Australia's stock market was undervalued, but valuations were not going to catch up with fundamentals anytime soon, thanks to obstacles facing the market's main sectors, Russell Investments' head of strategy said yesterday.
A year ago, there was no significant valuation gap between Australian shares and the rest of the world, Russell Asia-Pacific chief investment strategist Andrew Pease said.
"There is now," Pease told a teleconference.
"We'd be looking at the Australian share market 15 to 20 per cent undervalued on a valuation basis," he said of the benchmark S&P/ASX 200 Index.
"Given where earnings are, given where things like book value are, given where [price-earnings ratios] are right now, it should be at about 5000, rather than the 4200 or 4300 that it's at now. That is not the forecast; we'd be comfortable with the Australian share market having the ability to hit 4500 at the end of this year."
He said domestic market headwinds would prevent a significant narrowing of the valuation gap, at least in the short term.
"I think we'll have a little bit of a move upward, but the Australian market does face some headwinds," he said.
He said the mining cycle was near its peak.
"I'd say it's fairly mature at this stage," he said of the mining sector, which helped Australia avoid the economic slide experienced offshore.
"The prices aren't going to be as strong," he said of iron ore and other resources.
"They need volumes to grow profits, and the volumes may not be as strong as anticipated. At the same time, we're seeing an amazing amount of capacity expansion coming into the sector. All of this suggests that we're getting very late in the cycle."
Meanwhile, financial stocks faced margin pressure and export-related issues had to combat the negative impact of the strong Australian dollar.
"It's been one of the investing paradoxes over the last couple of years that we've had the strongest economy but the weakest share market. I think we're still going to have an undervalued market for a while yet," Pease said.
