Despite the low interest rate levels, the low global growth and domestic fiscal outlook has kept the ROE at low levels while analyst are hoping for a commodity bounce to boost growth in 2017.

Yield – The GFC high gap between dividend yield and bond yield gap will see more investors chasing equities with high sustainable yield.

Risk – Earnings yield to bond yield gap shows risk is at medium level. Central banks around the major regions have provided the safety net of stimulus and low rates.

Momentum – Price momentum follows earnings revision to negative territory.

Long term market charts – FIG. 3-2 to FIG. 3-9.

FIG.3-1: COST OF STYLE

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Cost of Growth Cost of YieldGARY (Growth At Reasonable Yield) Price Index ‐ RHS



04 April 2016


Market (S&P 300) FIG.3-2: INDEX WITH PE BANDS FIG.3-3: INDEX WITH PB BANDS

1000

2000

3000

4000

5000

6000

7000

8000

9000

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

FIG.3-4: EARNINGS YIELD TO BOND YIELD GAP AND INDEX FIG.3-5: DIV YIELD AND BOND YIELD

500

1500

2500

3500

4500

5500

6500

7500

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Earnings Yield to Bond Yiled Gap (%) ‐ LHS Price Index ‐ RHS

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Forward Dividend Yield 10Year Bond Yield Average DY Average BY

FIG.3-6: EARNINGS GROWTH FIG.3-7: ROE

0.00

5.00

10.00

15.00

20.00

25.00

30.00

14.00

16.00

18.00

20.00

22.00

24.00

26.00

FIG.3-8: PE FIG.3-9: EARNINGS REVISION AND PRICE MOMENTUM

7.00

9.00

11.00

13.00

15.00

17.00

19.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

3mth Avg Earnings Revision 3mth Price Momentum

Source: ASX, Baillieu Holst, Bloomberg, IRESS, Thomson Source: ASX, Baillieu Holst, Bloomberg, IRESS, Thomson


04 April 2016


Major sector outlook – Resources Summary – The Resources sector continues to struggle with the long term dynamics

pointing towards a multi-year downtrend to lower commodity price based equilibrium. BHP and RIO are expanding production and reducing costs at the bottom of the cycle, putting the pressure on junior miners and explorers in an environment of declining demand. Resources will benefit from better sentiment on China as it looks to deliver multiple layers of stimulus and a devaluation of the Yuan, but the short term risk remains high with free falling commodity prices. Energy sector outlook can only improve with OPEC cutting supply in synch with other major non-OPEC members. The recent reporting season has seen substantial write downs and dividend cuts as corporates move to protect their balance sheet for the long term. The short term recovery in commodities is likely to subside and resources will be under pressure again with low growth outlook.

Value – Resources trading at a substantial premium to long term average with substantial negative sentiment.

Growth – Low global growth outlook has kept the ROE at historical low levels while EPS growth recovery in 2017 looks to be in doubt.

Yield – The gap between dividend yield and bond yield has met for the fourth time in the past decade. The market does not trust the yield premium to bonds can be maintained.

Risk – Earnings yield to bond yield gap shows risk is at medium level. Falling commodity prices and emerging market growth downgrades are increasing risk to the sector.

Momentum – Price momentum moves into positive territory while earnings revision moves further down the negative territory.

Long term sector charts – FIG. 4-2 to FIG. 4-9.


500

1000

1500

2000

2500

3000

3500

4000

4500

5000

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Cost of Growth Cost of Yield

GARY (Growth At Reasonable Yield) S&P 300 Resources ‐ RHS



04 April 2016


Resources (S&P 300) FIG.4-2: INDEX WITH PE BANDS FIG.4-3: INDEX WITH PB BANDS

0

1000

2000

3000

4000

5000

6000

0

1000

2000

3000

4000

5000

6000

7000

8000


500

1000

1500

2000

2500

3000

3500

4000

4500

5000

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00


1.00

2.00

3.00

4.00

5.00

6.00

7.00



-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00


5.00

7.00

9.00

11.00

13.00

15.00

17.00

19.00

21.00

23.00

25.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00




04 April 2016


Major sector outlook – Industrials ex Financials Summary – US/China growth worries and stimulus driven Euro/Japan are raising risks for

Industrial sector outlook with global facing models. Domestic cyclical Industrials will be under pressure with government budget plans, housing bubble, high unemployment and deteriorating terms of trade. Large cap market darlings will be under pressure in the short term as they are trading on stretched multiples and declining yields. Small Cap MITCH (i.e. Media, Information, Telecommunication, Consumer and Health) sectors that deliver exposure to the new economy remains the best growth and yield to value option in the market.

Value – Industrials trading at a premium to fair value compared to the long term average.

