Valuations for Australian equities may be out of line with their moderate outlook as growth forecasts are “heavily distorted” by expected rebounds in resource sector profits, according to Morningstar.
In a note to investors, the research house cautioned that recent earnings per share growth estimates, such as Credit Suisse’s expected 15 per cent growth forecast, are driven heavily by growth in mining and energy profits, expected to be 59 per cent and 42 per cent respectively.
“Ex the resource sectors, the outlook for everything else - 80 per cent of the index - is for distinctly less impressive 4.8 per cent profit growth, yet investors are paying a price to earnings ratio of 18.4 times current earnings, which is an expensive price by historical standards,” Morningstar said.
The research house said a “clear acceleration” in business cycle pace has the potential to change this, but at present Australian equities may face a period of ongoing readjustment “to more realistic valuations”.
Additionally, while Australian equities don’t appear to be breaking away from slower-than-usual growth, Morningstar said a case was building for “a gradual turn for the better” off the back of an improving mining sector, where “the wind-down of investment spending has been a major drag on overall economic performance”.
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