Stephen Bruce, director of portfolio management at Perennial Value Management, has pinpointed Australian companies as an area of focus for investors this year, as local businesses continue to fare strong compared to the global stage.
“In terms of the market more broadly, our forecasts are for continued, moderate earnings growth over the coming year,” Mr Bruce said.
“In addition, corporate Australia has been paying down debt and balance sheets are in very good shape, which provides the flexibility to reinvest for growth, pay healthy dividends and weather any economic headwinds that may arise.”
The world stage
He said global macro-events such as Brexit and the US-China trade war are impacting overseas companies, making investment in local businesses increasingly attractive.
“What struck us is that, in comparison to US companies, Australian companies’ growth prospects seemed relatively solid and our balance sheets generally seemed to be in better shape too,” Mr Bruce said.
He said that although the Australian markets have been shaken by falling property prices and recession rumours, investors should avoid buying into over-negative sentiment and instead consider the recent market sell-offs as an opportunity to invest in quality stocks at attractive rates.
“Market sell-offs inevitably provide buying opportunities for the more patient investor, and I believe that 2019 will provide such opportunities for those looking to build a robust share portfolio for the longer term,” Mr Bruce said.
His words echo those of Perennial Value’s director, John Murray, who encouraged investors to consider Australia’s strong fundamentals as an indication that recession remains unlikely.
“We have strong population growth, albeit it is easing; favourable demographics, with a relatively young population compared to most other developed economies; our government debt levels are low by global standards, and we are one of the few countries boasting a AAA credit rating. The budget is heading back into surplus, and both interest rates and inflation remain at low levels,” Mr Murray said.
“Unemployment is low, activity is robust in the infrastructure sector on the back of a large number of major projects, and there is likely to be increased investment in the resources sector. The weaker Australian dollar is also acting as a buffer, benefitting export industries and our key education and tourism sectors.”
According to Mr Bruce, investors should be looking towards value stocks with high growth potential, as the current valuation dispersion will normalise, and value style portfolios will eventually deliver significant outperformance.
“Many of these opportunities are to be found at the value end of the market, and the key is to be seeking companies which are well-managed, possess strong balance sheets, have sound earnings growth prospects and are delivering reasonable dividend flows. These are the companies that will inevitably carry investors through tougher times,” he said.