Australia Industrials Safer Than Banks, Says JPMorgan

By Shani Raja

Sept. 17 (Bloomberg) -- Australian industrials stocks are a ``safe haven'' amid a slowing global economy and are better value than either financial or resources companies, according to strategists at JPMorgan Chase & Co.

Industrials are ``cheap'' relative to resources and bank stocks, Sydney-based strategist Paul Huxford said in a research note released today, citing possible slowing demand for the nation's resources from China and softer credit conditions affecting financial companies.

JPMorgan's preferred industrials stocks include Brambles Ltd., the world's biggest pallet supplier, Coca-Cola Amatil Ltd., the nation's biggest soft drinks maker, and Aristocrat Leisure Ltd., the world's No. 2 slot machine maker.

``We advocate investors seek refuge in this section of the market as a soft landing has already been priced in,'' Huxford wrote in the note. ``The macro outlook for resources stocks remains bleak as emerging market growth headwinds abound,'' while banks face higher borrowing costs and decreased lending volumes.

Global economic growth has slowed since the U.S. housing recession triggered a worldwide credit crisis that has wiped out about $18 trillion in equity value. A measure of industrial stocks on Australia's benchmark S&P/ASX 200 Index has tumbled 29 percent this year, while materials and financial shares have fallen 21 percent and 34 percent, respectively.

Market Turbulence

Banking stocks remain a risky bet given slowing credit growth, rising loan losses, high long-term debt funding costs, and escalating operational costs, according to Huxford.

``The outlook for the Australian banks is deteriorating,'' he wrote. ``From a longer-term perspective, the sector is overvalued and earnings risk is rising.''

Those sentiments are echoed in a note released today by Morgan Stanley, which retained its ``underweight'' ratings on three major Australian banks -- Commonwealth Bank of Australia, Australia & New Zealand Banking Group Ltd., and National Australia Bank Ltd.

The last two ``are the most vulnerable due to their weaker capital positions, risk of further writedowns and higher-risk business mixes,'' strategists led by Sydney-based Richard Wiles said in the note, citing the recent financial-market turbulence.

Australia's four biggest banks are owed about A$290 million ($229 million) by Lehman Brothers Holdings Inc., the U.S. investment bank that filed for bankruptcy protection on Sept. 15.

Earnings Certainty

Resources companies offer low earnings certainty due to the daily fluctuation of metals prices, Huxford said in the note. There is even less certainty now that some mining companies are shifting to spot pricing for bulk commodities, he said.

Rio Tinto Group, the world's second-largest iron-ore producer, said last week it won't agree to any more contracts for the steelmaking raw material based on traditional benchmarks.

Investors should steer clear of resources companies with high debt or gearing, and which are dependent on asset sales to reduce their financial leverage amid overall declining commodities prices, wrote Huxford.

Paladin Energy Ltd., which is developing a uranium mine in Malawi, and Fortescue Metals Group Ltd., an iron ore producer controlled by Australia's richest man Andrew Forrest, are among the least safe stocks, JPMorgan said.

Its top ``safe haven'' picks among resources companies include Newcrest Mining Ltd., the nation's largest gold producer, and Centennial Coal Co., Australia's fourth-largest coal producer.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.