Some of the best times to buy are when you don’t feel like buying, says fund manager Fidelity Worldwide Investment.
When you compare asset classes, Australian equities are looking better than many other allocations, says Kate Howitt, Fidelity Australian Equities Portfolio Manager.
She says bank deposits provide around a 5% yield pre-tax and with no capital growth to help offset inflation. And if the Reserve Bank cuts interest rates again to protect growth that could see deposit rates weaken further.
Bond yields are too low and there is still a risk of capital loss when you look at previous periods when bond yields have been this low. And the local bond market is lamentably thin.
Property net yields may be positive, but are often still too low and also require significant capital gains to offset inflation. The Reserve Bank is unlikely to do anything that will boost property prices, rather it seeks a gradual decline in real residential property values.
“This leaves equities, but why would anyone want to buy stocks when the world economic outlook is so grim? Stepping back from the headlines, we see that the Australian stock market offers close to a 5% yield with solid blue-chip stocks offering higher income flows.
“The Australian equity market as a whole offers over a 5% market dividend yield. This is above the 10 year bond rate of less than 4%. If you invest in shares of the four major banks and Telstra that dividend yield rises to 8.4%, franked for tax, coupled with the opportunity for capital growth to assist with inflation.
“Also, the market offers good value, with price-earnings ratio (P/E) down to 11.5x and close to its lowest levels since the global financial crisis and before that 1989-90. Australian companies are in healthy shape and their stocks priced at attractive valuations.
“As always there is a risk to earnings and P/Es may turn out not to be as low as they seem, and of course there are risks in the external environment that could have an impact on shares prices near term. But if your time horizon is for a longer period, for example if you are building up assets for a future retirement, and you average into the market over time then you do not need to be as concerned about the near-term risks.
As Warren Buffett reminds us, for those with a longer horizon, weak markets are a positive because they allow a cheaper entry point.”
Ms Howitt said “while top-down macro economic risks are unusually high, it is even more important to think bottom-up when selecting equities.
“If you’re bearish, own good yield with solid prospects.
“If you’re bullish, own good prospects with solid yields.”
Ms Howitt adds “in 2008, investors experienced the downside of holding equities. Now the stock market offers good valuations, good yield income and the potential to reflect reflationary policy moves. These factors suggest that at some point in 2012 we may experience something more similar to the rebound of 2009 than the directionless 2010 and 2011. So the biggest gamble of all this year might be not holding equities.
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product. The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.
