Wednesday, April 29 2015
The strong run in the first quarter of 2015 has left many investors questioning whether Australian equities have run too hard and are too expensive, says Jamie Nicol, Director, Dalton Nicol Reid.
The key dilemma for the Australian stock market remains that of valuation, but there are still attractive investment opportunities available said Mr Nicol.
“Certainly the PE of the market at 16.3x is looking high by recent historic standards. However the dilemma for the market is that it has rarely looked cheaper relative to the current low bond yields and interest rates.”
“Given the size of the market’s move (11% year to date) a pullback is quite possible.”
“We tend to think most at risk are those segments where valuations look stretched – high yielding stocks and those which have experienced very strong share price momentum.
Despite this we continue to find opportunities in a number of segments in the market.
We see key opportunities in the following sectors:
- Growth stocks: Over the past year a number of higher quality companies with strong structural growth stories have been reasonably flat despite a strongly growing market. We have seen PEs compress as the market has chased higher dividend paying stocks. This leaves structural growth stories looking cheap.
Our preferred method for valuing growth stocks is via a DCF valuation. Lower interest rates support valuations on these types of stocks because much of the value for long duration growth stocks is in the outer years. The lower the interest rate, the greater the value when it is discounted back into today’s dollars.
Stocks which fit this category include Veda Advantage and Seek.
- China exposed stocks: The market remains negative towards China yet it has been undergoing reform and loosening bank reserve requirements. While there is little evidence yet of a bounce in the Chinese economy, Chinese equities have been rallying in anticipation of an improvement.
We could see improved conditions later in the year in China which is likely to support those companies exposed to China. This includes some of the resources companies as well as tourism and education exposed companies.
- Domestic consumer stocks. These companies have bounced this year but remain heavily shorted and will be cycling through a softer sales period in May / June. We are also seeing a lift in sales prices (due to currency) which should result in strong sales albeit with a lower gross margin percentage. A reasonable budget could see a strong 4Q.
“So despite the move in markets we continue to see selective opportunities and continue to see the low interest rates as likely to support the market in the event of a pullback,” he said.
For more information please contact:
|IMPORTANT NOTE: This information has been prepared by DNR AFSL Pty Ltd ABN 39 118 946 400, an Australian Financial Services Licensee, Licence Number 301658. Whilst, Dalton Nicol Reid has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. This document is not intended to provide you with personal advice and in providing this information, Dalton Nicol Reid has not taken into account your particular investment objectives, financial situation or needs. You should assess whether this information is appropriate for your particular needs, either by yourself or with your adviser. Dalton Nicol Reid expressly disclaims any responsibility or liability to anyone who acts or relies upon anything contained in, or omitted from, this document. Past performance is not indicative of future performance. Total returns shown are based on Dalton Nicol Reid’s model portfolio and have been calculated before taking Dalton Nicol Reid’s fees into account. No allowance has been made for taxation.|