Tailwinds return for Aust equities


By Krystine Lumanta

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Financial planners and investors can take a more positive outlook on Australian equities, with several developing factors bringing earnings growth back in line with longer-term averages.

Alphinity Investment Management lead portfolio manager Johan Carlberg said with the economy transitioning from the mining and mining-related sectors, a number of tailwinds had re-emerged.

“Where we are today is that we have some reasons to be more optimistic about earnings this year than the last couple,” Carlberg told financialobserver.

“Clearly, the lower Australian dollar and even though it’s rebounded over the last month or so, it’s still 10 per cent or so lower than it was on average last year, so that should give a good tailwind and that, of course, is in contrast to what we’ve seen for a number of years.

“Also, the lower interest rates initially had the effect of leading to improved flows as interest rate savings became less attractive, so that should flow through to more attractive earnings.

“That earnings boost has been a bit slower to come through than what we’ve seen historically, but I think we are starting to see some signs of that now, so we will get some earnings growth this year more in line with longer-term averages.”

In the past year, good returns had been achieved in the Australian market, he said.

“What’s been driving the market for the last 12 to 18 months has primarily been the flows out of cash and interest rates and term deposits coming down,” he said.

“Also, people are realising they need to step up a bit in terms of slightly riskier assets in searching for that yield.

“What we’ve been saying for some time is that’s all rational and there’s nothing wrong with that, but at some point you do also need some earnings growth in the market and I guess that has been, for the last several years, what’s been missing.”

Alphinity’s approach had been to avoid big sector bets and concentrate on individual stocks from different sectors, he said.

“Going forward, growth will be lower no matter what happens with raising or not raising the debt ceiling, so interest rates will stay low for some time,” he said.

“I think you should be more diversified in your equity market exposure, otherwise you do risk missing out on that broader earnings-driven market that we’re bit by bit putting in place.”

In regards to new flows into international equities, the Australian market would not be held back by such flows as the success of the local market was much more dependent on achieving earnings growth, he said.

As investors were increasing their risk level by returning to the equity market, there was merit in choosing a manager with a good track record to avoid further risk on top of the market risk, he said.

“Our message in terms of delivering good outperformance for relatively low risk compared to a lot of other managers is resonating well with planners and the people we speak with,” he said.

“Sometimes there can be a bit of choosing the ‘flavour of the month’ and that’s what you need to try to refrain from doing.”

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