There are better places to be than in mining and banks, according to the latest Australian equity strategy report from Deutsche Bank.
The bank remains cautious in the near term but is making some changes to its allocations.
"Equities have softened a little in the past month, following strong performance in the previous three to four months. Even with the easing, market performance is consistent with global growth accelerating to above trend, and a cessation of earnings downgrades,” Deutsche Bank said.
"That could well eventuate in time, but the risks seem tilted to the downside, which would limit near-term gains. However, we see opportunities to make changes while leaving our risk profile little changed.”
It believes that indicators are pointing towards more of the same modest growth in the US and a continuation of the recessionary environment across Europe. Regarding China, the outlook is still cloudy although it does see positive signs in terms of bottoming growth and a firming of leading indicators (see chart below). However, it questions when growth will pick up enough to drive commodity prices higher.
Source: Bloomberg Finance, Datastream & Deutsche Bank
Against that backdrop, Deutsche Bank notes that the mining PE has risen and its recent PE-growth ratio analysis indicates the sector is expensive. Subsequently, it has lifted its exposure to the energy sector to overweight and the mining space to underweight, explaining that it prefers energy as spot commodity prices pose less earnings downside for energy, valuations are low versus history, and the threat from US gas looks to overdone.
In other changes, the broker has moved building materials to overweight from underweight as it prefers the space compared to consumer exposure. It believes the RBA is looking for more growth drivers, especially from the housing sector as capital expenditure from the mining sector continues to track lower.
Elsewhere, the yield theme is still alive and kicking as bond yields and term deposit rates continue to come under pressure. Given this, the marginal investor is likely to find equities more attractive, although Deutsche now believes it is appropriate to lower its exposure to banks and raise its position in the listed property sector.
The broker remarks that both sectors have performed well, but banks look worse on a PE/growth ratio basis, and are vulnerable to domestic investors reducing their record overweight position.