Australia | Nov 09 2007
By Chris Shaw
Volatility on the Australian sharemarket has increased in recent sessions as investors are more concerned about the health of the US economy and what this could mean for global economic growth but for CommSec chief equities economist Craig James the market’s behaviour represents a necessary period of consolidation.
What should see the market move higher in coming months in James’s view are the strong underlying fundamentals of the Australian economy, while he sees continued growth in China as enough to maintain solid global growth rates.
As a result CommSec has lifted its end of year forecast for the S&P/ASX200 Index to 6,800 from the 6,400 target it had in August, with further gains expected in the first half of 2008 that will take the index to 7,250 by the end of June next year.
James points to a number of factors supporting this positive outlook, including a historic P/E (price to earnings ratio) for the market of 14.91 times currently, which is below its long-term average of 15.75 times.
Population growth in Australia is also supportive as more people translates into more spending and for companies more revenue and profits, while strong growth in Australia’s capital stock implies companies are investing and this should help satisfy consumer demand and so keep inflation in check, which James views as a positive for the economy’s growth.
Potential problems the market faces include ongoing fall-out from the global credit crisis and the sub-prime mortgage crisis in the US in particular, while stronger oil prices and a stronger Australian dollar may trim profits and hold back spending.
Given the risks and opportunities in the current environment James has adjusted index weightings, starting with a downgrade in weighting for the Utilities sector to Underweight from Overweight. At the same time he has upgraded the Telecommunications and Property Trust sectors to Indexweight from Underweight, the changes reflecting movements in relative dividend yields.
Having previously (in August) downgraded the Materials sector to Indexweight in what proved to be an unsuccessful move James has restored the sector to Overweight, reflecting how quickly the market was able to recover from the sell-off in late July and early August.
With domestic consumption remaining strong in Australia and benefits flowing through from a stronger Australian dollar James retains an Overweight call on the Consumer Discretionary sector, while the existence of some speculative opportunities in the Healthcare and Biotechnology sectors results in these sectors being upgraded from Indexweight to Overweight.
While something of a risky call given the current strength in oil prices James has downgraded the Energy sector to Underweight from Indexweight, reflecting the eight-year highs in valuations currently in place in the sector.
There is no change to his Indexweight call on the Financials sector as valuations are broadly supportive, while the Industrials and Consumer Staples sectors are also rated as Indexweight.
Taking a longer-term view James notes Australian shares have historically delivered total returns of 13-16%, but the past few years has seen this jump to around 24%. A return to more normal rates of return can be expected, but the good news according to James’s estimates is if annual growth in returns of 15% was maintained through to 2010 the Australian market would be trading at around 10,000 points.