From Morgan Stanley:
What’s Puzzling You? Peak multiples and arguably peak earnings for the ASX 200 leave us cautious on the outlook for Australian Equities. Our Index Target remains below current levels but we acknowledge that the benchmark could trade above this in the short term whilst Yield compression buffers the reality of negative earnings momentum.
Index Target Update: We update our 12-month Index
Target and raise the level from 5350 to 5650. The key change in methodology is applying a higher multiple to earnings – 14.5x (vs 13.8x). We accept that investors will pay higher multiples whilst rates remain low and liquidity abundant. That said, earnings will ultimately matter and the absence of positive momentum keeps risk to Index levels to the downside.
Growth with Yield a key Focus: In our recent Asia
Insight (Strategies to Yield Alpha) we highlight that the focus on yield remains relevant for Australian Equities. We see a shift in market leadership with Growth Yield outperforming Blue Chip and Bond Proxies UW.Earnings Matter in May: As the 3Q conference circuit gets underway, so does the focus on what FY15e will actually bring. EPSg has turned negative and the domestic macro backdrop remains challenged. And multiples at 16.2x are extremely full versus history.
Sticking with Foreign Earners: With a pause in USD strength, so have we seen some stability in the AUD cross rate. With more RBA rate cuts to come and a recommencement of USD appreciation, the attraction and momentum for the foreign earners basket remains. Key holdings remain: MQG, RMD, ANN and JHX.
I agree completely with this analysis except for the conclusion. I expect that as interest rates fall that the market will abandon all sense and rise on liquidity alone, at least until the underlying economic deterioration emanating from the mining bust infects the banks.
