Goldman Sachs likes where Australian stocks are heading in 2017, upgrading the ASX 200 to an overweight rating for the first time in over a decade.
The bank says that “Australia looks better positioned than many other parts of the region against the backdrop of global reflation, firmer commodity markets, a stronger US dollar and more protectionist US trade policies”, noting that “for the first time since the GFC recovery in late 2009, the ASX 200 appears to be going through an earnings upgrade cycle, driven by the improved outlook for commodity prices, the end of the earnings downgrade cycle in the Banks and a relatively benign outlook for industrial earnings”.
Goldman thinks that consensus earnings forecasts will continue to be upgraded, driven by resources stocks.
“Most spot commodity prices sit well above current consensus, particularly in AUD terms, and the global demand outlook is improving,” it says.
As such, it’s upgraded its allocation to miners to an overweight rating.
“While commodity prices have already enjoyed a large bounce, the sector still presents as one of the few cyclical parts of the market where valuations are not stretched and earnings momentum remains strong given the significant disconnect between the AUD and spot commodity prices,” it says.
Goldman’s also has an overweight rating on financials, suggesting that these two sectors are positively positioned with respect to the reflationary dynamic seen in the global economy at present.
At the other end of the spectrum, it is underweight “Bond-Proxies” and “Secular Growth” stocks.
“Despite their recent de-ratings, valuation risk to rising rates remains,” it says.
“Defensive firms with the most fragile balance sheets and poor dividend coverage will be the bigger underperformers in a rising interest rate environment in our view.
“Similarly, within the universe of ‘growth’ stocks, we would be more cautious on those that have been aggressively rolling-up assets to acquire growth,” it adds.