At an average of 19x forward P/E, Industrial stocks have never been this expensive: Growth had already re-rated, but now even ‘cheap’ stocks trade at unprecedented multiples. Despite this, even high-yielders whose valuations look most stretched relative to history are still very cheap versus bonds.
…Mispricing recession risks; we downgrade Banks to Underweight from Neutral. With valuations stretched, a low starting point for bad debts and historically high pay-out ratios, we see significant risks to the sector. Unemployment is rising and the second-order impacts of the commodity correction are yet to be felt while macro prudential and increased capital requirements will slow growth.
Seeking defensives with some valuation support, we upgrade Staples to Overweight from Neutral. Despite full valuations, we remain overweight offshore earners given more favourable macro and our lower A$ view. Given valuation support and some short-term momentum, we stay overweight domestic cyclicals but see increased risks around this view. We stay underweight Resources given high valuations on spot commodity prices…
That’s exactly my own view though the move lower in interest rates is structural.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
