In its Australian Economic Update for June 2014, the research house said the price/earnings ratio for Australian shares is already around 17 times earnings and while the economy did perform better than expected in the March quarter the “pattern of lower than trend growth has re-appeared”.
The Morningstar report said the decline in resource sector investment is not being compensated for by strong growth in the non-mining economy.
The report said recent political volatility has added to the “ongoing weight of weaker economic data out of China” with mining shares down 4.7 per cent for the past month and eight per cent for the year to date.
“Shares linked to consumer spending have also struggled in an environment in which the economy has been growing more slowly than usual and unemployment has risen,” said Morningstar.
“In the year to date, consumer staples stocks are down 2.6 per cent and consumer discretionary stocks are down 3.5 per cent.”
As a result Morningstar said the “economy is back into a slower than usual period of business activity”.
“Nor is there any clear indication of any likely acceleration out of current sub-par conditions,” said the report.
Morningstar referred to the Westpac Melbourne Institute Leading Indicator report which had a similar expectation for growth.
The report by Westpac and Melbourne Institute said despite the improvement in the past month the index “continues to point to a significant loss of momentum”.
“The growth rate has now been below trend for four months in a row and is consistent with a slowdown over the second half of 2014 carrying into early 2015,” said the indicator report.
Morningstar said the “prolonged period of sub-par activity is proving to be a challenging environment for corporate profits” with the latest ACCI-Westpac Industrial Trends Survey stating “profits are expected to weaken over the year ahead”.
Morningstar said the Australian share market is likely to remain subdued until there is “clearer evidence of an upturn in economic cycle”.
