(Bloomberg) -- Pricey valuations and a deflated earnings outlook have Goldman Sachs Group Inc. doubting whether Australia's rallying stocks can keep producing gains.
The firm downgraded Australia's equity market to underweight, citing high valuations, sluggish earnings growth and a possible weakening of the Australian dollar. The nation's S&P/ASX 200 Index has soared 18% this year to a near-record high, but these warning signs led Goldman “to favor fading this outperformance in favor of the north Asian markets,” analysts led by Timothy Moe wrote in a June 25 note.
The Reserve Bank of Australia's dovish slant also prompted Goldman's Australia strategists to cut the nation's banks to underweight recently. Bank earnings per share could be slashed more than 15% if the RBA's cash rate drops to 0.5% from the current 1.25%, Goldman said. This would pose a “significant earnings risk against a backdrop of full valuations,” the analysts added. Financial firms have a more than 30% weighting on the nation's benchmark index.
To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net
To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Naoto Hosoda
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