Growth – Low EPS growth recovery is under threat with weaker ROE.

Yield – The gap between dividend yield and bond yield has expanded again offering more value in a market chasing yield.

Risk – Earnings yield to bond yield gap shows risk is at medium level. Central banks around the major regions have provided the safety net of stimulus and low rates.

Momentum – Price momentum and earnings revision remain in slight negative territory.



900

1000

1100

1200

1300

1400

1500

1600

1700

1800

0.00

1.00

2.00

3.00

4.00

5.00

6.00


GARY (Growth At Reasonable Yield) S&P 300 Industrials Ex Financials ‐ RHS



04 April 2016


Industrials ex Financials (S&P 300) FIG.5-2: INDEX WITH PE BANDS FIG.5-3: INDEX WITH PB BANDS

700

900

1100

1300

1500

1700

1900

2100

500

1000

1500

2000

2500

3000


500

700

900

1100

1300

1500

1700

1900

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00


2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00



7.00

9.00

11.00

13.00

15.00

17.00

19.00

21.00

16.00

17.00

18.00

19.00

20.00

21.00

22.00

23.00

24.00


10.00

11.00

12.00

13.00

14.00

15.00

16.00

17.00

18.00

19.00

20.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00




04 April 2016


Major sector outlook – Financials Summary – Global chase for yield will continue to drive the Australian Financial sector to

premium levels. Financials are back below fair value with investors selling on capital requirement risks, property bubble and growth outlook concerns. Banks have started to move on interest rate rises out of cycle to protect their margins, and we do expect to see more out of cycle rises in the next 6-12 months. Global investors were the main sellers in recent selloff on currency worry and we expect that trade to reverse as the currency stabilises around the mid-60s.

Value – Financials are trading at a discount to fair value compared to the long term average. Improving global outlook and sustainable high dividend yield should help quality financials recover.

Growth – Low growth outlook has kept the EPS growth at post GFC low levels while ROE needs margin support to flatten out.

Yield – The GFC high gap between dividend yield and bond yield has expanded again offering more value in an environment of low growth and even lower fixed income yield.

Risk – Earnings yield to bond yield gap shows risk is at low level. Central banks around the major regions have provided the safety net of stimulus and low rates.

Momentum – Price momentum has turned negative with earnings revision.



500

700

900

1100

1300

1500

1700

1900

2100

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50


GARY (Growth At Reasonable Yield) S&P 300 Financials ‐ RHS



04 April 2016


Financials (S&P 300) FIG.6-2: INDEX WITH PE BANDS FIG.6-3: INDEX WITH PB BANDS

500

700

900

1100

1300

1500

1700

1900

2100

2300

500

700

900

1100

1300

1500

1700

1900

2100

2300

2500


500

700

900

1100

1300

1500

1700

1900

2100

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00


1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00



0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

12.00

13.00

14.00

15.00

16.00

17.00

18.00

19.00

20.00


6.00

8.00

10.00

12.00

14.00

16.00

18.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00




04 April 2016


Performance Analysis

FIG.25-1: AUSTRALIAN MAJOR MARKET INDICES

Index Description Latest1wk

Perf (%)1mth

Perf (%)3mth

Perf (%)12mth

Perf (%)Perf since GFC

low (%)All Ordinaries Index 5151.79 0.00 4.12 -3.61 -11.42 65.56

S&P 300 Index 5043.62 0.00 4.17 -3.91 -12.72 60.94

S&P 300 Accum ulation Index 46466.15 0.01 4.78 -2.64 -8.56 119.29

S&P 300 Resources Index 2475.96 -0.29 5.98 2.87 -25.42 -31.44

S&P 300 Resources Accum ulation Index 14235.25 -0.29 6.66 4.39 -22.35 -16.58

S&P 300 Indus trials Index 8441.45 0.05 3.91 -4.86 -10.40 101.60

S&P 300 Indus trials Accum ulation Index 98459.73 0.06 4.50 -3.62 -6.03 187.11

S&P 100 Index 4207.27 -0.05 4.14 -4.28 -13.90 61.94

S&P 100 Resources Index 3501.51 -0.40 6.37 1.56 -27.08 -30.13

S&P 100 Indus trials Index 4629.60 0.00 3.81 -5.09 -11.51 101.43

S&P 50 Index 5072.73 -0.23 4.07 -5.14 -15.65 58.15

S&P Mid Cap Index 5200.38 1.19 4.70 1.82 -0.16 92.00

S&P Sm all Cap Index 2171.31 0.48 4.47 -0.18 0.91 50.36

S&P Sm all Cap Accum ulation Index 5784.21 0.57 5.47 1.03 4.60 87.82

S&P Sm all Cap Resources Index 1514.43 0.53 2.86 16.67 -6.23 -45.28

S&P Sm all Cap Resources Accum ulation Index 2563.27 0.53 2.97 17.30 -4.98 -42.17

