Australia | Jul 05 2006
By Chris Shaw
As if the volatility of the past couple of months hasn’t been enough, Macquarie now expects it will continue through the coming financial year as the Australian market struggles with the dual impact of rising bond yields and falling liquidity levels around the globe.
This has led the broker to forecast subdued returns from the market over the next 12 months, its estimate for the S&P/ASX200 index being a total return of 2.5%, comprising a negative 1.7% in capital return and a positive 4.2% in dividend yield.
The Small Ordinaries is tipped to do slightly better, the broker forecasting a total return of 6.9% thanks to a 2.7% capital return and a similar 4.2% yield.
Most likely to outperform in the broker’s view are the resources stocks, as they are expected to continue to benefit from strong and improving growth in China and Japan respectively. Don’t expect similar gains to last year though, the broker noting the rate of return from the sector is likely to be lower this year as investor focus moves to big miners and their potential to benefit from volume increases at the expense of smaller companies with more limited mine life.
Other stocks considered likely to outperform by the broker are those in oligopolies either domestically or internationally, as their ability to exert pricing power in their markets will support earnings while cashflows will support growth initiatives.
Defensive stocks are less likely to lag the market now given the interest rate outlook, though the broker suggests focusing on areas such as property trusts as the more mature stocks in this sector will demonstrate greater earnings certainty.
Stocks the broker considers most at risk are those with high P/E ratios, particularly as it expects harsh treatment by the market for any company that misses on earnings guidance or shows signs of balance sheet stress. The broker notes the healthcare and diversified financials are two sectors of the market characterised by high P/E ratios currently, so both are worth watching as reporting season approaches.