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Stock Investors May Have Missed the Boat on Australia’s Rally

  • NZ index offers worst return among 18 regional equity markets
  • ASX gain over next 12 months seen less than half past 6 weeks

Australia’s benchmark stock index has posted its longest weekly winning streak since 2016, its New Zealand counterpart is at a record high. If you haven’t placed your bets by now, you may have missed the boat.

That’s the message from analysts, who expect Australia’s S&P/ASX 200 to rise about 2.7 percent over the next 12 months, based on price targets of companies in the index compiled by Bloomberg. That’s less than half the gain since April 1.

New Zealand’s benchmark index is offering a 1.2 percent upside, the worst among 18 regional stock markets. The MSCI Asia-Pacific Index, whose 1,042 members span from Wellington to Mumbai, is expected to advance more than 13 percent over the same time.

“We’re about at the top of where we should be”’ with Australia’s benchmark needing “a breather and a refresh to go higher,” said Karl Goody, a private wealth manager at Shaw & Partners, a Sydney-based firm with A$15 billion ($11.3 billion) under advice. “That’s what we’ll see. Higher lows, and then higher highs throughout the market.”

Upside Funk

Potential return over next year based on price targets of members

Source: Bloomberg

The Contagion Benefit

Antipodean mutual funds and ETFs have attracted a combined $225 million from global investors in the four weeks to May 9, Jefferies analysts led by Kenneth Chan wrote in a May 11 note, as foreigners bailed from India, Indonesia and Korea. Australia has been the best performing market in Asia the past month amid a rally in commodity prices and as contagion from higher U.S. interest rates spread into emerging markets.

Australia is "one of the beneficiaries” of the rotation out of emerging markets, said Michael McCarthy, Sydney-based chief strategist at CMC Markets. International investors have also been getting comfort from the Australian dollar trading near the bottom of its historical range, he said by phone.

Upside Potential

There are some Australian stocks where analysts are vastly more optimistic than investors. Vehicle leasing business Eclipx Group Ltd. has the most upside on the benchmark index, with analysts forecasting a price about 49 percent higher than where it closed Friday. Syrah Resources Ltd., a mineral exploration company which produces graphite in Mozambique, has upside potential of around 47 percent.

At the other end of the spectrum, the 14 analysts tracking Beach Energy Ltd. have a price target more than 27 percent below where it closed Friday, while those who follow commercial services company ALS Ltd. forecast a similar decline from current levels.

Best and Worst

ASX 200 stocks with largest upside/downside and at least 5 analyst ratings

Source: Bloomberg

Still, there are other ways to play the region. Australia is the third-highest dividend yielding developed market in the world behind Sweden and the U.K., according to data compiled by Bloomberg. Genworth Mortgage Insurance Australia Ltd. is yielding 8.8 percent on forward estimates, the data show, the best among Australian stocks worth more than $700 million.

New Zealand offers the third-best dividend yield in the region behind Australia and Taiwan with Genesis Energy Ltd. leading the way among companies worth more than $700 million.

Get The Cash

The top four stocks with the highest dividend yields in the antipodean markets

Source: Data compiled by Bloomberg

Note: Stocks listed on benchmark indexes above $700 million market cap

Stocks are trading pretty close to fair value after looking cheap “for a brief period,” David Cassidy, the chief equity strategist at UBS Group AG’s Australian unit, said by phone. “We’re still offering reasonable total return potential, but not as exciting as other parts of the world.”

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