S&P Sm all Cap Indus trials Index 2499.63 0.47 4.88 -2.40 2.52 106.81

S&P Sm all Cap Indus trials Accum ulation Index 7995.52 0.58 6.05 -1.10 6.69 177.50 Source: ASX, Baillieu Holst, Bloomberg, IRESS, Thomson

FIG.25-2: MAJOR GLOBAL INDICES, COMMODITIES AND CURRENCIES

Index Description Latest

1wk Perf (%)

1mth Perf (%)

3mth Perf (%)

12mth Perf (%)

Perf since GFC low (%)

S&P/ASX 300 5043.62 0.00 4.17 -3.91 -12.72 60.94

US - NASDAQ 4869.85 2.02 6.84 -2.75 -1.57 276.38

US - S&P 500 2059.74 1.17 6.60 0.77 -1.27 201.40

US - DOW JONES 17685.09 0.97 7.08 1.49 -1.62 166.87

CANADA - S&P/TSX 60 790.93 0.83 4.72 3.45 -9.03 N/A

BRAZIL - BOVESPA 50055.27 0.80 16.97 15.47 -2.32 34.90

MEXICO 46124.29 1.04 5.51 7.32 4.87 170.63

UK - FTSE 100 6174.90 1.12 1.28 -1.08 -10.40 74.89

FRENCH - CAC40 4385.06 1.28 0.72 -5.43 -13.74 73.02

GERMAN - DAX 9965.51 1.16 4.95 -7.24 -17.55 171.81

JAPAN - NIKKEI 225 16758.67 -0.79 4.57 -11.95 -13.67 133.63

HONG KONG - HANG SENG 20776.70 2.12 8.71 -5.19 -16.41 74.28

CHINA - SHANGHAI 3003.92 1.45 11.75 -15.12 -20.67 36.98

INDONESIA - KLSE 1717.58 0.12 3.80 1.48 -5.72 100.13

NEW ZEALAND - NZSE 50G 6752.42 1.35 8.37 6.77 16.00 173.26

IRON ORE - Iron Ore fines 61.5% Fe US$/dm t 53.20 -5.34 9.47 26.07 -6.67 N/A

GOLD - Spot Gold - US Dollars / Oz 1232.52 1.27 -0.47 16.17 3.93 31.40

SILVER - Spot Silver - US Dollars 15.43 1.70 3.56 11.54 -7.58 15.70

COPPER - COMEX High Grade Copper Futures 218.30 -2.46 2.37 2.25 -21.52 29.25

OIL - WTI - NYMEX Light Sweet Crude Oil Futures 38.11 -3.74 12.92 2.89 -21.71 -16.28

OIL - Brent Crude Oil 40.12 -0.69 9.50 6.79 -28.89 -11.94

COAL - NYMEX Central Appalachian Coal Futures 43.62 -0.02 -1.20 -1.53 -15.05 -7.53

GAS - NYMEX Natural Gas Futures 1.96 4.09 14.90 -16.64 -25.91 -50.30

AUDUSD 0.7658 1.76 7.25 5.03 0.10 19.57

AUDEUR 0.6730 -0.06 2.50 0.22 -4.71 32.90

AUDJPY 86.22 1.51 7.16 -1.71 -6.17 36.90

VIX - CBOE Market Volatility 13.95 -5.36 -32.12 -23.39 -3.86 -71.72

XVI - S&P/ASX 200 Volatility 16.33 6.22 -26.37 0.10 9.09 -56.95 Source: ASX, Baillieu Holst, Bloomberg, IRESS, Thomson


04 April 2016


FIG.25-3: S&P 300 AND GICS LEVEL 1 SECTOR PERFORMANCES


1wk Perf (%)

1mth Perf (%)

3mth Perf (%)

12mth Perf (%)


S&P/ASX 300 Energy - 10 7960.88 -0.82 5.68 -2.14 -27.30 -36.62

S&P/ASX 300 Materials - 15 7259.29 -0.21 5.45 3.85 -18.90 -8.98

S&P/ASX 300 Indus trial - 20 5099.95 0.24 1.75 4.36 9.04 124.26

S&P/ASX 300 Consum er Discretionary - 25 2060.90 1.47 4.19 -0.85 2.13 110.61

S&P/ASX 300 Consum er Staples - 30 8533.41 -1.10 2.23 -4.05 -8.74 44.08

S&P/ASX 300 HealthCare - 35 16000.10 -0.35 -0.46 -2.49 0.63 131.68

S&P/ASX 300 Financials - 40 5726.60 -0.10 5.61 -8.20 -17.34 109.92

S&P/ASX 300 Inform ation Technology - 45 871.54 0.55 4.82 -6.39 -4.07 58.79

S&P/ASX 300 Telecom m unication Services - 50 1910.83 1.43 1.84 -3.06 -11.36 76.88

