Looking for value? About a third of the market is cheap compared to its peers, an interesting bit of research from State Street reckons.
The price-earnings ratio of Telstra, health-care, real estate investment trusts, utilities, transport and consumer staples shares have risen since September 2011. But these stocks all lag the 40 per cent PE gain the S&P/ASX 300 Index has experienced in the last 18 months, says Olivia Engel, State Street's head of active Australian equities.
Moreover, says Engel, the earnings per share forecasts for companies in those sectors favoured by State Street are all positive and are even being revised higher. In contrast, the S&P/ASX 300 Index’s EPS forecast has fallen 10 per cent since September 2011.
The companies in the sectors favored by State Street are expanding with the help of cash rich balance sheets. Engel says that Telstra, health-care, the REITs, utilities, transport and consumer staples offer less volatility than other sectors.
Still, stock selection is paramount. Pockets of value can be found with proper analysis, she says.
State Street says bank valuations have increased more than the market. Banks do not have the earnings growth of the sectors State Street likes as their share price has risen.
Engel warns that bank dividend payments may soon hit a ceiling.
Banks are bolstering their payout ratios from about 60 per cent historically. As the banks' EPS have slid, their dividend payout ratio has increased to the point where up to 90 per cent of their sustainable sources of earnings have been paid out, says the asset manager.
The increase in dividend payments by the banks had gone some ways to attracting an astonishing 67 per cent of the money invested in Australian shares in December 2012 by a local household, versus an average of 44 per cent since 1989, according to the Bureau of Statistics.