As we begin the 2019 calendar year, Randal Jenneke, head of Australian equities and portfolio manager at T. Rowe Price, says there are a range of risks to the Australian markets, both here and abroad, that investors should watch closely.
“We head into 2019 with a cautiously optimistic slant to Australian equities. A few risk factors are clouding the market and economic outlook, including falling house prices locally, political risks the US-China trade conflict and tightening global monetary policies,” he said.
“Supply chains and business models that thrived during globalisation now face disruption of increased trade tariffs, which will have direct consequences for global GDP growth, earnings and inflation.
“This global pressure may impact Australia’s ability to manage its housing downturn, which is at least one year into a three-year cycle. In addition, with interest rates at very low levels, the Reserve Bank of Australia has a limited arsenal to stimulate growth and spending.”
However, Mr Jenneke remains positive that the Australian market can withstand likely volatility due to the marketplace’s high dividend payments. He points to Australia’s history as a long-term, high-performing equity market as evidence for this, highlighting its comparatively large income component, traditionally strong economy and pioneering business community.
He advises investors to steer away from the headlines, which can encourage short-termism and/or ‘sheep’ investing, and instead focus on understanding the fundamentals that can signal a company’s growth potential.
“An environment dominated by risks calls for a greater investment focus at the sector and stock levels and would benefit an active investment approach,” Mr Jenneke said.
“For the year ahead, we favour structural growth companies, as well as companies with direct exposure to the robust global environment, particularly the US, and expect this to remain a strong area of performance for our portfolio.”
He says the insurance industry is looking particularly appealing for investors, while the banks’ performance will be hindered by dropping house prices, higher funding costs as a result of rising offshore interest rates, and increasing costs of business due to the royal commission and the subsequent heightened surveillance of ASIC and APRA.
“We are more positive about the outlook for the general insurance sector. Premiums are ahead of inflation and rising, in the order of 4-5 per cent p.a., while claims inflation is under control, resulting in good margin expansion for these businesses. Rising bond yields are also supportive, given insurers’ large fixed income portfolios,” Mr Jenneke said.
“While 2019 won’t be without volatility or issues to navigate, we think a four to five per cent dividend yield and attractive valuations augers well for a sound equity marketplace that delivers healthy income and growth,” he concluded.