S&P/ASX 300 Utilities - 55 6808.39 1.32 0.98 2.30 7.63 93.33

S&P/ASX 300 Metals & Mining 2025.21 -0.05 6.10 5.29 -24.60 -29.44

S&P/ASX 300 RESOURCES 2475.96 -0.29 5.98 2.87 -25.42 -31.44

S&P/ASX 300 INDUSTRIALS 8441.45 0.05 3.91 -4.86 -10.40 101.60

S&P/ASX 300 5043.62 0.00 4.17 -3.91 -12.72 60.94 Source: ASX, Baillieu Holst, Bloomberg, IRESS, Thomson

FIG.25-4: S&P 300 AND GICS LEVEL 2 SECTOR PERFORMANCES


1wk Perf (%)

1mth Perf (%)

3mth Perf (%)

12mth Perf (%)


S&P/ASX 300 Energy - 1010 7960.88 -0.82 5.68 -2.14 -27.30 -36.62

S&P/ASX 300 Materials - 1510 7259.29 -0.21 5.45 3.85 -18.90 -8.98

S&P/ASX 300 Capital Goods - 2010 2244.24 -0.39 7.38 20.64 7.55 -12.95

S&P/ASX 300 Com m & Profess ional Services - 2020 2480.68 0.22 1.19 4.12 -1.96 109.60

S&P/ASX 300 Transportation - 2030 9526.92 0.32 1.52 3.37 17.39 199.94

S&P/ASX 300 Autom obiles & Com ponents - 2510 1322.51 0.74 -0.20 -6.82 21.68 N/A

S&P/ASX 300 Consum er Durables & Apparel - 2520 547.92 2.13 5.90 -9.72 -12.57 -71.87

S&P/ASX 300 Consum er Services - 2530 6980.87 2.04 3.51 -1.71 1.23 122.02

S&P/ASX 300 Media - 2540 1462.25 1.39 6.04 -3.32 -5.73 117.87

S&P/ASX 300 Retailing - 2550 4882.54 0.02 4.72 5.25 12.66 110.30

S&P/ASX 300 Food & Staples Retailing - 3010 12029.95 -1.52 2.27 -3.93 -13.09 41.54

S&P/ASX 300 Food Beverage & Tobacco - 3020 5846.57 0.49 0.91 -3.02 12.50 54.05

S&P/ASX 300 HealthCare Equipm ent&Services - 3510 8346.29 -0.21 -0.05 -0.38 -10.14 115.63

S&P/ASX 300 Pharm aceuticals&Biotechnology - 3520 30927.52 -0.47 -0.80 -4.18 11.40 150.41

S&P/ASX 300 Banks - 4010 7611.40 -0.82 6.47 -12.04 -25.11 107.80

S&P/ASX 300 Divers ified Financials - 4020 6993.40 1.03 3.68 -15.72 -8.14 195.38

S&P/ASX 300 Insurance - 4030 3612.37 1.33 7.63 -0.16 -6.57 45.15

S&P/ASX 300 Real Es tate - 4040 3143.67 0.87 2.73 4.82 3.95 146.61

S&P/ASX 300 Software & Services - 4510 1048.82 0.55 4.87 -6.26 -3.15 78.04

S&P/ASX 300 Technology Hardware&Equipm ent - 4520 162.26 0.00 -10.42 -36.76 N/A N/A

S&P/ASX 300 Telecom m unication Services - 5010 1910.83 1.43 1.84 -3.06 -11.36 76.88

S&P/ASX 300 Utilities - 5510 6808.39 1.32 0.98 2.30 7.63 93.33

S&P/ASX 300 5043.62 0.00 4.17 -3.91 -12.72 60.94 Source: ASX, Baillieu Holst, Bloomberg, IRESS, Thomson


04 April 2016


Market and Sector Multiples FIG.26-1: MARKET MULTIPLES

Category GICSNumber of

stocks

Market Cap

($b)

S&P 300

Weight (%)

S&P 100

Weight (%)

Expected

12mth Price

Return (%)

PE 2015 (x) PE 2016 (x) PE 2017 (x)EPS Growth

2015 (%)

EPS Growth

2016 (%)

EPS Growth

2017 (%)

Al l Ordina ri es S&P 500 464 1548.61 100.00 100.00 12.49 15.89 16.64 14.67 ‐3.28 ‐4.54 13.41

