MARKETS SPECTATOR: All tapped out

In a recent Australian equity strategy report from Deutsche Bank, it notes that the local market could be at risk of a pullback given equities are already pricing in a pick-up in growth and economic data is no longer surprising to the upside.

The investment bank notes that global growth looks to be on the mend as the global Purchasers Management Index is rising and company earnings revision ratios are becoming less negative. However, in Deutsche's view equities have been pricing this improvement and more in for some months now. Further, it believes equities have lost the support of better-than-expected data, with economic surprise indices on the way down.

It notes that its Asia strategist points out that US data is now surprising on the negative side at the same time that equity market sentiment is very high. This combination resulted in short-term pullbacks in 2010 and 2011.

Australia's price to earnings ratio has re-rated sharply over the last eight months but Deutsche sees little signs of a pick-up in earnings.

"Earnings in Australia remain under more pressure than in offshore markets," the investment bank said. "Nonetheless, local performance has been quite good, thanks to a large PE re-rate (PE up 31 per cent since mid-2012, versus 17 per cent globally). With the PE around long-run averages, we are reluctant to bank on a further rise. And with an immediate earnings bounce not obvious to us, we see near-term downside for the market."

Looking ahead, Deutsche Bank's preference is for sectors where the PE re-rate has been below average (energy, utilities, chemicals). It still believes yield is an attractive place to invest although it prefers to avoid the banks and telecommunication names in favour of real estate investment trusts and insurance stocks.

In terms of more cyclical names, the bank is comfortable with sectors where earnings momentum already exists (gaming) or where it is content with expectations of a pick-up, like the building materials space.