Aussie equities fundamentals still sound

equity markets fund manager global economy

24 July 2008
| By Mike Taylor |

While equity markets will be unpredictable over the next 12 months, investors should not be overly concerned as key fundamental drivers behind Australia’s strong performance are still in place for the next decade, according to fund manager Fidelity.

Fidelity head of Australian equities Paul Taylor said the group was maintaining an optimistic position for the future and described Australia as “still the lucky country”.

According to Taylor, Australia is currently in a very unusual position, with one foot stuck in the rapidly rising east and the other in a declining west.

“Australia’s foot in the east is running flat out, the foot in the west is caught in quicksand — we’re being torn apart in different directions.

“This is a really interesting position, on the one hand we are significantly benefiting from our links to the east, but we’re also paying the penalty for our excesses in the debt markets,” he said.

“The east and emerging markets are growing very rapidly while the west and developed markets are stagnant and probably heading backwards.”

Taylor said inflation was the biggest concern for investors as the global economy enters a period of “de-leveraging”.

“While the direct benefits of the east and direct costs of the west are pretty easy to identify, there is another consequence when east meets west and that’s inflation. East plus west equals inflation.”

According to Taylor, in order to benefit from this unusual confluence of events, it is important to focus on individual stock selection over the next 12 months.

“It’s important to note that in an inflationary environment, real assets outperform and financials underperform. Looking back at the 70s, sectors that did well were consumer stables, healthcare and energy; sectors that did poorly were financials,” Taylor said.

“That said, individual stock selection is critical. Some of the key attributes we’re looking for when selecting stocks is a strong balance sheet, quality management teams, quality business models and industry structure and pricing power.

“We have significant overweight positions in Rio Tinto, Oil Search, CSL, Westfarmers and Woolworths, which are all very well positioned in this environment.”

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