Ma rket S&P 300 299 1491.94 100.00 100.00 7.90 15.49 16.85 14.93 ‐3.25 ‐8.05 12.87

La rge Cap S&P 100 100 1301.79 87.23 100.00 7.84 14.89 16.41 14.90 ‐2.89 ‐9.30 10.14

Sma l l Cap S&P Sma l l 199 190.16 12.74 0.00 8.31 21.42 20.56 15.11 ‐6.66 4.20 36.10

Micro Cap S&P Micro 165 56.66 0.00 0.00 126.66 43.14 12.74 10.31 ‐4.95 238.67 23.58

S&P 500 wi th mkcap be tween $20‐500m MC $20‐500m 223 51.86 1.69 0.00 170.74 57.28 14.00 7.96 ‐53.59 309.23 75.89

Category GICSROE 2015

(%)

ROE 2016

(%)

ROE 2017

(%)

Profit Margin

2015 (%)

Profit Margin

2016 (%)

Profit Margin

2017 (%)

Div Yield

2015 (%)

Div Yield

2016 (%)

Div Yield

2017 (%)PB 2015 (x) PB 2016 (x) PB 2017 (x)

Al l Ordina ri es S&P 500 14.38 14.71 17.42 11.25 10.82 11.60 4.81 4.53 4.77 1.61 1.72 1.65

Ma rke t S&P 300 14.62 15.01 18.09 11.72 11.21 11.94 4.89 4.60 4.83 1.74 1.75 1.69

La rge Cap S&P 100 15.88 14.93 18.23 13.15 12.52 13.25 5.10 4.72 4.92 1.75 1.76 1.70

Sma l l Cap S&P Sma l l 6.01 15.54 17.13 5.90 6.33 7.14 3.50 3.72 4.20 1.72 1.69 1.60

Micro Cap S&P Micro 8.44 7.15 0.65 3.45 4.99 6.45 2.68 2.96 3.23 0.54 1.15 1.14

S&P 500 wi th mkcap be tween $20‐500m MC $20‐500m ‐18.56 12.27 4.03 3.53 4.27 6.32 3.30 3.33 3.76 0.44 0.90 0.87

Category GICS PCF 2015 (x) PCF 2016 (x) PCF 2017 (x)EV/EBITDA

2015 (x)

EV/EBITDA

2016 (x)

EV/EBITDA

2017 (x)

EV/EBIT 2015

(x)

EV/EBIT 2016

(x)

EV/EBIT 2017

(x)

Al l Ordina ri e s S&P 500 10.30 9.39 9.78 9.38 9.62 8.70 11.56 12.09 10.69

Ma rke t S&P 300 10.12 9.54 9.78 9.31 9.63 8.75 11.34 12.02 10.67

La rge Cap S&P 100 9.91 9.29 9.74 9.27 9.76 8.92 11.04 11.91 10.66

Sma l l Cap S&P Sma l l 11.87 11.62 10.06 9.62 8.86 7.76 14.00 12.78 10.73

Micro Cap S&P Micro 18.18 6.77 9.72 11.29 9.30 7.70 22.00 14.39 11.11

S&P 500 wi th mkcap between $20‐500m MC $20‐500m 10.97 5.23 6.88 9.93 8.27 6.55 18.53 13.13 9.29


FIG.26-2: MAJOR SECTOR MULTIPLES


stocks

Market Cap

($b)

S&P 300

Weight (%)

S&P 100

Weight (%)

Expected

12mth Price

Return (%)


2015 (%)

EPS Growth

2016 (%)

EPS Growth

2017 (%)

Market Resources S&P 300 Res 43 192.53 12.90 12.90 13.67 12.85 32.23 19.24 ‐34.12 ‐60.14 67.53

Ma rket Indus tri a l s S&P 300 Ind 256 1299.41 87.07 87.10 7.03 15.99 15.72 14.44 6.03 1.68 8.87

Ma rket Indus tri a l s Excl Financi a l s S&P 300 Ind Ex Fin 191 655.53 43.93 40.42 4.58 21.06 20.45 17.61 6.23 2.99 16.11

Ma rket Financi a l s S&P 300 Fin 65 643.88 43.15 46.68 9.56 12.81 12.70 12.18 5.90 0.86 4.23


stocks

Market Cap

($b)

S&P 300

Weight (%)

S&P 100

Weight (%)

Expected

12mth Price

Return (%)


2015 (%)

EPS Growth

2016 (%)

EPS Growth

2017 (%)

Sma l l Resources S&P Sma l l Res 30 24.58 1.65 0.00 26.25 20.22 23.18 13.61 6.35 ‐12.78 70.32

