Foreign investors are starting to look more favourably at Australian equities as a weaker currency and stronger US bond yields take some of the shine off high-dividend stocks.
The Australian sharemarket is no longer regarded as the most expensive in the Asia-Pacific region, according to a report by Credit Suisse, and is instead considered the sixth cheapest.
The benchmark index, the S&P/ASX 200, is down almost 8 per cent this year in US dollar terms, and 3 per cent in Australian dollar terms.
Since the start of the month, shares in all four major banks have lost ground, and many investment experts believe the trend will continue as the US economy continues to recover and higher rates start to be priced into bond markets.
"If growth slows and the banks cannot sustain current dividends, they will be hit hard," said Principal Global Investors chief executive Grant Forster.
He added that global fund managers see no reason to hold expensive local banks with potentially significant downside risk if dividends are not sustained.
Bell Potter market strategists Charlie Aitken told Channel Nine's Financial Review Sunday Australian shares are starting to look more attractive to overseas investors, particularly in US dollar terms.
Mr Aitken said he sees a further 10 per cent downside to a lot of stocks, particularly high-dividend-paying companies such as Telstra, the big four banks, and listed real estate.
"US long bond yields will continue to rise as the Federal Reserve ends its quantitative-easing program, which will mean the US dollar will continue to appreciate and the Australian dollar will fall," said Mr Aitken.
US 10-year government bond yields are up 6.3 per cent this month and are trading at 2.57 per cent. Australian 10-year government bond yields are up 12 per cent to 3.72 per cent. Bond prices and yields move in opposite directions.
Australian shares fell last week, as did the local currency, as speculation increased off shore about a rate increase in the US and the end of quantitative easing in October.
The local market is tipped to fall a further 0.3 per cent on Monday morning, according to the SPI futures. Falls in commodities prices on Friday and flat leads from global markets continue to weigh on investor sentiment.
