What is the outlook for Australian equities?

Are we seeing a genuine move back into Australian equities driven by an exit from cash and cash-like investments, or are there other forces at play? A Money Management roundtable investigates.

Mike Taylor, managing editor, Money Management: Welcome ladies and gentlemen. AMP Capital is sponsoring this roundtable on Australian equities. I’m going to kick off with a question that goes to the heart of what most of our readers, particularly the planners, are asking themselves which is: What are the elements that you think will drive sentiment over the next six to 12 months with respect to Australian equities?  

Now I ask that in the sense of there’s been a lot of positive sentiment at the start of the year, possibly a little less over the last two weeks, but it’s the longer term outlook that everyone is looking at. So I’m going to kick off with you Tim as a winner, I’m going to kick off with you to give us a bit of a flavour. 

Tim Samway, managing director, Hyperion Asset Management: Well, it’s important to recognise that the market’s had a terrific run and it was due for a bit of a pull-back. 

We don’t spend a lot of time trying to judge short-term sentiment; the next year, the next five years is much more important I think for investors.  

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The next five years is looking like a pretty low-growth environment for Australian equities. There are patches which will do better. We think the online businesses are looking pretty strong, they’re world’s best practice in their business models. 

And we think that, like many people, the banks are looking very toppy. There’s that yield story that’s been driving them the last year but I think that will run out of steam at some stage, I can’t tell you when but it will. 

Veronica Klaus, senior investment consultant, Lonsec: We don’t actually give views on the market, especially over the short term; we tend to build portfolios with a long-term prospect. 

In building portfolios we’re not looking specifically as to whether we believe the market is going to necessarily go up or down or level, so it’s what’s going to offer the best potential return at the lowest possible risk and we try and build portfolios in that way. 

The one thing I would say is that we do expect volatility to continue, so we’re trying to ensure that our portfolios have a diversification of strategy that ensures that there is a level of downside protection in those portfolios. And we believe that’s going to continue over the medium term. 

Jonas Palmqvist senior portfolio manager, AMP Capital: Short term there’s a lot of factors driving stocks up and down. There’s liquidity which has been the main game globally for a while now. 

What we struggle to find in many sectors across the market is earnings. And if you look beyond six to 12 months it’s the earnings power of these companies that decide the valuation.  

We’re quite cautious, quite defensive on the market as a whole. It’s an outcome of both our bottom-up analysis. We failed to find the earnings for mining stocks, mining services. The mining cycle is over definitely.  

For many of the domestic cyclicals that have run very hard, we struggled to see the earnings. Banks are overvalued is our view. 

So we’re quite defensive. And top-down we’re a bit worried still about these global experiments with liquidities.  

But it always comes back to the fundamental earnings and cash flows for us and that’s where we are a bit concerned. The market is up by 50 percent since March ’09 – that was the bottom globally - but that’s not to say it’s still a good investment to be in equities long-term. But short-term, yes, we are a bit concerned about the fundamentals. 

Dominic McCormick, chief investment officer, Select Asset Management: I’d agree with that view. It makes sense to be defensive here. The key drivers have been this quest for return, quest for yield in a very low interest rate environment, which is likely to continue and potentially get lower in Australia. But arguably the earnings that would normally support the sort of rise that we have aren’t really coming through yet. 

Everyone says markets look ahead, but the market is now up around 30 percent in the last year, and those earnings haven’t come through yet. I think particularly we come from a top-down perspective. It makes sense to be pretty cautious, particularly given the slowdown in China and big banks looking expensive in a low credit growth environment. 

Mike Taylor, Money Management: Claire, you come from a slightly different perspective, probably more like my perspective really. What’s your take? 

Claire Mackay, financial planner, Quantum Financial: Certainly clients for the last few years have been inherently conservative. They were defensive, they were spooked by the GFC and so they’ve stayed out of the market because of the volatility, the shocks that keep hitting the market and the uncertainty. 

In the last 12 to 18 months, particularly as interest rates have come down, my retiree clients particularly are looking for income in their portfolios – they’re certainly looking to redeploy investments. But they’re concerned about the ongoing volatility. 

So it’s something that we’re managing with our clients on a case-by-case scenario and in their context: how much risk are they prepared for and able to take and what is their timeframe? 

I think if you have a short timeframe you can’t withstand the volatility and the uncertainty in the market. But for the longer term you do need that growth to sustain your retirement.