Sma l l Indus tri a l s S&P Sma l l Ind 169 165.58 11.10 0.00 5.62 21.61 20.21 15.36 ‐8.46 6.93 31.62

Sma l l Indus tri a l s Excl Financi a l s S&P Sma l l Ind Ex Fin 133 129.39 8.67 0.00 5.39 24.29 22.87 16.03 ‐14.78 6.20 42.71

Sma l l Financi a l s S&P Sma l l Fin 36 36.19 2.43 0.00 6.43 15.50 14.27 13.36 10.22 8.57 6.84


(%)

ROE 2016

(%)

ROE 2017

(%)

Profit Margin

2015 (%)

Profit Margin

2016 (%)

Profit Margin

2017 (%)

Div Yield

2015 (%)

Div Yield

2016 (%)

Div Yield

2017 (%)PB 2015 (x) PB 2016 (x) PB 2017 (x)

Marke t Resources S&P 300 Res 8.38 4.53 6.61 9.81 5.39 8.01 5.66 2.39 2.74 0.94 1.12 1.09

Ma rke t Indus tri a l s S&P 300 Ind 15.55 16.58 19.82 12.30 12.52 12.85 4.78 4.93 5.14 2.00 1.92 1.84

Ma rke t Indus tri a l s Excl Fi nancia l s S&P 300 Ind Ex Fin 16.38 19.02 25.53 6.76 6.84 7.24 3.69 3.84 4.18 2.76 2.69 2.58

Ma rke t Fi nancia l s S&P 300 Fi n 14.70 14.08 13.93 27.20 27.94 28.20 5.90 6.05 6.14 1.56 1.48 1.41


(%)

ROE 2016

(%)

ROE 2017

(%)

Profit Margin

2015 (%)

Profit Margin

2016 (%)

Profit Margin

2017 (%)

Div Yield

2015 (%)

Div Yield

2016 (%)

Div Yield

2017 (%)PB 2015 (x) PB 2016 (x) PB 2017 (x)

Sma l l Resources S&P Sma l l Res 9.44 8.77 14.04 4.36 4.29 7.89 2.10 1.52 2.29 1.00 1.12 1.04

Sma l l Indus tri a l s S&P Sma l l Ind 5.50 16.55 17.59 6.15 6.61 7.04 3.71 4.06 4.48 1.93 1.83 1.74

Sma l l Indus tri a l s Excl Financi a l s S&P Sma l l Ind Ex Fin 2.33 16.36 17.63 4.89 5.31 5.74 3.23 3.62 4.06 2.03 1.96 1.86

Sma l l Financi a l s S&P Sma l l Fin 16.88 17.23 17.47 29.16 29.17 29.07 5.43 5.64 6.01 1.65 1.48 1.41


2015 (x)

EV/EBITDA

2016 (x)

EV/EBITDA

2017 (x)

EV/EBIT 2015

(x)

EV/EBIT 2016

(x)

EV/EBIT 2017

(x)

Marke t Resources S&P 300 Res 5.25 7.67 6.33 4.65 6.56 5.34 8.29 16.97 11.31

Ma rke t Indus tri a l s S&P 300 Ind 11.76 9.90 10.65 11.47 10.52 9.85 12.18 11.41 10.57

Ma rke t Indus tri a l s Excl Fina nci a l s S&P 300 Ind Ex Fin 12.49 11.65 10.73 10.55 10.10 9.32 14.96 14.47 13.10

Ma rke t Financi a l s S&P 300 Fin 11.09 8.58 10.57 12.70 11.06 10.53 10.08 9.17 8.65


2015 (x)

EV/EBITDA

2016 (x)

EV/EBITDA

2017 (x)

EV/EBIT 2015

(x)

EV/EBIT 2016

(x)

EV/EBIT 2017

(x)

Sma l l Resources S&P Sma l l Res 6.25 7.51 5.53 6.19 6.22 4.52 13.45 14.53 8.20

Sma l l Indus tri a l s S&P Sma l l Ind 13.72 12.66 11.47 10.36 9.37 8.52 14.07 12.58 11.15

Sma l l Indus tri a l s Excl Fi nanci a l s S&P Sma l l Ind Ex Fin 13.41 12.51 11.20 9.63 8.67 7.85 13.95 12.33 10.80

Sma l l Financi a l s S&P Sma l l Fi n 14.99 13.25 12.56 14.16 12.93 12.00 14.51 13.56 12.52



04 April 2016


FIG.26-3: SECTOR MULTIPLES


stocks

Market Cap

($b)

S&P 300

Weight (%)

S&P 100

Weight (%)

Expected

12mth Price

Return (%)


2015 (%)

EPS Growth

2016 (%)

EPS Growth

2017 (%)

