The ASX 200 Accumulation Index returned 10.33% over the quarter
ending 31 March 2015.
S&P ASX200 Accumulation
Industrials and banks recorded moderate earnings growth during
the February reporting season, offsetting falls in resources.
Valuation metrics suggest that the sharemarket is modestly
Long Term Average
ASX 200 Price/Earnings (actual 12mths)
ASX 200 Price/Earnings (1 yr Forecast)
Our outlook for key market sectors is as follows:
Recommendation: Move from
Neutral to Underweight
Conditions have been very favourable for the banking sector
given the low interest rate environment, strong demand for
residential property loans and benign level of bad debts. The
strong level of bank profitability however hides significant
looming risks. Unfortunately house prices (certainly in Sydney and
Melbourne) are in bubble territory and household debt is at or near
record levels, which means the risks for lenders (banks) are
clearly rising. Loan defaults would escalate if we either see a
sharp rise in interest rates (a 2% increase would result in a 40%
increase in mortgage repayments) or a moderate rise in
unemployment. Although a sharp rise in interest rates does not
currently look likely, a moderate rise in unemployment cannot be
ruled out given Australia's uncertain economic outlook.
Despite sharp falls among the miners, valuations based on
current spot prices imply further downside risk if commodity prices
stay lower for longer than most analysts expect. Given the
significant overinvestment in property and infrastructure in China,
the risk of a protracted downturn cannot be ruled out. As a result
we remain cautious on the sector in the near term.
Infrastructure & Utilities
Recommendation: Move from Neutral
The low interest rate environment has heightened demand for
perceived lower risk yield based investments such as infrastructure
and utilities. Valuation metrics now look stretched (well above
long term averages) for many stocks in the sector.
With most sectors screening as expensive on valuation metrics,
this is one of the very few sectors that still offers value.
Typically earnings in this sector can be reasonably leveraged to
any incremental improvement in demand. As an example, stocks
exposed to residential housing construction have already
appreciated but the approval process significantly lags
construction activity so further profitability is likely. On the
flipside, these stocks tend to react very quickly to any bad news
and can turn negative well before peak profitability is
Australian Real Estate Investment Trust (AREITs)
The demand for yield has led to sharp gains in AREIT share
prices in recent years. The demand has not just been domestically
driven either. Overseas investors have shown a particular interest
in residential and commercial property, helping to boost asset
prices. This has occurred despite relatively subdued fundamentals.
Office and industrial markets are generally suffering from an
excess of supply. Bricks and mortar retail is suffering from the
duality of below trend sales growth and convenience of online
shopping. Residential markets are either suffering from the
downturn in mining (Brisbane and Perth) or the bubble that is
Sydney and Melbourne. Notwithstanding, those quality property
trusts that have relatively low debt and long term leases in place
in areas of high employment should continue to perform well.
Australian equities are modestly overvalued and therefore remain
more vulnerable to any deterioration in earnings. An improvement in
underlying earnings is needed to justify current valuations. We
recommend investors marginally reduce exposure into the current
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