As the green shoots of recovery start to appear, investors are advised not to wait until the global economy is in full bloom before they get themselves set. Krystine Lumanta reports.
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Market experts are optimistic about a return to form by Australian equities in the coming financial year, but recommend that investors and advisers continue to exercise cau- tion in the current climate of uncertainty.
As valuation levels become more attractive, a mix of positive and negative influences is creating opportunities in specific sectors and stocks.
This contrasts with the beginning of 2010, when the Australian equities market struggled against the slowdown of investment amid tense fears of a double-dip recession, due to the financial strife in Ireland, Portugal, Greece and Spain.
Back then, financial markets were clearly alarmed. Today’s economic situation is not so different, yet there appears to be a change of attitude among investors, and a focus on how performance can be maximised, rather than a meek acceptance that returns will be murky.
Riccardo Briganti, head of research at Macquarie Private Wealth, says he believes that the global economy is going to pick up after experiencing a “period of weakness that we’ve been through mid-year”, allowing investors to get set for a move back into equities.
“That’s the starting point, and that’s a positive for equities in general,” he says.
“You’ve sort of seen it [recently] as some of the risks of the Greek debt crisis have eased and that’s led to a higher level of confidence. “We need to watch the economic indicators, but our feeling is the weakness we’ve been through over the last month or so is not a fundamental problem, and so the global economy [will start] to recover through the second half of this year.”
Even if a recovery is not yet fully apparent, it should not be dismissed as an unattractive period as “the uncertainty will present opportunities for long-term investors to accumulate some solid companies over the next 12 months”, according to Robert Penaloza, head of equities at Aberdeen.
“If we’re looking forward over the next 12 months, [we] are quite cautious; but having done the homework for quite a long time already, we have identified companies that will withstand the headwinds, both external and domestically,” Penaloza says.
“So what will probably happen is that valuations will get cheaper.
“But when you do invest, you’re obviously looking out towards the longer term.”
The table shows the latest performance data conducted by Morningstar, current to 30 June, with figures for large-cap domestic share funds ranked by their five-year rate of return. Interestingly, the best performers over five years weren’t necessarily those with the largest net assets.
Paul Taylor, head of Australian Equities at Fidelity and portfolio manager of the Fidelity Australian Equities Fund, says that “the ideal situation” is to be able to “buy at this point in time when the fears are quite great, and buy good quality companies at a great price”.
“The Aussie market would be below 12 times earnings and under 5 per cent dividend yields,” he says.
“Historically we trade on 15 times earnings.”
MACRO FEARS
Three key macro-economic “fears” have been identified as the top influences on the financial markets – particularly equity markets – and do not look likely to go away anytime soon.
According to Macquarie’s Briganti, the possibility of a China slowdown is the most important concern for Australia.
“The data coming out of China shows that they are going through this mid-year slowdown, but it also shows that inflation has seemed to have peaked out at about five-and-a-half per cent,” he says.
“So the Chinese government don’t have to tighten monetary policies further and that’s what gives us confidence – that you’ll see a pick-up in the second half of the year.”
Taylor says that China’s growth is slowing and will slow down even more.
“I think that’s the interesting one that could change in this environment…because that’s not an external influence, that’s the Chinese authorities saying, ‘we need to slow down; inflation’s too high’.
“In a historical perspective, China has acted fairly counter-cyclical through the whole period,” Taylor says.
“When things were tough they went for growth and when things kicked off, they pulled back progressively.
“So there’s probably a reasonable argument to be made that if global growth, which is one of the fears at the moment, becomes weaker and becomes tougher, the [outcome] is that China will probably reverse its economic undertakings.”
China is currently slowing economic growth by raising interest rates and making it harder to borrow money, Taylor says.
“If global growth becomes weaker, what’s likely to happen is that China will reverse those decisions and metaphorically take their foot off the brake and maybe put their foot back on the accelerator.
“That’s actually a [situation] that I think could change this year. If that happens, the markets could turn around very, very quickly.
“And if I look at the markets, they’re factoring [in] a lot of negativity right at the moment. They really are at fairly depressed levels but reflecting quite a weak global economic outlook.”
The biggest “fear” that has grabbed the most attention worldwide is the European sovereign debt levels – in Greece, in particular – but also “debt levels generally around the world”, according to Taylor.
