The outlook stated that profits and dividends for the four major banks increased by 10 per cent in the 2013 fiscal year and that 2014 is expected to bring another strong all-round performance.
Asset quality is continuing to improve with arrears rates declining, and bad debts are predicted to remain low unless there is a rapid deterioration in the economy.
The report noted that while regional banks are still producing low returns in comparison to the major banks, improved funding conditions and a recovering housing sector are good signs of future earnings growth.
Morningstar head of financials David Ellis said the regional banks have strong brands and loyalty from customers and shareholders, which will promote earnings growth as operating conditions improve throughout the 2014 and 2015 fiscal years.
Morningstar said it is also positive on the medium-term outlook for general insurers, with a reduction in natural disasters and stronger investment returns encouraging earnings.
“Improved economic conditions are likely to lead to solid premium growth, increased business activity, gradually accelerating GDP and moderately higher interest rates boosting investment returns,” said Mr Ellis.
Morningstar referred to QBE’s surprise earnings downgrade as disappointing, but said it expected a recovery in 2014.
The outlook said wealth managers will benefit from stronger and less volatile equity markets.
These improved equity market conditions will improve investor confidence and strong long-term tailwinds delivered by Australia’s compulsory superannuation system.
“We expect risk aversion to ease, with investors focusing on higher returns from equities as returns from bank term deposits plummet,” said Mr Ellis.
The outlook said the Australian REIT sector continued to underperform the rest of the market in the December quarter.
Morningstar said it favours property stocks with reliable income streams and a solid growth outlook.
“In this regard, we see a number of good quality, narrow-moat Australian REITs as looking relatively attractive,” said Mr Ellis.
“Our top picks are Westfield Group, BWP Trust and Goodman Group.”
In terms of infrastructure, Morningstar said it remains wary of regulated utilities like DUET, Envestra, Spark Infrastructure and SP AusNet, as it expects the unfavourable regulatory environment to start to impact financial performance over the coming years.
