I believe over the next two years we will see a wall of individual investor money come back into Australian equities from cash and fixed interest. Australians are currently holding record cash levels right as the return from cash is crunched in nominal and real terms. This is exactly what happened in the USA and it’s coming to Australia as we join the ultra-low, extended period, cash rate club.
Equity fund managers reading this may doubt it, but you all know how it works. You have outflows at the bottom when there is obvious value and inflows into the recovery when value is harder to find. You are forced to sell CBA at $30.00 on redemptions and buy them back at $80.00 on inflows. Money comes in when you don’t want it and goes out when you do. It happens every cycle and it will happen again this cycle, leading to P/E expansion as that asset allocation inflow to equities is put to work.
The P/E expansion will be greatest in the sectors that offer sustainable income streams. The great rotation I see coming in Australia from cash and fixed interest back to equities will be driven by a search for income. Therefore I expect a disproportionate amount of the flow to head towards income funds, buy/write funds, pure industrial funds and individual stocks that have income attributes. A wall of income seeking money will be heading down a relatively narrow street, and when that happens, you do get P/E expansion beyond expectations.
Too much demand, not enough supply
The question then becomes – where will the equity supply come from to meet the demand for equity income streams?
Foreign investors are underweight Australia due to valid falling currency concerns. They are more likely to be buyers when the Australian dollar finds a level.
Domestic institutions are going to be experiencing discretionary and compulsory super inflows and will be buyers, not sellers.
Domestic individual investors will be buyers, not sellers
The companies themselves, particularly the top 20, will be buyers of shares, not sellers. Large-cap corporate Australia is over-capitalised and likely to be embarking on buybacks and further on-market dividend reinvestment plan (DRP) neutralisations.
The demand for existing large cap industrial equity is going to surprise us all.
I believe there’s every chance that my long-held FY14, 5% fully-franked yield based share price targets on the Big Four banks and Suncorp prove conservative. I also believe the $6.00 price target on Telstra could prove conservative.
Confidence boost
The macro settings are right and I think a decisive Federal election result on September 7 will be the trigger for the missing ingredient known as confidence.
The single best ideas are stomach churning and you almost need to look away from the screen when you press the “send” button.
The end of the five-year bear market in Australian equities note from this day a year ago was one of those moments. It was like lighting a match in a fireworks factory in terms of the (negative) feedback and debate it created. However, fast forward to today and while some of the components of the note weren’t accurate, the over-riding call of the end of the five-year bear market was actually correct, almost to the day.
Now that the federal election has been called, I think all the conditions are in place for the next leg of the Australian equity bull market. I think it will be led by big cap industrials and become self-sustaining, as the RBA continues to drive cash rates and the Aussie dollar down. It won’t be an earnings led bull market, it will be a P/E expansion led bull market, as investors bid up reliable equity income streams in household names they know.
The driver
I think financials are going to continue to lead this bull market. I strongly believe the ASX Financials Index (XFJ) will head back to all-time highs. That is why I have ANZ, CBA, NAB, WBC, SUN, AMP, MQG and QBE in my high conviction list. The XFJ has clearly broken out of the post GFC trading range and those eight high conviction financial stocks make up 77% of the XFJ Index.
[1]In January, I wrote it’s going to be a very good year to be a real estate agent. That is proving correct. From this point though, I think it’s going to be even better to be an Australian equity fund manager or dare I say, a lowly stockbroker.
I am going to continue to keep the bullish Australian equity strategy pedal flat to the floor. I forecast that within 12 to 18 months, the ASX200 will recover to 6,000, led by large cap financials as Australians buy shares for income.
Again, let’s judge this call in 12 months’ time.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Peter Switzer: Will the election be good for stocks? [2]
- James Dunn: All eyes on earnings [3]
- Greg Fraser: Stock in Focus – Amcor [4]
- Paul Rickard: As BHP and RIO bounce back, SSR portfolios outperform [5]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [6]
- Penny Pryor: Real estate rebound spreads beyond Sydney [7]