Back in February, I warned that all was not well Down Under, noting that any further softness in Australia’s growth would lead me to downgrade my near-term view of the country’s stocks.
Since then, a number of leading indicators have suggested that the Australian economy is slowing. So, as I write in my latest Investment Directions monthly market outlook, I’ve downgraded my near-term view of Australia to underweight from neutral.
While Australia posted a strong fourth-quarter 2012 gross domestic product report, more recent local business confidence surveys are pointing to a slowdown in domestic growth. At the same time, the economy faces future growth headwinds including a strong Australian dollar and easing commodity prices.
Australia’s sluggish growth outlook is problematic given that local equities are expensive compared to those of other developed markets. While most market watchers have been focused on the United States rally lately, Australia has actually done better over the last 12 months. Since March 2012, Australian equities have climbed roughly 16% in dollar terms, outpacing most developed markets, including the United States.