Second-half rebound expected tipped for stockmarket

Australia’s equity market could recover ground in the second half of the year, as the recent pullback had pushed down valuations.

Australia’s equity market could recover ground in the second half of the year, as the recent pullback had pushed down stock valuations to reasonable multiples and as investors looked to move money into equities in search of better returns.

Analysts at Deutsche Bank estimated that earnings forecasts in the April-June “confession season” held up well, particularly for a range of companies that had sizeable downgrades in recent years. They also believed that the recent turbulence in the stock markets reflected normal market volatility.

The S&P/ASX 300 index endured a 5.5 per cent decline in June, the worst monthly performance in more than three years. The consumer discretionary sector was the weakest performer for the month, down 10.9 per cent, followed by resources sector down 9.1 per cent, transport down 7.1 per cent and financials down 3.1 per cent.

The slump came amid a bout of global volatility, caused by last-ditch attempts by Greece to reach a bailout agreement with its creditors, a fall in China’s equity markets after a government crackdown on margin lending and positive US economic data supporting the likelihood of a lift in rates in September.

But Deutsche analysts calculated that before the April peak the Australian market had rallied 16 per cent over 94 days, so a dip was due. On a comparable basis, between dips the market has trended up by 10 per cent over an average 47 days, over the past six years. The market’s peak-to-trough fall of 9 per cent is also in line with the historic average.

“At present, the market PE is broadly in line with our ‘fair value’ model. We see scope for the market to trade expensively in the second half, as money moves into equities in search of a decent real return,” Deutsche Bank strategist Tim Baker said.

While there had been some high-profile downgrades in recent months, there seemed little evidence that this year was much worse, he said.

The brokerage identified lender Westpac, pharma major ResMed, fund manager Perpetual and gloves and condom maker Ansell among 11 stocks available at discounted prices. These companies had seen their share prices significantly underperform in April-June.