UBS believes that while Australian stocks look attractive on a valuation basis – most notably versus competing interest rates – this view is the bull case for Australian equities, with sluggish corporate earnings remaining an ongoing headwind.
The Australian market has posted earnings per share growth of -3 per cent for fiscal 2012 with only 3 per cent expected for 2013 (consensus). From a macro perspective, UBS now expects 0 per cent earnings per share growth for 2013, down from 4 per cent previously.
Interestingly, the picture is somewhat better excluding resources, with market-ex-resources earnings per share growth managing a slightly better 3 per cent growth in 2012, with the consensus expecting 5 per cent for 2013.
"While ex-resources earnings growth has improved slightly this year, this represents the fifth year in a row of sub-par (below 6 per cent) growth. Perhaps worryingly, fiscal 2012 may well represent the start of a secular correction in resource earnings,” UBS noted.
While it’s somewhat difficult to point the finger at the key determinant, the most dominant factor has been the continued strength of the Australian dollar, hurting via negative translation impacts as well as heightening competitive and cost pressures.
Historically, the Australian dollar has been positively correlated with Australian earnings due to its propensity to move in tune with commodities and hence, buffer the economy when commodity prices came under pressure.
However, in recent years the dollar has taken on safe haven characteristics due to our triple-AAA sovereign rating and strong, positive yield differentials compared with much of the developed world.
With this in mind, the broker believes that the re-rating towards yield and defensive growth areas of the market has been too aggressive and now looks stretched. However, it is beginning to see some attractiveness in specific stocks that have been de-rated on only moderate downward earnings revision. Some of these names include Seek Ltd, AGL Energy, Orica, Asciano, QR National and Downer EDI.