The Australian sharemarket is providing a dividend yield of 5% – equivalent to some bank deposits – with the added potential of long-term capital growth as well as franking.

“The Australian market as a whole provides a significant dividend investment play – a dividend yield of about 5%,” says Taylor.  “Some individual stocks obviously offer even more.

 “That’s a really sustainable yield – and also provides a real fundamental valuation underpinning the market. Even if we stay at this low valuation level we’re still going to get pretty good returns from the earnings growth as well as that dividend yield.

“If I look at the opportunities for the market going forward, they’re around earnings growth as well as that dividend yield. Maybe we don’t get a valuation re-rate in the short-term, but to get a good return over the next 12 months to three years, you don’t need the valuation up-lift anymore and that’s what’s making the Australian market so attractive.”

Mr Taylor says “the Australian market, because of the recent volatility, is now sitting on a very attractive valuation level of around 10 times earnings and about a 5% dividend yield. That’s very attractive from both an absolute valuation level and also against Australia’s own historic levels. Traditionally the Australian market trades at closer to 14 – 15x. While I don’t think the Australian market is going to go from 10 back up to 14-15x anytime soon, I think maybe we stay at that 10-11x and returns come from the dividends that get paid, as well as the earnings growth in the market.

“The other really interesting thing that’s happening through this crisis is compression in valuations across the market. Whether a company is high quality, low quality, high growth, low growth; they are trading at these relatively low multiples and a real compression in valuations. To me that is where the opportunities are in the market. I don’t think every company is low growth. Find the structural growth opportunities which companies are growing faster. Find which companies have really good industry positions and the best growth opportunities. Which ones are going to get the earnings growth coming through and the dividend yield coming through.”

Mr Taylor says “despite the macro clouds and volatility, I think there are still good investment opportunities in this lower growth world. If you look at the whole market you see different pockets of growth and investment opportunities.

“We are in a very different environment to that of the original global financial crisis (GFC), which was all about debt on corporate balance sheets. Through the GFC companies repaired their balance sheets and took their dividends back to much more sustainable levels. We’re coming in to this slow down in a much better position. Corporates are now in a much stronger position and have spent a lot of the time on strengthening their balance sheets.  Many Australian corporates have fantastic balance sheets. They raised the capital and they’re still quite profitable. They’re in really good shape. And in fact with a few of the larger caps, you could probably argue that maybe they’re too strong – as we are seeing share buy backs from a range of larger corporates.”

Earning season
“At the start of the Australian reporting season we’re already seeing some great results out of a Commonwealth Bank or a Telstra, that’s really demonstrating that some companies are in very strong position. They are well placed within their industry, they’ve got good industry structure, quality management teams that are delivering in this environment. I think they’re the companies that are going to do well in this sort of environment.

“As such, we’re finding great opportunities with really good quality companies at great prices. That, as a fundamental investor, is really what I get excited about. Find a great quality company with strong balance sheet, really good growth opportunities and an attractive valuation – to us that’s going to be a great investment.”

Mr Taylor says “if I look at the major overweight positions in the Fidelity Australia equity fund, they’re companies like Rio Tinto, Iluka, MAp Airports, Commonwealth Bank, Telstra, Oil Search. And we think all of those companies offer those attributes. They are attractively valued and they have got great dividends as well as a growth profile that comes from that.

“So even in this environment we’re finding great opportunities, great companies at great prices – and as a fundamental investor that’s what we’re really trying to find.  Picking the Australian market up at 10 times earnings with 5% dividend yield is a really good long-term investment opportunity.”

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