Mixed Messages On Valuations With the recent rebound in the index the aggregate market P/E has once again pushed back above long term average levels (currently 15.2x versus LTA of 14.5x). In part this reflects the high P/E of the resource sector c21x. The market-ex-resources P/E is closer to average. The benefit of low rates suggests some residual upside to valuations in our view. We view the expected dividend yield of 5% continues to look attractive against a 2% cash rate.
Earnings Growth Is There…For Stock Pickers As we have been emphasising for some time the Australian market lacks earnings growth at the aggregate index level. We believe earnings growth is better ex-resources and ex-banks with 8% growth expected in FY16E. The weak A$ is providing a boost to earnings, while cost control continues to drive some moderate margin expansion.
Sector Views Unchanged We remain overweight Banks. Valuations are much improved after the sector’s big underperformance. The re-pricing of mortgage rates across the big four introduces the potential for some modest earnings growth after the dilutionary impact of recent capital raisings. We are less sure on the potential of the Resources sector to continue its recent bounce, given an expectation of ongoing subdued China/global demand. We continue with our US$ earners theme as we believe the RBA will cut rates at the early November meeting. Domestic cyclicals look oversold based on our view that domestic housing will slow but not collapse, given support from low interest rates.
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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.
Mixed Messages On Valuations With the recent rebound in the index the aggregate market P/E has once again pushed back above long term average levels (currently 15.2x versus LTA of 14.5x). In part this reflects the high P/E of the resource sector c21x. The market-ex-resources P/E is closer to average. The benefit of low rates suggests some residual upside to valuations in our view. We view the expected dividend yield of 5% continues to look attractive against a 2% cash rate.
emphasising for some time the Australian market lacks earnings growth at the aggregate index level. We believe earnings growth is better ex-resources and ex-banks with 8% growth expected in FY16E. The weak A$ is providing a boost to earnings, while cost control continues to drive some moderate margin expansion.
growth after the dilutionary impact of recent capital raisings. We are less sure on the potential of the Resources sector to continue its recent bounce, given an expectation of ongoing subdued China/global demand. We continue with our US$ earners theme as we believe the RBA will cut rates at the early November meeting. Domestic cyclicals look oversold based on our view that domestic housing will slow but not collapse, given support from low interest rates.
