Citi is out this morning with a note downgrading Australian equities to a sell:
A Strong Run — Australian equities have started 2013 well and the local index has now hit our strategists’ year-end target. Tony Brennan, our Australian strategist notes that PE valuations in Australia have moved 10% higher than the two decade average which was largely a period of low inflation and interest rates. The recent rerating of Australian equities has been concentrated in the more defensive stocks.
Global Search for Yield — Australian equities have performed well as the global search for yield has intensified. At the start of 2012 the dividend yield for Australian equities was 5.1%, 220 basis points higher than the global average. Now it is 4.1%, 150 basis points higher. Tony notes the ability of non-commodity companies to sustain a much higher payout ratio from here is limited. They already distribute 60-70% of earnings in dividends.
Moderate EPS Growth — An additional factor capping the near term increase in dividends is the moderate outlook for Australian company earnings. Expectations are for 4% EPS growth for the Banks over the next few years. Forecasts are for only a moderate recovery in “Industrial” company EPS after five consecutive years of contraction.
Downgrade — We downgrade Australia to Underweight in our Global regional allocation. Australia joins the US where the current index level has also surpassed our year-end target. We remain Overweight GEMs and Asia ex Japan where Markus Rosgen, our Asia strategist, believes valuations do not seem justified given higher levels of profitability.
QED.