Ene rgy 1010 14 62.01 4.16 4.37 19.37 16.81 28.18 17.13 ‐45.34 ‐40.34 64.52

Ma te ri a l s 1510 45 193.08 12.94 12.42 9.71 13.84 31.55 18.18 ‐27.18 ‐56.14 73.53

Capi ta l Goods 2010 10 16.14 1.08 0.88 ‐18.34 16.35 17.46 16.02 ‐27.46 ‐6.38 9.01

Commerci a l & Profes s iona l Se rvi ce s 2020 19 41.32 2.77 2.47 7.59 18.09 17.80 16.44 2.13 1.60 8.27

Tra nsporta ti on 2030 9 75.70 5.07 5.08 ‐1.14 30.62 23.74 20.66 102.19 28.96 14.93

Consumer Durable s & Appa re l 2520 4 3.17 0.21 0.00 2.74 22.86 22.38 18.14 12.36 2.16 23.35

Consumer Servi ce s 2530 23 54.35 3.64 3.13 4.65 21.30 19.74 17.86 8.65 7.90 10.51

Media 2540 14 19.86 1.33 0.71 7.64 16.20 15.75 14.76 4.45 2.89 6.71

Reta i l i ng 2550 17 21.13 1.42 0.58 1.67 19.22 16.98 15.09 0.52 13.20 12.58

Food & Staple s Reta i l i ng 3010 3 76.38 5.12 5.74 3.96 14.86 17.17 16.14 ‐2.03 ‐13.44 6.42

Food Beve ra ge & Toba cco 3020 16 23.66 1.59 1.20 10.05 28.61 20.43 17.35 4.15 40.06 17.74

Hea l th Ca re Equipment & Se rvi ces 3510 17 58.35 3.91 3.50 2.82 24.68 22.86 20.59 17.60 7.96 11.02

Pha rma ceuti ca l s & Biotechnology 3520 7 51.63 3.46 3.73 12.79 27.83 30.30 24.48 36.92 ‐8.14 23.77

Banks 4010 9 380.09 25.47 29.07 11.01 11.30 11.49 11.07 5.00 ‐1.69 3.80

Di ve rs i fi ed Financi a l s 4020 16 56.69 3.80 3.58 15.95 15.70 13.39 12.86 17.70 17.32 4.09

Insura nce 4030 8 72.60 4.86 5.30 9.01 14.39 14.32 13.40 ‐1.08 0.48 6.92

Rea l Es ta te 4040 32 134.50 9.01 8.73 3.07 16.82 16.12 15.44 9.74 4.38 4.38

Softwa re & Se rvi ce s 4510 17 21.51 1.44 0.63 7.17 24.70 21.42 19.01 33.46 15.29 12.71

Te lecommuni ca ti on Se rvi ce s 5010 7 87.53 5.87 6.09 3.46 17.44 16.61 15.39 5.41 4.99 7.92

Uti l i ti e s 5510 8 37.55 2.52 2.79 7.99 24.49 24.38 21.51 ‐10.96 0.43 13.34


(%)

ROE 2016

(%)

ROE 2017

(%)

Profit Margin

2015 (%)

Profit Margin

2016 (%)

Profit Margin

2017 (%)

Div Yield

2015 (%)

Div Yield

2016 (%)

Div Yield

2017 (%)PB 2015 (x) PB 2016 (x) PB 2017 (x)

Energy 1010 7.83 5.56 7.53 5.84 4.22 6.75 5.07 2.49 3.51 0.85 0.98 0.95

Ma te ri a l s 1510 7.98 4.83 24.42 10.16 6.28 8.23 5.28 2.87 3.01 1.22 1.44 1.39

Capi ta l Goods 2010 12.61 12.23 12.63 3.59 3.76 3.82 4.25 3.64 3.90 1.60 1.68 1.62

Commercia l & Profe s s iona l Se rvi ce s 2020 22.90 19.07 18.84 6.98 6.91 7.24 3.41 3.38 3.71 2.44 2.42 2.28

Tra nsporta tion 2030 10.50 13.03 16.82 8.52 10.71 11.73 3.15 3.78 4.38 2.99 3.00 2.88

Consumer Durable s & Appa re l 2520 17.88 16.91 18.50 5.22 4.99 5.99 5.50 3.20 3.51 3.05 2.90 2.73

Consumer Durable s & Appa re l 2520 17.53 18.47 19.27 11.56 10.43 11.33 3.44 3.51 3.65 2.73 2.57 2.45

Consumer Servi ce s 2530 20.23 20.21 20.08 6.56 7.02 7.50 3.69 3.92 4.21 1.43 1.67 1.60

