The ASX 200 traded below 4,900 again yesterday. That took it to a low of 4,865, the weakest price since July 2013, before the buyers were back in and lifted the market back above 4,900 at the close.
Overnight futures trade suggests further gains today with the March SPI200 contract pointing to a rally of 42 points, around 0.8% when the market opens this morning.
It’s a long way from this month’s high around 5,330 on January 4 and a very long way, 18%, from last year’s high just below 6,000. So traders and investors would be forgiven for thinking that the battered down prices of stocks on the ASX make the index cheap.
Not so, says a team of equity analysts from Morgan Stanley Australia.
Chris Nicol, Daniel K Blake, Anthony Conte and Steven Yo said in a note to clients that “2016 opens with the ASX 200 cheaper but not necessarily cheap”.
“The ASX 200 has declined 18% since the peak last year on 27 April 2015, leaving the index firmly in correction territory. The gap between EPS growth and valuation remains, and the price contribution to total market returns continues to dwindle. Yes, the market is cheaper than a year ago – but given the contraction in aggregate EPS, the multiples investors are required to pay for earnings (14.5x 12m fwd) are not outright cheap,” they said.
But it gets worse.
The authors have cut their 12-month target on the ASX from 5,150 to 4,800. That, they say, means Australian stocks will have their “second year of negative capital gains”.
“We cut our 12-month ASX 200 price target by 7%, to 4800, which is below market levels and some 15% below consensus. In our view, the forward earnings growth that the market pays for will continue to decelerate; we therefore apply a below-trend 13.5x multiple to forecast EPS. We think a more constructive target would require a significantly stronger
earnings outlook than our current macro forecast and backdrop supports,” they wrote.
One key highlight amongst this somewhat negative outlook that can perhaps embolden investors is that the report suggests the ASX is entering the type of market where returns can be generated over and above that of the total index return – if investors follow a Benjamin Graham/Warren Buffett style approach.
They say the ASX 200 is “undergoing a transition of sorts”.
“The larger-cap stocks are exhibiting declining growth potential, whilst newer growth stories emerge and capture both attention and alpha. This underpins our call for negligible ASX 200 index returns in 2016 and a continued focus on stock and sector fundamentals in order to outperform.”
It’s not all bad news.