Director’s Cut Shorter sharper means lower PERs :Macquarie Research,

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Director’s Cut
Shorter sharper means lower PERs
Tanya Branwhite has updated her return forecasts for Australian equities.
The headline number is a forecast 12 month TSR of 14%, but what is much
more important in the latest note is how she arrived at this number.
Tanya has written continuously on her view of ‘shorter sharper’ cycles emerging
post the GFC, and the increased uncertainty and volatility that would accompany
this environment. In such an environment, she believes there is a regime shift in
equity valuations, as PERs compress and depress equity returns.
In updating her equity market outlook Tanya argues a forward PER of around
11.5 to 12 times is appropriate, which leaves EPS growth and dividend yields as
the most significant drivers of Australia’s total market return. In other words,
there will only be modest PER expansion over the next year. >> Read Report
With Australia just one example of a country impacted by an aging Baby Boomer
demographic, and balance sheet deleveraging, we would expect to see shorter,
sharper cycles and lower PERs in all major developed markets.
One key implication is we are unlikely to see sustained PER expansion in major
equity markets for some time. Given the likely shift in valuation regime, target
prices based on the assumption a stock will seek equilibrium near its historical
average PER are also likely to be too high in the new regime.
Australian PER below 50 year average for second time since mid-1990s;
multiples unlikely to expand given likely continued risk “sensitivity”


Highlights
 Damian Thong has initiated on Hitachi (6501 JP) with an Outperform,
arguing the company is more defensive post the restructuring.
 Daniel Kim sees a strong outlook for Korean LiB companies due to rapid
market growth, and market share gains by Samsung and LG.