By Paul Taylor, Head of Australian Equities & Portfolio Manager, Fidelity Australian Equities Fund
Australian equities have again shown considerable resilience to domestic and global headwinds in 2017/18. The ASX 200 Accumulation Index rose 13.3% during the 12-month period ended June 2018, against the backdrop of rising US interest rates and subdued economic and company earnings growth, geopolitical tensions and increasing protectionism and government interventions. This resilience was a result of still attractive dividend yields, low single digit earnings growth and valuation multiple expansion.
Meanwhile, Australia’s current economic environment remains largely supportive. Despite headwinds from weaker housing prices and its wealth effect, the country is seeing a steady growth in GDP, supported by an increase in government spending and consumption. More recently, investments in the non-mining sectors seems to be picking up. In addition, unemployment levels have remained low as employment growth has been very strong.
The longer term structural rebalancing of the economy continues to gather pace with the composition of growth shifting away from goods and towards services. As a result, the share of services (both business and consumer) in consumption, production, employment and exports continues to rise. In this regard, the theme of China moving away from infrastructure investment towards domestic consumption is likely to benefit Australia’s tourism and education services sectors.
Looking ahead, we think Australian corporates remain in a strong position with quality balance sheets and good underpinning fundamentals. The stock market has been the best-performing market in the world over the long term, driven by strong population growth, excellent and low-cost natural resource base, strong corporate governance environment, high dividend yields and high real dividend growth. These key fundamentals should continue to drive Australian equities in 2018/19 and beyond.
