Two reasons why Australian stocks may continue to underperform in the second half of 2015

Australia may be “open for business”, but its stock market remains unpopular, and ranks poorly based on various market metrics, compared to Asian peers.

That’s the finding of Tim Baker and Joseph Kim, equity strategists at Deutsche Bank Australia, who suggest “Asia still looks more compelling than Australia” in terms of future market performance.

The chart below, supplied by the pair, shows the current popularity of Asian markets based the proportion of buy, hold and sell ratings from analysts across the region.

Baker and Kim note that those markets that are very popular, or at the other end of the spectrum very unpopular, tend to underperform the others somewhere in the middle.

“We find that over the past four years, markets that are viewed neutrally have tended to outperform. Markets that are very popular, or very unpopular, have tended to lag. This is consistent with our findings at the stock level in Australia. Popular markets are likely discussed more, and interested investors have likely bought in already, leaving few marginal buyers. At the other end, unpopular markets are likely to have the most ‘sell’ recommendations. And with such recommendations not common, they may have scarcity value and attract intention of investors who can short”.

Not only do Australian stocks rank poorly based on popularity, according to their analysis, the Australian market trails most other major Asian markets based on valuations, earnings and exposure to key themes. This, as a consequence, suggests Australian stocks may struggle in the period ahead, at least according to recent history.

As the table below shows, based on these metrics, the Australian market ranks ahead of only Malaysia at present.

Based on their rankings from December 2014 those markets that rated favourably tended to outperform those that didn’t. The table below shows where various Asian markets ranked back then, and the subsequent six-month performance seen since.

Given Australia has slipped even further down this list over the past six months, and recent history suggesting unpopular markets tend to underperform those carrying a neutral market rating, it suggests Australian stocks could endure another lacklustre period in the second half of the year.

Baker and Kim suggest that a “complete lack of earnings growth” is the most obvious challenge facing the Australian market at present.

“Australia’s most obvious challenge is a complete lack of earnings growth. In fact, earnings are forecast to fall in both FY15 and FY16. It is also unpopular with analysts compared to the region, which isn’t a good thing. The market still offers a compelling yield (~5%, the highest of any major market), so will be of interest to income investors. And given its large size, there should be interest in selected sectors and stocks. (We favour housing exposure, given the robust construction cycle underway)”.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at