Medi a 2540 15.22 15.82 16.46 4.79 5.14 5.52 4.13 4.16 4.61 2.21 2.08 2.00

Re ta i l i ng 2550 14.23 12.09 13.79 3.69 3.13 3.25 5.59 4.68 5.01 2.00 2.10 2.03

Food & Staple s Reta i l i ng 3010 10.20 14.23 15.38 3.66 4.90 4.93 2.40 3.04 3.57 2.49 1.93 1.85

Food Beve ra ge & Tobacco 3020 20.04 21.05 21.93 7.70 7.62 7.92 2.35 2.99 3.39 3.29 3.12 2.95

Hea l th Ca re Equi pment & Se rvi ces 3510 43.37 43.30 45.65 22.51 19.20 21.07 1.53 1.55 1.82 9.68 10.14 8.43

Pha rmaceuti ca l s & Biotechnology 3520 16.14 15.17 14.97 36.26 36.17 36.43 6.64 6.66 6.68 1.61 1.52 1.45

Banks 4010 20.70 21.14 20.47 24.24 25.47 25.86 4.71 5.26 5.57 2.20 1.95 1.85

Divers i fi ed Fi nanci a l s 4020 12.91 13.80 13.87 10.27 11.31 11.86 5.21 5.63 5.72 1.48 1.50 1.46

Ins urance 4030 9.10 8.19 8.29 29.29 28.76 27.91 4.67 4.88 5.08 1.31 1.23 1.18

Rea l Es ta te 4040 22.70 22.80 25.01 16.36 15.99 16.78 2.48 2.84 3.20 5.05 4.25 4.04

Softwa re & Servi ce s 4510 10.37 28.75 28.49 15.47 14.54 14.97 4.84 5.30 5.45 4.85 4.04 3.97

Te l ecommuni ca tion Se rvi ce s 5010 9.78 8.64 9.51 7.39 8.12 8.41 4.81 5.20 5.57 1.68 1.71 1.72


2015 (x)

EV/EBITDA

2016 (x)

EV/EBITDA

2017 (x)

EV/EBIT 2015

(x)

EV/EBIT 2016

(x)

EV/EBIT 2017

(x)

Ene rgy 1010 6.03 8.25 6.32 8.09 9.51 7.04 14.78 20.90 13.00

Ma teri a l s 1510 6.09 8.31 7.19 4.67 6.48 5.54 7.96 14.73 10.96

Capi ta l Goods 2010 8.52 9.50 9.38 6.78 7.64 7.42 9.48 12.37 11.47

Commerci a l & Profes s iona l Servi ces 2020 10.11 10.46 9.63 9.03 8.65 7.97 13.85 13.32 12.04

Transporta ti on 2030 13.55 10.77 9.98 13.41 11.85 10.95 21.86 18.65 16.92

Consumer Durables & Appa re l 2520 16.82 17.36 13.86 11.71 10.86 9.51 15.12 13.49 11.59

Consumer Durables & Appa re l 2520 16.43 15.96 12.74 12.68 11.52 10.59 16.69 15.55 13.65

Consumer Servi ce s 2530 11.24 11.51 10.48 5.87 5.53 5.07 8.91 8.17 7.33

Media 2540 12.95 12.96 11.30 11.10 9.84 8.91 14.02 12.27 10.98

Reta i l i ng 2550 10.58 11.47 10.34 8.36 9.27 8.71 10.79 12.73 11.75

Food & Stapl es Re ta i l i ng 3010 18.49 12.99 12.64 9.98 7.74 7.03 14.89 10.55 9.68

Food Bevera ge & Toba cco 3020 16.41 10.96 11.38 13.84 13.07 11.88 17.93 16.92 15.26

Hea l th Ca re Equipment & Servi ce s 3510 24.20 28.94 24.30 20.03 21.52 17.85 22.30 24.76 19.82

Pha rmaceuti ca l s & Biote chnology 3520 9.28 9.67 9.35 11.43 9.89 9.47 7.82 7.21 6.83

Banks 4010 14.05 10.07 11.59 10.80 9.36 9.04 11.01 10.19 9.60

Dive rs i fi ed Financi a l s 4020 12.26 3.31 10.68 11.96 9.95 9.02 13.37 10.99 9.84

Insurance 4030 18.83 16.23 15.69 18.79 17.02 16.20 18.95 17.23 16.40

Rea l Es ta te 4040 18.80 21.14 16.48 15.83 13.72 12.03 19.15 16.55 14.36

Softwa re & Servi ces 4510 8.97 8.53 8.06 8.00 7.80 7.38 12.85 12.57 11.64

Te le communi ca tion Servi ces 5010 10.68 9.48 9.14 12.63 11.26 10.67 18.39 17.04 16.08


BAILLIEU HOLST RESEARCH

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