While the ASX may have offered positive returns for seven of the last eight years, DNR Capital chief investment officer Jamie Nicol says the Australian equity market continues to look cheap.
“This is an extended run by historical standards and the price-earnings multiple of the market is trading towards the upper band,” Mr Nicol said.
Despite this, the market has not experienced the enthusiasm of previous runs.
“It has been characterised by cautiousness, lower interest rates and strong support for defensive assets, such as property and utilities,” he added.
However, while Mr Nicol pointed to the potential for an inflationary US under President Trump, it will be up to Australian investors to pivot accordingly.
“A critical question for investors is whether inflation is accompanied by faster growth. Either scenario – inflation or inflation plus growth – is negative for bond yields and defensive assets,” he said.
“An inflationary environment [is] one where corporate margins are likely to decline, especially for lower quality companies with little pricing power,” he explained.
Given this, Australian investors should look for those companies that will perform well in such an environment.
“We are inclined to continue to seek quality companies with earnings upside and we are exploring opportunities among cyclical industries. Cyclicals are trading below their average price to book,” Mr Nicol said.
“In addition we expect opportunities will emerge to buy good quality growth companies over the next quarter as the market continues to rotate away from these names.”