The defensive bull-market that saw the safe companies, and secular growth stocks, rally to unsustainable highs ended in August 2016. This rally appeared to be unprecedented in both magnitude and duration. Multiples of these stocks have compressed significantly since then, as rising interest rates and global growth outlook burst the bubble. However, we believe the re-rating of the low PE stocks that has been driven by the large value differential, will be driven now by earnings growth helped along by rising global inflation. The market traditionally underestimates this earnings leverage, and this should drive the outperformance of these stocks for quite a while yet. So the Australian market has seen quite a large rotation away from defensives and bond-sensitive stocks toward the cyclical and value end. Our view is that this still has some way to go. Brad Potter discusses this, as well as his view on the banks, iron ore, reporting season and more in his Australian equity market outlook report: (VIEW LINK)
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