In his July Global Market Review, Betashares chief economist David Bassanese said investors' continuing to chase yield and a rebound in resources stocks led to a good performance by the domestic equity market over the month.
“Earnings expectations, however, remain under downward pressure, principally due to weaker commodity prices and a lower[ing of] expected mining sector profits,” Mr Bassanese said.
“While valuations are not especially cheap and earnings are under pressure, the market’s dividend still remains attractive in a low interest-rate environment.”
Mr Bassanese said in the absence of an improvement in forward earnings, further market gains are possible if investors continue to bid up the PE ratio, in light of low interest rates and poorer returns from bonds and cash.
“I anticipate the moderate uptrend in prices to continue, underpinned by steady local official interest rates for at least another six months to one year,” Mr Bassanese said.
“One risk is a major back-up in bond yields as the US Federal Reserve inches closer to raising official interest rates, though I continue to expect the Fed to act cautiously in light of low US inflation.”
Mr Bassanese also said Australian bonds will remain sought after, with 10-year bond yields falling from almost 4.5 per cent per annum at the start of 2014 to around 3.5 per cent more recently.
“Unless the RBA moves to an easing policy bias again, I don’t anticipate a further significant bond rally, and see local 10-year bond yields heading back to at least four per cent per annum by end year,” he said.
