Our market is set to end the financial year with a bang as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has hit a more than 10-year high today.
That’s the good news. The bad news is that the market may not have much more room to move higher for several months, according to Morgans’ forecast which is predicting the S&P/200 to hit 6,200 by December this year.
The index has already past that point with the top 200 stock benchmark adding over 1% to 6,241 points. The market could become directionless from here as market bulls weigh up the full valuation following the rally and the lack of earnings growth momentum.
“Earnings momentum has slowed considerably since reporting season. Cautious trading and elevated valuations will test investors’ tolerance for bad news,” said Morgans.
“Meanwhile the aggregate valuation (industrials ex-financials) at ~21x 12mf PE [12-month forward price-earnings] leaves a small margin for error. Without meaningful upside to earnings growth, the market is likely to remain constrained.”
But this doesn’t mean there aren’t opportunities in the current market and the broker is highlighting 10 stocks that it thinks can outperform over the coming months.
“Upside in the near term will come from stock-specific exposures. Segments of markets have tended to overshoot and undershoot fundamentals given the multi-speed economic recovery, and have thrown up some trading ideas,” added Morgans.
“We highlight some opportunities for nimble investors in a historically weaker period for markets and ahead of the all-important August reporting season.”
Some of the “tactical”, or short-term, buy ideas include embattled insurer QBE Insurance Group Ltd (ASX: QBE) which is trading on an undemanding valuation as management has a habit of shooting itself in the foot.
The stock could be a victim of tax-loss selling and the selling pressure could abate as we head into the last week of the financial year. But investors may want to sell this stock into any rally.
Meanwhile, oversold stocks that Morgans thinks are worth hanging onto include casino operator Star Entertainment Group Ltd (ASX: SGR) and share registry services group Link Administration Holdings Ltd (ASX: LNK) with both stocks making a comeback from recent sharp sell-offs.
Finally, Morgans believes there are undervalued stocks in the wealth and funds management sector. The stocks that the broker is urging investors to buy include AMP Limited (ASX: AMP), Pendal Group Ltd (ASX: PDL) and Magellan Financial Group Ltd (ASX: MFG).
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Motley Fool contributor Brendon Lau owns shares of Magellan Financial Group. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.