Morningstar continues to hold an underweight allocation to Australian equities in its growth portfolio, viewing the asset class as expensive and Australian banks in particular as overvalued.
In its June 2016 quarter economic briefing, Morningstar Investment Management Australia noted the three months to 30 June was a strong quarter for the S&P/ASX 200 Accumulation Index (including dividends), delivering a return of 3.94 per cent.
This was notwithstanding the month of June, when the index lost ground. July to date has been a strong month for Australian equities, with the S&P/ASX 200 currently up by more than 5 per cent.
However, Morningstar said it "[continues] to view Australian equities as expensive, both in absolute terms and relative to other asset classes".
Underpinning this opinion is a cautious view of Australian banks, which remain overvalued, the report said.
Furthermore, there are risks on the horizon for Australia's banks, including increasing capital requirements; macro-prudential policy aimed at limiting lending to property investors; growing bad and doubtful debts; a domestic economy that remains under pressure following the mining boom; lacklustre credit growth, with consumers already well leveraged; and the threat of a slowing property market in general.
"Our caution also extends to the resources sector, especially with stocks having rallied strongly on the recent commodity price stability," said Morningstar.
"With financials and resources making up such a significant portion of the domestic market (albeit the latter now represents much less than it once did), and with more attractive opportunities available in other asset classes, we remain underweight Australian equities," said the report.