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Company earnings to regain importance

Since the financial crisis crippled global equity markets, it has been primarily the actions of central banks around the world that have driven the markets’ upswings and given investors outstanding returns. Following the announcement from Ben Bernanke of the US Federal Reserve that it would be tapering off from its bond-buying program next year, however, it seems as though that trend is due to change.

According to Kapstream Capital, central banks around the world have cut interest rates a total of 515 times over the last six years. This has prompted investors to scramble from term deposits and throw their money into shares for better returns. A total of $12 trillion provided in liquidity has also peppered this trend.

In Australia, it has been the investors’ search for high yielding stocks that has driven the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). Companies like Telstra (ASX: TLS), Woolworths (ASX: WOW) and its rival Wesfarmers (ASX: WES), as well as the big four banks, have all given investors enormous gains on top of hefty dividend payouts.

With global interest rates unable to fall much further, however, along with the Fed choosing to pull back on its quantitative easing, companies will now need to rely much more heavily upon impressive earnings to increase in value.

Despite recent falls in the aforementioned companies, many of Australia’s blue chips are still overpriced compared to their future earnings prospects. Instead, it is well worth considering other companies such as Coca Cola Amatil (ASX: CCL), QBE Insurance Group (ASX: QBE) or NIB Holdings (ASX: NHF) that are still sitting at attractive prices and stand an outstanding chance of increasing profitability in the future.

Foolish takeaway

As the market has largely corrected itself over the last month, the need has become more apparent to seek out quality businesses at discount prices, as opposed to following the crowd into overpriced assets. Investors should aim for long-term gains in these quality companies, as opposed to aiming for short-term gains from market swings.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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