The research house said Australian equities remained expensive “both in absolute terms and relative to other asset classes”.
Indeed, at this juncture, Australian equities are barely showing positive real expected returns, on our analysis, such has been the strength, and relative outperformance, of the local market,” the company said.
“With poor expected returns comes the heightened risk of loss of capital – a poor trade-off, in our view.”
Morningstar said the Australian market was “quite narrow” with financials and materials comprising more than half the market by capitalisation, and while these two sectors have also been the best performing on a rolling 12-month view, both face risks moving forward.
“Financials remain generally overvalued following the reflationary bounce, and while sentiment toward the need for increasing capital has improved, largely as Trump signals less onerous capital requirements for banks in the US, it nonetheless remains a key issue, with banks expected to need to raise additional capital in the future,” Morningstar said.
“Our concerns also extend to the materials sector, with BHP Billiton and Rio Tinto trading 22 per cent and 39 per cent, respectively, above Morningstar Equity Research’s fair value estimate of what those companies are worth.”
Morningstar said this was “unsustainable” and noted that “more attractive” opportunities exist in other asset classes.
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