Australia | Jul 02 2007
By Chris Shaw
After hitting a record high on June 20th the Australian market lost some ground at the end of the month as investors became concerned about rising bond yields and Sub-Prime lending issues in the US, meaning the ASX200 index finished June with a small loss. This didn’t impact on what was another tremendous year for Australia equities, as the market recorded a total return of more than 30% to bring its average return for the last four years to just over 25%.
Comparing this to global markets, the Morgan Stanley Capital International (MSCI) Index rose 21.3%, the Dow Jones was up 20.3%, the S&P500 18.5% and the NASDAQ Index gained 20%.
As Commonwealth Bank points out this is an incredible performance given the length of time it represents, but taking a view of returns for the decade as a whole shows performance has been in line with long-term averages as growth has been around the 15% mark.
The bank sees a similar return being generated this year as earnings will be supported by a pace of domestic economic growth it regards as sustainable given the Australian economy is benefiting from the migration of skilled workers, which is both boosting growth and keeping inflation in check.
Also supportive is the pace of global economic growth, while the bank sees the main danger signs as China, oil prices and the US economy, the latter as the ongoing problems in the sub-prime lending market are putting financial balance sheets under pressure.
The bank’s view is similar to that of GSJB Were, who noted the gains over the past 12 months reflected in part renewed confidence in the potential for China to de-couple from the US and to continue growing strongly even as the world’s largest economy slows down. The broker also has a positive outlook on the potential for the European economy to continue its current solid pace of growth, which would also be supportive for equities.
From an investment viewpoint the broker suggests the key issue for the balance of this year will be the battle between surplus liquidity and valuation risk in the market, making asset allocation a key going forward.
It cautions valuation risk for industrial stocks remains high as the domestic market is now to a large extent priced for perfection, so the broker has a preference for stocks offering leverage to the global economic cycle and with offshore earnings given it has some concerns over the outlook for the domestic currency.
Merrill Lynch is also growing more cautious as it expects the current cycle of inventory liquidation will soon be complete, which should herald a period where the risk appetite of investors sits at a structurally lower level. Having said that, the broker has revised up its earnings growth outlook for the Australian market overall to 12%, in turn causing it to revise up its target for the market as represented by the ASX200 Index at the end of June next year to 6,800 from 6,400 previously.
Commonwealth Bank is a little more bullish and is targeting 7,000 on the index by the end of the next financial year, which suggests a return of around 15%. In terms of preferred stocks in the short-term it favours those companies operating in consumer focused sectors such as retailing, while it also expects the materials (mining and building materials) sector to outperform given its outlook of strong domestic construction spending and solid global growth.
GSJB Were is also recommending being overweight materials stocks, along with those in the media, insurance and services sectors. At the same time the broker suggests being underweight property trusts, diversified financials and infrastructure stocks.
More specifically the broker’s largest overweight positions are in BHP Billiton (BHP), Rio Tinto (RIO), Westpac (WBC), National Australia Bank (NAB) and Woolworths (WOW). Its largest underweight positions are in Westfield (WDC), Commonwealth Bank (CBA), ANZ Banking Group (ANZ), Macquarie Bank (MBL) and Telstra (TLS).