Market rally to stall, says Credit Suisse

Current local market euphoria is unlikely to last through the third quarter, says Credit Suisse.

The bank said it could be time to “take some profits” on commodity producers like BHP after a strong rebound this year.

The local sharemarket’s strong rally to 11-month highs will take a breather in coming weeks as investors look for earnings to catch up to lofty valuations, a leading investment bank has cautioned.

In its latest quarterly outlook, Credit Suisse said the local market’s 10 per cent post-Brexit rally could be readily explained by falling bond yields and an uplift in earnings expectations.

The euphoria is unlikely to last through the third quarter, however, with research analysts headed by Hasan Tevfik tipping the rally to “stall” as investors are unable to clear two key hurdles.

“After the sharp rally we forecast sideways markets in the near-term,” Mr Tevfik said.

“Further upside is capped by a combination of testing valuations and broader macro concerns.”

The market is currently priced at around 18 times earnings, the highest valuation seen since the collapse of Lehman Brothers, while global growth risks tilt to the downside.

Domestic demand could also be hurt by a softening of the housing market, Credit Suisse noted, explaining why it had recently trimmed its end of year target for the benchmark S&P/ASX 200 index to 5,500.

Such a target is less than 1 per cent below current valuations.

The investment bank added low rates would ensure investors continued hunting yield stocks, which should prevent a major correction and keep the exchange rangebound.

“The downside is also capped, in our view, as the global-search-for-yield will continue to bring investors to Aussie equities,” Mr Tevfik and his team wrote.

Credit Suisse says investors need to be selective in their choices, with buyback candidates at the top of their list of potential outperformers for the remainder of the year.

For investors this means opportunities could be presenting themselves ahead of earnings season next month.

“Despite the sharp rally in equity markets, and P/E ratios at post-financial crisis highs, a buyback continues to be immensely accretive for the average Industrial stock,” Mr Tevfik said.

“We have noticed that more buybacks tend to get announced at the full year results. And given the reporting season is just around the corner we think it is an opportune time to highlight potential buyback candidates.”

On Credit Suisse’s list of companies that may soon pursue a buyback are AMP, IAG, AGL, Caltex, South32, Qantas, Harvey Norman, Boral, Incitec Pivot, JB Hi-Fi, Metcash, Independence Group and Ansell.

The bank added it could be time to “take some profits” on commodity producers like BHP after a strong rebound this year.

Meanwhile, the biggest anomaly found in the report was the trading success of the healthcare sector in Australia, which is seen trading at a 50 to 60 per cent premium to global peers despite comparatively weak earnings momentum.