Investors are now witnessing a once-in-a-generation value opportunity to enter the Australian equity market, according to AllianceBernstein chief investment officer Roy Maslen.
AllianceBernstein is the latest of a swathe of big name asset managers to declare its renewed confidence in the equity market after a strong 2012.
Maslen says that, recent stock market performance aside, there is still a silo of cash sitting in defensive assets.
"Many cyclical companies are now unusually cheap, despite strong balance sheets and cash flows, and this has created a compelling opportunity," he said.
In Australia, fear of the global economic outlook and the sovereign-debt crisis in Europe, has seen a move to defensive stocks such as consumer staples, healthcare, IT, utilities and property.
The herd mentality has seen valuations of these stocks driven artificially upwards and consequently, the value opportunity in Australian equities, expressed as the discount of the cheapest 20% of stocks to the most expensive 20% of stocks, is close to record highs.
"Listed corporates' debt-to-equity ratios and earnings before interest and tax are extremely robust. These key measures of balance-sheet strength are much healthier than during the value opportunities created by the GFC, the tech boom and the Australian financial crisis of 1991," said Maslen.
He adds that while the value spread between cheap and expensive stocks has typically been driven by relative balance-sheet strength, now it is being driven by whether a stock is exposed to the business cycle or not. This has created a valuation fault line between defensive and cyclical stocks.
AllianceBernstein thinks the size of the opportunity is greatest in cyclical sectors such as housing and retail. While the fund manager concedes that these sectors may have further to fall, it believes that downside risks will be limited by a recovery of demand.
"In our view, this provides contrarian-thinking, value-driven investors with an attractive return as the crowded trade in defensive stocks begins to unwind," Maslen finished.
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