He says it’s vital to get a mix of resource companies when holding a portfolio of stocks.
Fidelity’s Taylor says not only is the market overall attractive,“but the sort of difference in valuation is actually quite compressed”.
“So whether it’s a high growth company, low growth company, high quality company, low quality company, they’re all trading on very similar multiples, which is also the market saying we’re going into a low growth environment and everything’s going to grow slowly; everything’s going to have very weak growth,” he says.
“Now that’s actually a really interesting market when you’re taking a bottom-up stock specific perspective, because it allows you then to really identify great quality companies at great prices.
“If I can find a good quality company, [with a] strong balance sheet that has good growth prospects that is valued like the rest of the market on a cheap valuation, it presents really good opportunities.
“So I think that’s where we are at the moment.”
SECTOR PERFORMANCE
During June, Aberdeen’s San visited Western Australia to gain real insights into the mining sector’s condition. “They’re supposedly in the midst of a commodity boom, but when you talk to the miners [and] when you talk to the mining contractors, they’re actually facing a lot of constraints either on the infrastructure side, on the labour side, equipment or even tyres,” San says.
“We think that with the different sectors, [they each] face specific challenges. I feel that the opportunity is more at a stock level.
“The risks in the next 12 months are largely macro-driven with the international events and the domestic conditions. But from a stock point of view, much of the risks can be mitigated if we actually look at quality companies that have strong management and strong balance sheets.
“We’re looking to top up in companies that provide sustainable cash flows and dividend yields and actually provide us with earnings growth. We’re looking to do that when valuations become attractive in this kind of cautious and uncertain market.”
According to Macquarie’s Briganti, several sectors will begin to struggle, such as industrials.
“And then consumer discretionary is likely to come under pressure because consumers are not spending to the extent that they had been previously – that partly reflects relatively high interest rates and partly reflects consumers just being a little bit more cautious. And their savings have increased, rather than putting their money into the equity market,” he says.
Taylor says the Australian market is providing “good value”.
“You’ve got some great companies at great prices so I think the likelihood of getting good returns over the next 12 months is much better,” he says.
“I think you’re going to get reasonable performance from the Australian market.
“If I look at sectors… I’m overweight in industrials and particularly mining service companies, overweight diversified resources, overweight energy and overweight healthcare.
“But I would stress that we tend to build a portfolio from the bottom up and look at individual companies rather than have sectoral themes.”
AUSTRALIAN MARKET PAST PERFORMANCE
Taylor says the historical performance of the Australian market, compared to the rest of the world, should comfort investors and bring back some confidence.
“Australia has been the best-performing market in the world long term,” he says.
“The London Business School looked at stockmarket performance around the world for the last 110 years, so from 1900 to 2010, and that identified Australia as the best performing market over the long term.
“Australia generated a real rate of return, so inflation-adjusted, of about seven-and-a-half per cent.
“On a nominal basis, that’s about 12 per cent – so the Australian market has delivered nominally 12 per cent return per year for 110 years, which is quite a phenomenal return.”
The study found five underlying reasons for Australia’s leading performance: population growth, our natural resource base, corporate governance, high dividend yield and high real dividend growth.
“So if you go through all of these different areas, all of them are still very much in place and will be at least in the next decade,” Taylor says.
“That’s why Australia has been a good performing market. The fact that they are in place is an indication of why Australia is well positioned relative to other markets.”
Nevertheless, Briganti says that over the last year, “the rest of the world and particularly emerging markets have outperformed the Australian market”.
“This really goes to the crux of why you need to have a diversified equities portfolio, including international exposure, because sometimes when you look at the long-term numbers, it’s going to hide specific conditions that currently exist, and vice versa,” he says.
“So rather than saying that in the long term Australia had a better return than the US, which it has, [ask] why was that the case?
“It was the case because over the last 10 years, the US has suffered a head crash and a global financial crisis that hit them harder than it hit Australia. And at the moment, the Australian market is under a little more pressure because of these specific domestic conditions.
“In a way, looking over the returns over a long-term period, you have to be really cautious.”
MARKET RISKS
One would assume the market is swarming with more risks, given the additional pressure from the three macro-economic fears. However, Taylor says they are all priced into the market.
