Investor confidence back after tax settlement

Australians bank shares are expected to outperform market expectations now that the $2.2 billion tax settlement has been finalised, Craigs Investment Partners broker Chris Timms says.

The Bank of New Zealand, Westpac, ASB and ANZ-National - all Australian-owned - last week ended about five years of legal battles with Inland Revenue by agreeing to pay back $2.2 billion.

It is believed to be the largest single tax settlement in New Zealand history and stems from a High Court ruling in October that found the BNZ and Westpac owed a combined $1.6 billion in taxes and penalties relating to foreign-structured finance transactions.

Mr Timms said the settlement gave investors confidence all the unexpected shocks had been cleared out, particularly that the amount of money the banks had provided for was more than what they were paying out.

"They are provisioning for more than they paid.

"It removes all the uncertainty.

"We are going overweight in banks - carrying more than the market index weighting."

The listed Australian banks on Craigs' list are the ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac.

Craigs expected the global recovery to continue in 2010 and Australia to record almost 3% growth in gross domestic product in 2010.

The move to go overweight in bank stocks was based on both the recovery story and the expectation the bad-debt cycle had peaked, potentially allowing provisioning released by the end of the year.

Craigs was exiting the property sector as a funding source for the bank buy-up, he said.

"Craigs is confident in its forecast of 4.1% global economic growth in 2010.

"Stimulus packages and accommodative monetary policies should remain in place during the early part of 2010, globally."

Potential United States inflation risks would likely be offset by US unemployment and continued private balance sheet repair, facilitating continuing Federal Reserve support, Mr Timms said.

Craigs was positive on global equity markets and was growing more confident the current "tightrope" economic recovery would blossom into real demand.

Structural issues should remain, but should not prevent continued progress in the near and medium term.

The broker was forecasting a 15% rise in Australian equities, against 11% for the US and 13% for Europe.

The target was based on conservative earnings expectations for 2010, with a return to strong earnings-per-share growth in 2001 and an expectation the market would trade on its historical mean price-earnings ratio, Mr Timms said.

Craigs would also take overweight positions in consumer discretionary stocks, mining and services, and industrials and cyclicals.

To fund those positions, the broker was going underweight in the defensive sectors - consumer staples, financials and property, and was exiting Westfield Group.

The upward trend of progression for global markets should move from a straight-line V-shaped recovery, to trading within ranges for periods but with an upward bias, he said.

Catalysts to the upside would move the ranges up and catalysts to the downside would cause a "saw-tooth" pattern to emerge.

"We have observed saw-tooth patterns of market performance emerge after previous downturns.

The example is the most recent recessions experienced in the US and Europe, which bottomed in March 2003."

As markets rebounded towards the top end of historical valuations on all measures, Craigs believed earnings revisions - based initially on a cyclical recovery - would be the most important driver of market performance in 2010, Mr Timms said.

"We believe the Australian market will require continued upwards momentum in earnings revisions and this is reflected in our 2011 forecasts for earnings-per-share growth of 30.2%, compared to consensus at 22%."

 

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