Lonsec’s Head of Equity Research, Bill Keenan, believes the Australian equity market is ready to rebound.
“Lonsec has had a target of 5,000 for the All Ordinaries Index by the end of calendar year 2012,” said Keenan.
“I believe yesterday’s rate cut by the RBA will fuel this.” “History shows that a period of successive rate cuts nearly always leads to a strong rally in Australian equities.”
“The two most important reasons are firstly, a lower cash rate (and yield curve) lowers the return from cash, term deposits and bonds.”
“Secondly, the cost of debt is reduced which improves the disposable income of households and increases the return on equity of companies.”
In turn, economic growth recovers as consumption and business investment improve and a softer currency (usually) boosts exports. The Australian share market rallies as company profits improve and investors switch out of low yielding cash, term deposits and debt and into equities. Lonsec believes this easing cycle will end at 3.50% and therefore expects cash and deposits to come down by 75 basis points or more (from today) and loan rates to reduce by around 60 basis points.
“When you combine lower interest rates in the Australian economy with an improving global growth outlook, particularly in the US and Asia but also Germany, and Liberal/National governments transitioning back to each State and most probably federally by 2013, the economic and earnings outlook is suddenly a lot more brighter,” said Keenan.
Lonsec stock picks
Income stocks
- Commonwealth Bank (CBA) – best positioned and the most profitable major bank in the Australian market with the most advanced technology platform. Credit growth, superannuation flows and investment returns will recover over the medium term. Buy for yield (6.2% fully-franked) and long-term growth.
- Woolworths (WOW) – defensive with growth, given earnings are 90% food, liquor and petrol; home improvement provides a new growth driver. Has retreated to a good yield (4.7% fully-franked) and cheap valuation (FY13 PER 13.7x). Retail conditions should improve as interest rates come down.
Growth stocks
- Origin Energy (ORG) – has a leading vertically-integrated position in the Australian energy market. ORG’s LNG joint-venture (APLNG) is heavily de-risked after Sinopec (China) agreed to take most of the LNG and 25% equity in the project, but the market is paying very little for it. ORG has plenty of growth levers.
- Computershare (CPU) – the blockbuster BNY Mellon acquisition positions CPU as the dominant share registry company in North America (70% of the S&P500 covered), and indeed globally. CPU should generate double-digit earnings growth over the next few years from acquisitions and an up-tick in the cycle.