Reece Birtles
Martin Currie Australia, part of Franklin Templeton, has released its recent outlook paper on what has shaped the Australian market in 2023 and provide fundamental insight into the Australian equities landscape for 2024.
Reece Birtles, Chief Investment Officer of Martin Currie says “Further resilience in employment may support soft landing thesis established in recent market action”.
He adds, “Forward price -to-earnings ratio (P/E) for Australia is much lower than for global markets”.
In terms of expectations on earnings and dividend growth, Birtle says “Unfortunately, the outlook for dividend growth is dominated by this poor earnings growth outlook, even though Australian company balance sheets are generally strong and payout ratios are modest versus history. As a result, being selective in stock picking for income and growth is as important as ever.
“We expect that higher-quality, more defensive businesses that have pricing power to pass through inflationary impacts into their revenue stream will be better placed to grow dividends in the current environment. We note that inflation-linked mechanisms can often take time to flow through to revenues, so we see that positive impacts of past inflation can benefit returns for some time after inflation does slow.”
Looking at the Australian market, Birtles notes it “remains attractively valued”.
“Compared to the rest of the world, our view is that consensus EPS forecasts for Australian stocks have already digested more of the economic slowing, while global (especially US) EPS forecasts remain at cycle highs. Given the economic outlook of slowing inflation and growth, and the prospect of rate cuts, we expect EPS to be under pressure everywhere in 2024.
“At the same time, the forward Price-to-Earnings (P/E) ratio for Australia is much lower than that for global markets. Therefore, we see better value in the more discounted Australian market. There appears to be a contradiction between the economic growth pessimism of falling bond yields and the optimism of rising equity market P/E ratios.”
Birtles adds, “Within the attractively valued Australian market, we continue to see a wide dispersion between Growth-and Value-style stocks. This valuation dispersion narrowed in 2021-2022 on higher rates, but since the peak rate narrative and excitement around AI kicked off in March 2023, the valuation dispersion has again widened.
“Our view is that the greater the valuation dispersion between typical value stocks and growth stocks, the greater the excess return opportunity for a disciplined valuation investment approach.”
