The recent half-year reporting season was broadly in line with market expectations, according to Perpetual, though current market valuations don’t accurately reflect forward earnings.
The company noted that sectors such as resources and those with housing related exposures delivered strong results as per expectation, but added that this strength hasn’t “broadly led to upgrades on forecasts for the full financial year”.
“Resources as a sector delivered very strong results this half, driven by commodity prices that were well above the markets expectations of them six–12 months prior,” said Perpetual head of equities Paul Skamvougeras.
“We are cautious around the sustainability of commodity prices as they stand today.”
The banking sector also delivered strong results, Mr Skamvougeras said, which was likely driven by “solid credit quality” in the first half.
“Our view is that this has resulted from historically low interest rate levels combined with increasing housing prices, which has meant that bad and doubtful debts have remained low, allowing for increased profitability,” he said.
“Looking forward for the banking sector, earnings-per-share growth is still fairly weak in nature, capital imposts are still likely to happen and dividends aren’t likely to grow, so given current levels, we believe they’re fairly fully valued.”
Mr Skamvougeras said the broader market environment was currently “tough” and that many valuations looked expensive.
“The market today is trading as a whole at 15.5 times forward earnings, and the industrials ex-financials sector trading at 18 times, so our view is that earnings growth needs to pick up from here to start to justify current valuations,” he said.
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