In its review of 2012 performance drivers, UBS noted that the price-earnings multiple re-rating was the dominant driver of returns throughout the year given a weak contribution from earnings which were dragged down by downgrades.
Interestingly, UBS notes that the Australian market re-rated to a far larger extent than its global peers, while experiencing considerably worse earnings outcomes.
UBS now sees the market as fair value.
"The Australian market now sits at 13.0x one-year forward consensus earnings, having re-rated from 10.6x at the start of the year. Expected calendar year 2013 earnings growth is a modest 6 per cent though consensus estimates still continue to be trimmed,” the broker said.
"Our central case ASX 200 target of 4800 suggests a relatively normal 5 per cent capital gain from current levels. We go into 2013 overweight resources, modestly underweight banks and overweight value/cyclical industrials versus higher priced industrial safe havens."
Looking ahead to next year, UBS believes the ‘bull case’ for stocks remains the relative value. The broker’s expectation is that the market will continue to re-rate equities against the backdrop of very low fixed interest yields and cash rates.
Against the market's 20-year average multiple of 14.4x, the current 13x multiple appears cheap. On top of that, the markets expected 4.9 per cent dividend yield is very attractive against the current rates available, providing earnings and dividends can grow modestly.
MARKETS SPECTATOR: Value rated
Broker UBS sees the market as cheap versus to the 20-year average, while next year's anticipated dividend yield also compares favourably to fixed interest rates.
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