When looking at Australian stocks to determine their investment prospects, today and tomorrow, it is also important to look at how they are being impacted by shifts within the Australian and global economies.
“We think we’re picking up a lot of good companies that are being negatively cyclically impacted,” said Paul Taylor, head of Australian Equities at Fidelity Worldwide Investment and Manager of the Fidelity Australian Equities Fund.
Mr Taylor said today: “There is some confusion in the market about what is being caused by Reserve Bank of Australia interest rate settings (and resultant high A$) and what is being caused by larger structural shifts.
“Bricks and mortar retailers, for example, are facing structural headwinds that have more to do with changes in consumer preferences, focus on value for money and channels to market and have very little to do with interest rate policy.
“The significant structural headwinds facing large parts of the automotive sector, aluminium smelting, steel and media will be there for a prolonged period regardless of interest rates.”
He said: “Over the long-term there are still very good companies that we think should return to normal profitability levels and we’re picking several up very cheaply and see strong earnings growth over the next three years.
“In contrast, when a company is in structural decline, it is a lot more difficult to work out what is the right price, because how far those structural declines go is very, very difficult to work out, whereas a cyclical decline is much easier to value and work out where and when you think the company becomes good value.”
He noted changes are being prompted by technology, such as online developments and shale gas recovery. There were also major changes underway in the retail, health care, insurance and media sectors.
Mr Taylor manages $2.2 billion in the Fidelity Australian Equities Fund, which has outperformed the S&P/ ASX 200 benchmark by 4.9%, 3.1% and 3.8% net over the one, three and five years respectively to 30 September). The fund has consistently outperformed the benchmark since its inception in 2003 (13.5% return versus the benchmark’s 8.8%).
He suggested that while macro issues, such as global sovereign debt, and politics would drive markets in the short- and medium-term, investors also needed to look at individual company fundamentals. “How we’ve managed to outperform over the last nine years, I think is from not spending time focusing on the macro, but by being a bottom-up stock selector.
“What you see from the macro is a lot of volatility. The market goes up for a couple of weeks, then it goes down. But if you actually focus on which companies are gaining market share, what their balance sheet looks like, the quality of their management team, their strategy. We think all of those factors are important all the time, but incredibly important in this sort of volatile environment.”
He added: “Just understanding an Australian company doesn’t really get you to where you need. Australia’s a small, open economy. So a lot of the time, with Australian companies, their sales could be offshore, they could have domestic sales, they could have international sales… even if they are domestic-based, their competitors could be international companies. Their suppliers or customers could be international. And these offshore influences can have a great impact on how they perform: you need to understand those factors.”
Overall: “I’m looking for yield and growth. I think in a low-growth world, companies that can deliver good and sustainable yields will be bid up by the markets because that’s obviously very attractive.”
“There are still opportunities for Australian investors to generate income and returns. You’ll still get volatility issues from European sovereign debt issues, US fiscal cliff or China slowing, but at the end of the day, there’s great value, there are strong cash flows, and there are pretty strong balance sheets, which is why we focus on company fundamentals. We think at the end of the day, that’s what’ll drive markets.
“At present, whether a company is a good quality company, low quality company, high growth, low growth; pretty much all companies are trading around very similar ranges. We think there should be differentiation, there should be discernment in the market – and there will be at some stage – and that’s where we see opportunities.
“We think we’re picking up a lot of good companies that are negatively cyclically impacted, but over the long-term are still very good companies and we think they should return to normal profitability levels.”
