Australian Equity Strategy Update

Submitted by Jim Thesiger on 19 May, 2008 - 22:14

This update on the Australian Equity Strategy is provided by the Australian stock analyst Macquarie Research Equities.

Australian Equity Strategy

Market Outlook - Sizing Up The Rally

Valuation Now Closer To "Fair Value" From "Attractive":

The Australian market P/E has moved from a low in mid-March of just under 12x to 13.6x currently. This compares to its long term average P/E of 14.8x. With downgrades to market EPS estimates still likely and P/Es up, we believe there now exists less headroom on the market's valuation. Largest sector P/E expansions have occurred in energy and financials.

Earnings Unlikely To Collapse:

We do not expect a corporate earnings collapse, particularly in respect of the Australian market. FY09e earnings growth is still likely to be at least 10%, albeit significantly weaker in the All Industrials (probably sub 5%). Importantly the ongoing skew of global growth toward emerging economies should continue to benefit the Australian economy and Australian share market via the impact on commodity prices and the capital spending cycle.

Market Can Still Rise Despite Earnings Downgrades:

We continue to believe global and local equities can move higher, despite earnings downgrades, though the pace of the market's appreciation is likely set to moderate. Over the last couple of months we have argued that it is not unusual for equities to rise into downgrades as long as starting point valuations are not onerous.