Lonsec CIO Lukasz de Pourbaix

The domestic equity market may not reach the highs of a bumper 2019, but investment consultants say the market’s confidence is justified and local stocks are likely to continue driving portfolio returns into 2020.

There are dangers in the market – as always – and risk is being dialled down by degrees in many corners, but the consensus is that belief in the ability of companies to withstand major headwinds is largely warranted.

The AXS200 flirted with 7000 points today after hitting a then-record 6845 points in the middle of 2019.

“There is a high level of optimism,” says Toby Lewis, director of investment consultancy firm Harbour Reach, pointing to tight credit spreads and high equity multiples. “But that doesn’t mean it’s illogical.”

Sunsuper head of asset allocation, Andrew Fisher, says there are always danger signs in the domestic market. The red flags are well known; low rates are proving to be an ineffective cushion to the economy, wage growth has flatlined and consumer spending is miserly. Inflation remains below the RBA’s target and the nation is in the middle of a devastating bushfire crisis amidst the backdrop of broader climate change concerns.

Harbour Reach director Toby Lewis

However, these factors don’t pose an immediate threat to business prospects. The fact that the Australian market has had a good run doesn’t necessarily mean it’s due to collapse.

“One thing you always hear is that equity markets are at an all-time high,” Fisher says. “I think people forget that markets are supposed to go up.”

If anything, persistently depressed rates are causing the most consternation. Lonsec CIO Lukasz de Pourbaix suggests the low-rate period may be “hiding some of the company issues” and creating a bit of complacency. But the economy is not the share market; the issue only hurts valuations if it starts affecting company prospects, he explains.

“From an investment perspective it’s a question of – do any of these things have a longer-term potential to affect growth’?” De Pourbaix says.

Dialling down, but only slightly

Fisher rejects the notion that investors have been lulled into a false sense of safety. He says he hasn’t seen a marked level of complacency in the investment market or an overly reckless dependence on risky assets.

“Things are fairly evenly positioned right now,” he says. “If you look through the bulk of last year there’s been anything but complacency.”

Data from Vanguard supports the view that investors are embracing a fair portion of defensive assets and playing a reasonably cautious hand. In 2019, the largest share of ETF inflows (21 per cent) went to domestic fixed income, followed by Australian equities (16 per cent) and global equities (14 per cent).

Lewis says Harbour Reach is slightly underweight growth assets and is “wary of taking too much risk at the asset class level”. Despite the favourable conditions, a sensible approach to risk is warranted and full-ish valuations suggest that forward returns “may not be that high”.