AMP Capital co-head of fundamental equities Michael Price said merger and acquisition (M&A) activity has increased as a result of the rising market, and housing construction is also recovering.
Mr Price said after three or four years of limited M&A activity in Australia, this looks set to increase along with the local equity capital market (ECM).
“There is a healthy initial public offering pipeline in place for 2014, with signs suggesting the return of contestable M&A,” he said.
“Periods of rising M&A and ECM activity are typically associated with rising margins for those companies linked to such activity.”
AMP Capital said while interest rates have been slow to trigger residential activity due to job security concerns by consumers and a desire to reduce debt, demand is finally increasing across Australia.
According to AMP Capital, house prices are rising, finance approvals have increased and housing start numbers are now at their previous peaks.
AMP Capital believes significant demand for building products, combined with the high fixed-cost nature of building product manufacture should ensure a housing construction recovery translates into large profit increases for most operators.
Improving housing market should also support hardware and electronic retailers.
AMP Capital warned that laggards in the retail industry could face brand damage this year as supply chain management and supplier factory standards continue to be scrutinised.
Margins may also be impacted by a weak Australian dollar and continued wage inflation in Asia.
It also warned that investors should be mindful of the decline in mining capital expenditure, which will impact companies providing services to the major miners.
AMP Capital forecasts Chinese growth to be around 7.5 per cent this year, but expects demand growth to decline from credit intensive sectors later in the year, particularly from those that are highly carbon intensive, as environmental restrictions tighten.
AMP Capital said Liquefied Natural Gas (LNG) projects could be a boon to the Australian economy.
It noted, however, that LNG has higher operational costs and potentially lower profits, meaning tax revenues for these projects may not be substantial for many years.
Since the introduction of the ‘two strike’ rule, a number of companies have received their first strike, meaning a focus on executive remuneration is likely to continue in 2014, according to AMP Capital.
It said companies that continue to have remuneration structures “poorly aligned with shareholder’s interest” or that poorly disclose remuneration details may experience significant ‘against’ votes in 2014.
