According to Fairfax, prominent investment bank, Deutsche says Australian shares are undervalued.
Following recent falls in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) Deutsche believes the market is around 5% undervalued based on its price-earnings ratio of 15x.
In addition to a lower-than-fair P/E ratio, 15% corrections in Australian shares are generally followed by a market bounce (provided no recession ensues), superannuation funds are ploughing more money into shares (due to the record-low interest rates on offer), and economic concerns out of China and the USA have abated.
"If the market rises as we expect, correlations are likely to drop, providing a good environment for stock-picking," Deutsche said in a report cited by Fairfax.
The bank identified five stocks for strong share price performance in the next three to six months, including:
- Aristocrat Leisure Limited (ASX: ALL) – P/E ratio: 26x
- Qantas Airways Limited (ASX: QAN) – P/E ratio: 9x
- AGL Energy Ltd (ASX: AGL) – P/E ratio: 15x
- Iress Ltd (ASX: IRE) – P/E ratio: 26x
- James Hardie Industries plc (ASX: JHX) – P/E ratio: 21x
Ironically, the average P/E ratio of the five stocks above is roughly 19x – well above the market average.
Nevertheless, Deutsche's suggestion that the Australian market could be undervalued echoes the forecast of AMP Capital economist, Dr Shane Oliver, who was cited in Fairfax yesterday as saying a 'Santa rally' could be imminent.
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