By Virginia Harrison, MarketWatch
SYDNEY (MarketWatch) — Selected Australian companies could see earnings as much as triple if the U.S. economy picks up, although some analysts argue it’s too early to make that call.
In recent months the U.S. economy has found a firmer footing. Retail sales are rising, manufacturing and industrial output improving. Commercial and industrial loans have grown. Last month the Conference Board index of leading indicators posted its biggest jump since February, led by a rise in building permits.
U.S. reports mixed economic data
Durable goods in October fell, but not as much as most economists expected, while personal income for the month rose 0.4%, a tad more than anticipated,
But the health of the housing market remains a key sticking point for a U.S. recovery, with analysts split on whether the market has hit its lows.
Housing starts dipped 0.3% to 628,000 units in October, a shallower fall than forecast, while existing home sales beat expectations.
“There are bright spots in the housing market, [however] structural issues remain, particularly access to credit and tight lending standards,” strategists at Nomura said.
“Higher contract failures in association with broader U.S. macro-economic factors, such as high unemployment, ongoing foreclosures and still-falling house prices, all combine to challenge a sustainable U.S. housing recovery,” the analysts added.
Prasad Patkar, portfolio manager at Platypus Asset Management in Sydney, said softness in the housing market remains “one big handbrake” on U.S. growth and added: “even if the headline numbers in the U.S. are reasonable, the housing numbers are still pretty bad.”
“Once the housing market bottoms the U.S. economy will come back much more rapidly,” he said.
“The U.S. isn’t going to jump out of the blocks and go for a sprint. You’re looking at between 1% and 2 % growth, until housing recovers, and that could be 3 years,” Patkar said.
Stocks in focus
The tide appears to have already started to turn for some U.S.-exposed Australian firms, however, using recent share price performance as a guide.
James Hardie Ltd. /zigman2/quotes/201411224/delayed AU:JHX -2.23% /zigman2/quotes/200042563/composite JHX -3.48% shares, for example, are up 1.1% so far this month, compared to a 5.9% drop for the broader S&P/ASX 200 index /zigman2/quotes/210598100/delayed AU:XJO -2.27% .
The firm – which derives around 80% of its earnings from the U.S. market – swung to profit in its fiscal second quarter, helped by healthy volumes and an impressive grip on the fiber-cement market.
“During this downturn James Hardie has continued to operate very well,” UBS portfolio manager Jakov Males said.
“They’ve protected their margins and cash flows…because they have such a good [fiber cement] product. It’s very competitively placed when the U.S. market normalizes.”
U.S. housing starts currently sit below 650,000, while economists say a mid-cycle level of starts is between 1 million and 1.5 million.