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Goldman calls the return of the ‘defensive bull market’

The broker expects the market to cement gains, helped by defensive, dividend-yielding stocks. The broker expects the market to cement gains, helped by defensive, dividend-yielding stocks.
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The broker expects the market to cement gains, helped by defensive, dividend-yielding stocks.

The broker expects the market to cement gains, helped by defensive, dividend-yielding stocks.

The rebound in the local sharemarket since mid-October has been driven once again by higher dividend-yielding stocks, largely the banks, while other sectors have failed to step up. It is what Goldman Sachs has labelled the return of the ‘defensive bull market’.

The financials sector surged 6.9 per cent in October as investors began to feel banks were looking a little less expensive after stocks – and the general market – flirted with a technical correction, which is defined as a drop of 10 per cent or more.

“Market concerns about a sooner-than-expected rise in US rates, the potential introduction of macro-prudential controls, and the risk of capital raisings have dissipated,” said Goldman Sachs head of portfolio strategy Matthew Ross.

“The sector is now only 1 per cent off recent highs, up 16.5 per cent for the year and back [to] trading at elevated multiples – 13.5 times [expected earnings], 9 per cent above the past 10-year average.”

He said underperformance in small caps, resources and energy further highlights the return of the “defensive bull market” – share gains driven by dividend-yielding companies with recurrent earnings rather than growth stocks.

Some defensive stocks Goldman Sachs remains positive about are Spark Infrastructure, Goodman Group, ANZ and Sydney Airport.

The broker also likes stocks with a high price-to-earnings ratio such as Seek, CSL, Aristocrat Leisure and ResMed.

Stocks with a neutral rating from Goldman with potential for declines include TPG Telecom, Ausnet Services, Ardent Leisure, M2, Amcor, Ramsay Health Care, Telstra, iiNet, Commonwealth Bank and APA Group.

As the Australian economy transitions away from the resources sector as its growth engine, the hope that another sector will be able to fill the gap is fading.

Analysts were not convinced companies will deliver a lot more earnings growth, judging by consensus forecasts, said Morgan Stanley analyst Chris Nicol.

“The reality is that the current single-digit growth profile [in earnings estimates for financial years 2015 to 2017] seems to fit the current trading and macro backdrop. A deterioration in conditions would only pressure earnings-per-share growth forecasts further,” Mr Nicol said.

But Mr Nicol said the appeal of Australia’s high dividend-yielding stocks would continue to provide a floor for the local sharemarket.

“While we see challenges to earnings growth, our base case does not forecast a decline in earnings. As such there will be some perceived stability in the quantum of dividends and cash yield,” Mr Nicol said.

“Yes, the prospect of rates rising, eventually, will pressure the yield trade within equities, but we continue to highlight that any shift will be a gradual unwind rather than a bubble-like unravel.”

Despite the recent jump in financial stocks, Morgan Stanley has retained its underweight recommendation on banks.

“Calling the ‘big switch’ out of banks has been a financial version of the boy who cried wolf for the last three to four years,” Mr Nicol said.

The Financial Services Inquiry and its impact, the end of access to cheap capital and challenges to dividend growth highlight there are some headwinds ahead for banks. Mr Nicol is forecasting return on equity in the big four will trend down after the Financial Services Inquiry reveals its findings.

Australia has an inflated cost base which companies can address slashing expenses to keep earnings growth ahead of sales growth, according to Deutsche Bank strategist Tim Baker.

“Australia likely has a more inflated cost base to address, compared to the US. Inefficiencies tend to creep in during the good times, as firms focus on meeting demand and defending market share, rather than internal efficiencies, And Australia’s expansion during 2003 to 2007 was a lot stronger than in the US,” Mr Baker said.

This story Administrator ready to work first appeared on Nanjing Night Net.

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