Analysts Split on What's Next for Australia's Rallying Stocks

(Bloomberg) -- Analysts are divided on where Australian stocks will go after this year’s epic rally. Citigroup Inc. and Morgan Stanley Wealth Management gave more reasons for bulls to cheer, while Goldman Sachs Group Inc. said it’s looking elsewhere for gains.

The nation’s benchmark S&P/ASX 200 Index has surged 18% so far in 2019, and Citi doesn’t see it slowing down. Expectations for Australian interest rates to decline over the next 12 months are likely to drive the nation’s benchmark S&P/ASX 200 Index to a record high next year, analysts led by Tony Brennan wrote in a June 19 note.

“As well as making equity yields more attractive, lower rates support the economy and corporate earnings,” the analysts wrote. “It requires a bit of faith in that at the moment, the signs on earnings aren’t too bad, and prospects would seem to remain reasonable.”

Morgan Stanley is also feeling positive. Analysts raised Australia’s equity market to mildly overweight from underweight on the nation’s ability to weather a global economic slowdown.

Infrastructure spending, China’s appetite for commodities, high-yielding shares and the possibility of more tax cuts are keeping stocks afloat as the domestic economy lags. Given these factors, Australia is in “a relatively better position compared with the rest of the world at this time,” analysts led by Nathan Lim wrote in a June 27 note.

Goldman Sachs doesn’t agree. Even with Australian equities’ strong showing this year, several warning signs led Goldman “to favor fading this outperformance in favor of the north Asian markets,” analysts led by Timothy Moe wrote in a June 25 report.

The firm downgraded Australia’s equity market to underweight, citing high valuations, sluggish earnings growth and a possible weakening of the Australian dollar.

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Naoto Hosoda, Kurt Schussler

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