Over the quarter ending 30 September 2014 the ASX 200 Accumulation index fell by -0.60%.

ASZ 200 Accumulation Index


Overall the August corporate reporting season was broadly positive, with few disappointments. The ASX 200 delivered earnings growth of around 10% (6% industrials, 30% resources). Analysts on average expect earnings growth to accelerate in FY15, with industrials expected to rise by 8%, resources by 17% and property trusts by 5%. Assuming these estimates are delivered, the ASX 200 Price to Earnings multiple for FY15 is currently just under the longer term average, implying that the market is neither cheap nor expensive.

Nevertheless, in the short term we expect further volatility given the conflicting economic forces at play. On the one hand, the economy retains sufficient underlying momentum for earnings to continue to improve across sectors exposed to consumer spending, housing, and services. On the other hand, uncertainty surrounding China's growth trajectory is likely to continue to weigh on the mining sector. In addition, the RBA's concern about the debt fuelled housing boom and the possibility of imposing macro-prudential controls (whether they be in the form of stricter capital requirements on banks or lower loan to valuation ratios) may further diminish support for the banking sector. Collectively the market capitalisation of the banking and mining sectors account for a significant proportion of the index and so will have a major bearing on the short term direction of the sharemarket.


Given the divergent economic outlook, elevated geopolitical risks and uncompelling valuations, we recommend investors err on the side of caution and maintain a slight underweight allocation to Australian equities.

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