Aussie equities’ stock rising

Australian equities have weathered the storm of the global financial crisis (GFC) with the stock market up more than 140 per cent in the post-GFC, including a 10 per cent rise over the first quarter of 2015.

Yet, despite the market showing positive signs, AMP Capital's Australian equities manager, Kevin Pietersz, has urged caution.

"Valuations for industrial companies are above their long-term trend and have been pushed up by expectations of future earnings growth that may not come through for many of these companies," he said.

Boring is beautiful

Pietersz said investors should look for stability and certainty instead of gambling on what might be.

"In the current environment, we believe ‘boring is beautiful'," he said.

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"Companies that continue to deliver stable earnings and stable dividends, led by quality management teams are the type that should form a core part of your equity portfolio."

Pietersz's focus on stability was reiterated by State Super Financial Services chief investment officer, Damian Graham.

"We favour investment styles that prioritise dependable earnings and solid tax effective income," Graham said.

"It's companies with reliable earnings and reasonable dividends that will continue to perform solidly…from a shorter term perspective, markets will look to identify areas where share prices are discounting very negative outlooks and this is where we could see some buying opportunities in heavily sold sectors such as energy and mining services.

"But we would suggest these are value driven opportunities as opposed to longer term earnings stories."

More to market than ASX200

While Australian equities have performed well in recent times, Hyperion managing director Tim Samway warned the market's biggest businesses may not be the best bets for investors with a long-term outlook.

"The Australian share market is not just a big homogenous group," he said.

"There's a bunch of large top 200 businesses which are reasonably mature, who are focused on dividend payouts rather than growth. They don't have the ability to grow, [because] they don't have large addressable markets to grow into.

"They're somewhat constrained by either commodity prices or general economic activity, and therefore their only option at the moment is to support share prices with higher dividend payouts and hope like hell they can stave off the innovators and disruptors who are slowly going to pick away at their businesses."

Beware the chase for yield

Despite traditional views that Australia's Big Four banks are "safe as houses", Samway expressed concern about their place in investors' plans.

"The reality is the Australian market is a very small pool and so there just aren't that many good investments…and there's an awful lot of money chasing those small number of good investments," he said.

"The most glaring example of that is in the chase for yield and the investment in our banks - which make up [the Big Four and a couple of miners] nearly 30 per cent of the Australian market.

"I really worry when large sections of an index are being chased by one group of investors and that segment is overly exposed to one part of the Australian market, which is housing.

"While the next year looks good [for the banks], everything looks quite stable, the outlook gets much cloudier as you go out further."

The reality is the Australian market is a very small pool and so there just aren't that many good investments…and there's an awful lot of money chasing those small number of good investments.

Market Vectors Australia director of investments and portfolio strategy, Russel Chesler, also warned that investors would be wise not to bank on the Big Four over the long-term.

"[While] Australian banks continue to hit all-time valuation highs, we are less positive on the banking sector given the fundamentals, and believe that the mid-cap sector will present more growth and yield opportunities," he said.

"We believe that the top 10 Australian shares, particularly the banks' valuations are already stretched.

"Our view is, in the current market environment, in Australian equities, value is sought outside the top 10."

However, not everyone believes the banks have had their day, with AB (AllianceBernstein) director of research - Australian value equities, Hamish FitzSimons, saying their pending demise may be somewhat overstated.

"We view banks somewhat favourably," he said.

"The bad debt cycle is still a long way away. [However] we do have a preference for regional banks because we have a view that rising regulatory capital levels for the major banks will assist the competitive position of the regionals."

Where is the value?

With mixed views on the major banks, investors are being encouraged to look at "exciting opportunities" in other sectors, with Hyperion's Samway backing innovative businesses.

"There are small really exciting opportunities in the market with growth-focused businesses with real opportunities to innovate and expand outside their addressable market, [through] opportunities either here in Australia, but more often overseas," he said.

"We're constantly looking for long-term opportunities...businesses that are disrupting and have disrupted quite substantially in their existing markets - REA and SEEK in particular.

"You could almost say with SEEK and REA they've already thoroughly disrupted the market here and now they're expanding overseas by buying or creating similar businesses and using their intellectual property to build exactly what they have here or similar in offshore markets where the disruption hasn't already taken place."

WaveStone Capital principal, Raaz Bhuyan, also identified SEEK as a leading Australian investment opportunity, and backed Samway's view that businesses with opportunities to grow in overseas markets were also worthy of consideration.

"The WaveStone funds have been skewed towards companies that have strong and growing franchises overseas, such as Resmed, Macquarie, Brambles, Aristocrat, James Hardie and CSL," Bhuyan said.

"We also own the franchises that have benefited from digital disruption such as SEEK and Ooh Media, and expect them to continue to do well.

"In addition to the exposure these companies have to growing markets overseas, the depreciation of the Australian dollar gives them strong earnings over the next few years, which will be reflected in their share prices."

Read part two of Nicholas O'Donoghue's report: Resources from boom to near bust
Read part three of Nicholas O'Donoghue's report: Falling dollar a bright spot for Aussie equities