UBS’ David Cassidy is trying to sound bullish but is not succeeding.
He notes that the 13.8 times expected earnings the S&P/ASX200 Index is currently trading at is a discount to its 20-year average of 14.3 times.
“The valuation looks particularly compelling when compared to the 3.6 per cent yield on government bonds,” says Cassidy.
But the UBS Australian strategist can’t seem to get enthusiastic.
“China’s growth step-down and seemingly challenged growth model remains a headwind for Australian equities, though sentiment towards China is already very weak," says Cassidy. "Australia's domestic conditions are currently sub-trend.”
UBS says consensus analyst forecasts for 2013 earnings show in fact no earnings growth.
Excluding mining stocks, however, earnings are expected to increase 5 per cent.
“The weakening macro backdrop since last reporting season is unlikely to provide as fertile a backdrop for value and cyclical stocks,” says Cassidy. “Our analyst expectations for individual stock upside and downside surprise candidates are skewed to the downside by a ratio of three to one.”
Cassidy reckons 2014 consensus earnings growth for the market, excluding resources, at 8.8 per cent plus “seems a stretch”.