Investing in abnormal markets
Australian banks and high yielders enjoyed a relief rally post the surprise Australian Federal election result, but Australian long bond rates plummeting to record lows (below 1.3%) has been the major driver of Australian equities to near record highs. This is a pure yield arbitrage story. With Australian equity yields (ex-Resources) at decade lows (4.3%), their premium over long bond rates (roughly 3%) is currently at decade highs, supporting the share push to extreme valuations (currently >17.5x 12-month forward).
What worries us is the ongoing erosion in profit growth expectations. This was a difficult 'Confession season' this year with several larger stocks downgrading earnings guidance. That said, with the removal of Federal Election uncertainty, and with forecast FY19 earnings growth now at zero, the market has set itself a very low hurdle to clear heading toward August results.
Highlighting four standout opportunities over a 12 month period
Our Sector Analysts have provided an update on key dynamics, the outlook and have nominated their preferred picks per ASX sector.
We highlight four standout opportunities below, including our forecast 12-month return:
- Westpac Banking Corporation (WBC) – 27% forecast 12-month return
- Orora Limited (ORA) – 13%
- Treasury Wine Estates Limited (TWE) – 26%
- Oil Search Limited (OSH) – 48%
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