While there are many macro issues around the world affecting the markets, the outlook for the Australian market is positive – especially if you select the right stocks.
Australia is well positioned heading into 2011. The Australian market is very attractively valued, well below long run historic average valuation multiples. Australia’s strong fundamentals of high population growth, excellent and low cost natural resource base, good corporate governance and a high dividend yield and high real dividend growth are still very much in place as we move into 2011.
Australia will benefit from the high economic growth from emerging markets and the resultant positive impact on demand for resources and commodity prices. There is also likely to be very significant infrastructure and resource project investment in Australia through 2011, which should see this part of the economy grow well above trend and also keep the labour market tight.
Challenges
We are, however, likely to see the Reserve Bank of Australia (RBA) continue to raise interest rates through 2011 as they try to keep other parts of the economy growing below trend to ensure the capacity for the significant resource and infrastructure investments. These higher interest rates should see a fairly flat property market, slowing housing credit and a tougher consumer environment.
‘I like the industry leaders and/or those benefiting from structural growth themes’
All in all, however, combining the fact that the Australian equity market remains very attractively valued with these overall strong growth prospects could mean that we see quite a strong performance from the Australian equity market in 2011.
Sectors
Within the Australian market I believe the industrial, healthcare and resource sectors are well positioned to perform in 2011 – and the Fidelity Australian Equities Fund remains overweight these sectors.
The overweight in the industrials sector is from key positions in mining service companies, engineering firms as well as specific structural growth companies like recruitment on-line sites and airports. 2011 should be not only a strong demand year for these companies and sub sectors but they should also be able to achieve quite strong pricing power through the year.
The mining services and engineering firms should benefit from the very significant investment planned in major resource and infrastructure projects. This strong demand should lead to an improvement in contract terms like a move to a cost plus basis and higher charge out rates.
On-line recruitment sites should also benefit from a strong labour market and improving yields. In the health care sector, I like the industry leaders and/or those benefiting from structural growth themes. Health care should continue to see strong structural growth and should be relatively unaffected by the rising interest rate environment.
Resource companies will benefit from the growth coming from emerging markets and continued strong commodity prices. The larger diversified miners remain the stand outs from both a growth and valuation perspective.
Paul Taylor is head of Australian equities at Fidelity
As long as companies can increase profitability/ROE then share price will follow
It is great to have such a positive outlook for 2011 and I thank Paul for this. It has not been easy to improve holdings generally during 2010 although we have seen incredible results in some areas.
Considering that investor sentiment is a significant part of the Markets, Paul’s outlook I find a definite help in positioning me for the New Year and even through the Christmas period.
There are too many “on the side lines”, for my liking, who really don’t say anything truly useful. Many thanks