Valuations in defensive sectors have little room for disappointment

The current operating environment for Australian corporates has been one characterized by low growth, low interest rates and low inflation. While the composition of growth has shifted significantly in recent years, the overall level of growth remains below trend. Given this environment, corporates exposed to the economic cycle have generally delivered disappointing results relative to analyst’s optimistic expectations. The most recent reporting season proved to be no different, with the ASX200 Industrial companies delivering +4.6% EPS growth versus expectations of +7.2% at the beginning of the 2015 Financial Year. Given this investment landscape, investors have been willing to pay a premium for companies that can deliver earning certainty and in particular, growth. Defensive sectors such as Infrastructure, Telco’s and Healthcare have benefitted from this dynamic given their insensitivity to the economic cycle and pricing power. While this has been a rewarding investment strategy in recent times, we would highlight that valuations within these sectors have little room for disappointment.