The impact of today’s global uncertainties on the Australian economy, stockmarket and investors this financial year can be separated into those associated with a crisis of confidence and those associated with ongoing debt deleveraging.
The impacts from a crisis of confidence in Europe will primarily be focused on eurozone and global debt markets. This could potentially impact Australian corporations with high debt levels as well as Australian banks seeking wholesale funding.
Currently Australian corporations have very low debt levels and Australian banks have been reducing their dependence on wholesale funding due to the very strong growth in domestic term deposits.
The damage from a crisis of confidence would likely be fleeting. If anything, it might create a short-term buying opportunity for local investors in the Australian market.
In contrast, ongoing global debt reduction will slow global economic growth for a sustained period.
But a low-growth world is not necessarily bad for markets or investors. There are still opportunities for Australian investors to generate income and returns.
The Australian market, for example, has one of the highest dividends yields in the world and some of the best growth prospects.
Australian dividend yields are high and sustainable and even if world markets do not go anywhere in 2012-3, investors can receive close to a 6 per cent fully franked yield from the local Australian market.
With the cash rate heading down, this yield will look more and more attractive to investors. Companies that can deliver a high and sustainable dividend yield, or companies that have growth in a low-growth world, or both, will be bid up by the market. They are the ones we want to own.
At present, whether a company is a good quality company, low quality company, high growth, low growth; pretty much all companies are trading around very similar ranges.
We think there should be differentiation, there should be discernment in the market – and there will be at some stage – and that’s where we see opportunities.
I also think there is also some confusion in the market about what is being caused by Reserve Bank of Australia
interest rate settings and what is being caused by large structural shifts in markets and economies. Bricks-and-mortar retailers are facing structural headwinds that have more to do with consumer preference changes, focus on value for money and channel to market and very little to do with interest rate policy.
Interest rate settings will not change the long-term structural themes playing out in the economy. The significant structural headwinds facing large parts of the automotive sector, aluminium smelting, steel, media and bricks-and-mortar retailers will be there for a prolonged period regardless of interest rates.
Paul Taylor is head of Australian Equities at Fidelity Worldwide Investment
