Both global and domestic equities have downplayed the potential negative impact, following the unexpected Trump presidential victory, as they have initially adopted a ‘glass half full’ attitude, UBS says.
According to the company, the markets focused so far on the potential positive implications for growth, fuelled by infrastructure spend, and lower corporate tax while not taking into account the potential negative impact such as global trade sanctions or the risks posed by potential budgetary pressure.
According to the UBS outlook for Australian equity strategy in 2017, the Australian market valuations were moderately expensive in absolute (price-to-earnings [P/E]) terms and from that perspective the current P/E could potentially co-exist with a higher bond year. Additionally, the market looked cheap on price to book and therefore it was still attractive against relatively low interest rates.
The UBS study also said that Australian earnings were forecast to move back to solidly positive growth in 2017, after two years of negative growth, however across the resources sector earnings were expected to remain steadier and still quite constrained.
Overall market earnings looked set to pick up from -9 per cent in FY16 to +12 per cent in FY17, based on current commodity prices.
On the other hand, the banking sector looked set for a return to moderately positive growth and improvement in bank earnings growth was likely to become an important factor to the market performance in the coming months.
The authors of the report and UBS strategists, David Cassidy and Dean Dusanic, said: “We remain relatively neutral banks, which look reasonable value and the capital issue has seemingly been pushed out beyond 2017, albeit the sector still seems growth constrained,” the study said.
“We remain overweight resources.”
The authors of the study also noted that the significant Chinese stimulus, aimed at buoying residential construction and infrastructure sectors, helped drive up the price of the iron ore price.
“We expect Chinese growth to ease a little over the coming year, particularly in the key housing segment, although infrastructure spending is expected to stay strong,” they said.
“The sector may be able to show more resilience to falling prices over the next six to 12 months given how far above consensus forecasts spot commodity [prices] currently are.”
Also, according to the study, the downside risks in the coming months would include the domestic housing supercycle finally beginning to crack.
The Australian Securities Exchange [ASX] was expected to trade around 5700 by the end of 2017 and the market was yielding 4.6 per cent prospective.
“We prefer resources and banks to bond yield proxies,” the authors said.
“We believe the sell-off is beginning to create opportunities, particularly in the growth/GARP [growth at reasonable price] area.”
