Citi’s Australian equity strategists continue to favour the resources sector over “yield-sensitive” sectors like utilities, REITs, healthcare and infrastructure.
In a research note released on Sunday, Citi Research analysts Tony Brennan and Mark Tomlins said the recent reporting season has been effectively priced into the market.
The direction of Australian equities will now be guided by "the broader operating and financial markets", said Citi – namely, the "unusual confluence" of risking commodity prices and declining bond yields.
The twin forces in capital markets are supporting the two "poles" of the Australian equities market: the resources sector on the one hand and the yield-sensitive stocks on the other.
Citi put a higher probability on a stronger global recovery, accompanied by higher inflation due to "diminishing excess capacity" in the economy.
"This inclines us to continue to be more wary of a rise in bond yields than a sell-off in commodities, and so to still favour the resource sector over the yield-sensitive areas," said Citi.
"Elsewhere, with the domestic economy somewhat in its own cycle, and housing and business investment not as in sync with trends internationally (the latter due to the earlier mining investment boom), growth doesn’t look like seeing as much of an upswing.
"[This encourages] us to curtail exposure to the banks and other local cyclical stocks, and still prefer some of the larger sectors where profitability seems to be (slowly) improving: insurance, supermarkets," said Citi.