The quarterly Credit Suisse Australian Equity Outlook report believes its time for investors to start thinking contrarian.
“In today’s report we try and measure the influence of top-down drivers on Aussie stocks and it looks like it is now at extreme levels,” writes Credit Suisse analysts Hasan Tevfik and Damien Boey.
“History suggests that exceptionally macro-dominated markets, like we are in now, do not last long. It’s time for investors to be contrarian, it’s time for investors to start thinking bottom-up.”
Indicators of forward returns look better now than they did at the start of the year. Valuations are lower for equities, free cash-flows should continue, balance sheets remain sound and the cost of debt is low.
“Also, we are closer to the cyclical low in the current EPS (earnings per share) downturn,” they write. “And while we think macro will be less relevant, it is ludicrous to think it will be irrelevant. We expect easier policy by the ECB, Bank of Japan, PBoC and RBA to support risky assets.”
The trailing dividend yield for Aussie equities crossed over 5% at the end of September. Since then the yield has declined to 4.9%. But on a world scale, the yields from Australian equities look attractive.
“The dividend yield in Australia continues to dwarf those on offer in other markets around the world,” the analysts say.
Australian companies currently pay out 80% of earnings compared to around 33% for both the US and Asia, not including Japan.
“While high-pay-outs suggest the Aussie dividend could be less sustainable, we think there is still a considerable buffer before companies cut dividends,” say Tevfik and Boey.
“Free cash flows are expected to more than cover dividends. Strong balance sheets provide further options to keep income hungry investors happy.”
Here’s how Australian dividends compare:
Tevfik and Boey see the ASX 200 rallying to 6000 from about 5200 by the end of calendar 2016.
“Aussie equities remain supported by solid bottom-up drivers,” they write. “Valuations are now cheaper than the start of the year, we are closer to the cyclical low in EPS and balance sheets are solid.”
But what stocks should investors own as markets retreat from their extreme top-down focus?
“We highlight companies which have suffered poor-macro but benefit from good-micro,” the analysts say.
These include Lend Lease, Westpac, Flight Centre and South 32.
On the other hand, companies such as Brambles, Crown and Origin, with less bottom-up support, could be vulnerable as investors switch focus.