Australia’s top stocks are overvalued. The banks, retailers and miners are expensive. Especially if your investment timeframe is three to five years, the current share prices and record earnings by many of our favourite high-yielding S&P/ASX 20 (ASX: XTL) stocks is unlikely to be repeated.
Up until this past year, banks were being rewarded for their tight lending and Australians’ ability to save. Banks, like much of Australia, were shielded from the rest of the world thanks to an insatiable demand for resources stemming from Asia, solid economic growth and strong interest rates. Our two biggest retailers have thrived thanks to low unemployment and rising wages.
Now interest rates are at their lowest point in many years and unemployment is expected to rise – putting pressure on all of our biggest stocks.
Australia’s retail stores such as Myer (ASX: MYR) and David Jones (ASX: DJS) have struggled as consumer sentiment remains low but the RBA has stepped in and lowered interest rates in a bid to encourage people to spend in stores. The take-up has been slow and many investors wouldn’t be willing to accept the risk of a medium-sized retail stock for their hard-earned cash.
There is one product which both Australian businesses and consumers have continued to use despite a potential slow-down in the economy. Internet bandwidth, particularly mobile device usage, has been booming. Man’s best friend is now a mobile phone. It is now a non-discretionary expense, meaning if you’re in business or interested in the 21st century social life you can’t live without it.
In Australia, sitting atop the apex of the mobile phone, internet download and social media pyramid is Telstra (ASX: TLS). Despite being one of Australia’s biggest businesses, it’s growing. In the past year, unsurprisingly, Telstra’s legacy businesses posted a reduction in profit but its up-and-coming services outperformed. It also added 1.3 million new mobile customers in Australia alone and grew its overseas presence in Asia. This was echoed with strong results.
In its most recent full-year report, it announced a huge 12% increase in profit. Unlike Commonwealth Bank’s (ASX: CBA) record result, Telstra’s is more sustainable and, although it may not be as large in coming years, will remain sustainable. After going ex-dividend this week, the share price has dropped and could present a buying opportunity.
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
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