Australian Unity Investments chief executive David Bryant says current market conditions will likely constrain short-term growth.
“The message from reporting season so far is that investors will need to continue to have lower expectations of returns for the rest of 2016, as low interest rates and limited earnings growth prevail,” he said.
Mr Bryant pointed to the poor performance of resource companies as significantly dragging down this year’s average returns.
“Across the market as a whole, company earnings for the financial year 30 June 2016, are down on the previous year by around 8 per cent, but this reflects the major impact of resource companies where average earnings fell 48 per cent. Excluding this, company profits have grown around 5 per cent this financial year,” he said.
It is not the only sector struggling at the moment.
“The resources sector results have been very poor, as expected, and the banking sector is struggling to deliver much growth given low rates, strong competition and increasing bad debt levels,” Mr Bryant said.
“That leaves only around 40 per cent of the market to work with and as this profit reporting season has shown, there is a big gap between the best and worst companies.”
With many Australian companies currently undergoing transformation, investors will need to be patient in order to reap the rewards of this restructuring.
“If you contrast stocks like Qantas, who embarked on their transformation program two years ago after a reporting significant write-offs, today they are showing the benefit of that work. Companies like Wesfarmers and Woolworths are tackling those issues, but we are in the midst of the write-downs and restructuring work, so their improvement is realistically a year or two away yet.”
The onus remains on investors to do their homework, Mr Bryant said.
“As a result, investors need to be more well-researched and selective than ever, because the easy option of just investing in resources and banks is gone, and the winners and losers in the next couple of years will deliver substantially different outcomes for investors.”