A better year in 2015?
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Brad Potter is head of Australian equities at Nikko Asset Management Australia.
It hasn't been a good start to the year for global share markets. Continued falls in oil prices and renewed concerns regarding economic and financial system strength in the Eurozone in the face of potential default risk from Russia and Greece have rattled markets in the first few weeks of the New Year, including Australia.
From a valuation perspective, the Australian share market is slightly expensive compared to its historical average, with the S&P/ASX 200 Index PE (price-to-earnings) currently around 15.1 times forecast earnings (12 months forward). The Australian market needs to see a recovery in earnings growth to move higher from here.
The likelihood of continuing low interest rates, together with a weaker Australian dollar and lower oil prices will assist Australia's economic recovery and company earnings. The lower oil prices are already flowing through to the petrol pump, providing a boost to consumer confidence in January -- albeit it was off a low base and we need to see further gains yet.
We see value in the consumer discretionary sector, with many stocks trading on PEs well below the market, but the sector continues to face structural challenges and as such it really is a case of investing selectively. The old adage that "stocks can be cheap for a reason" remains as relevant as ever.
In 2015, we expect to see a pick-up in capital investment in the non-mining sector as business confidence increases. Despite accommodative interest rates, businesses have not been sufficiently persuaded to invest, much to the frustration of the Reserve Bank of Australia (RBA).
A recovery in consumer sentiment and spending may provide the impetus for this to occur. Companies are well positioned to invest, with very strong balance sheets, low gearing and record levels of cash.
A stronger US economy, together with a weaker Australian dollar, should continue to be supportive of Australian-listed companies with earnings sourced in the US.
This was a strong theme in the latter part of 2014 and we expect this will continue in 2015, as the full effect of the Australian dollar's depreciation versus the US dollar flows through to top-line revenues. The upcoming company reporting season in February will shed more light on this.
Resource stocks are starting to look attractive, based on consensus long-term prices -- particularly in iron ore and oil. Very large supply-side responses, however, make the long-term price forecasts problematic, so we continue to remain wary at this point.
We believe that banks continue to remain expensive on virtually all measures other than the dividend yield gap to bonds and/or cash rates. Paradoxically, the ongoing inflows to index and passive funds are resulting in 40-50 per cent of those flows finding their way into banks and thus keeping them expensive.
We held an underweight position in banks throughout 2014 and continue to maintain this position. Internationally, we are likely to see a real chance of policy divergence in 2015 (for the first time in a while).
As mentioned above, the US economy finished 2014 in strong shape, helping the US share market reach numerous record highs over the course of the year. The US Federal Reserve has reassured markets that they will only increase interest rates when economic growth warrants it.
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