The ASX 200 Accumulation Index returned 2.50% over the six months ending 31 December 2014
The outlook for the Australian sharemarket is subdued. From a valuation perspective, the ASX 200 is currently trading close to the long term average (as a multiple of earnings). With the market trading around fair value, an improvement in earnings is required to lift the market higher. Given the current economic conditions, any improvement is likely to be modest and uneven.
Although commodity prices have fallen sharply, we expect the downturn in China to continue, forcing many analysts to further revise profit expectations for the resources sector. Although share prices have already fallen sharply, further falls are likely.
Interest rates and oil prices however are likely to stay lower for longer. This should benefit the sharemarket in a number of ways:
- Borrowing costs should stay low, reducing costs for business.
- Costs of transportation should fall.
- Household incomes may improve, which could support retail sales.
- Defer the looming risks in the banking sector that are rising from the sharp increase in new loans to residential property investors.
- Force many income dependent investors to seek riskier assets in an attempt to generate more income, including higher yielding shares.
Although valuations are not compelling, we expect demand for equities to remain supported by the low interest rate environment. We recommend investors marginally increase exposure from slight underweight to neutral.
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