The Australian stock market’s 1.5 per cent fall in total returns (which includes dividend payments) compared with a 11 per cent fall for the MSCI All-Country World Index, its biggest annual drop since the 2008 financial crisis.
Australia outperformed a string of other developed markets including Hong Kong, UK, Canada, Japan and Switzerland.
Centennial Asset Management principal Matthew Kidman says that while some Australian asset classes (such as housing) had become overvalued, equity markets still look attractive in 2019.
He says the ASX has posted an underwhelming recovery since the global financial crisis (GFC) more than a decade ago, especially when compared with recoveries from previous market crises such as in 1987.
“We haven’t even reached the old high and its 11 years on. It’s appalling. I don’t think we have got out of the bear market from the GFC,” he adds.
But there are reasons to be optimistic, he says, even as the market factors in the prospect of slower global growth. He expects the ASX to finish 2019 higher than where it started.
Companies typically have little debt and valuations are not stretched across a number of major sectors.
“Things are going to be OK,” he says.
The backdrop for stock market valuations in 2019 is supported by expectations that, unlike the US in 2018, the RBA won’t lift rates in 2019 for fear of exacerbating the housing market downturn.
A consensus view might be that as long as the Australian economy can avoid recession the market looks relatively cheap, at least on an historical perspective.
Reasons for optimism
Despite the inevitable landmines (Kathmandu this month, Lend Lease late last year), broking analysts are tipping high single-digit earnings growth for ASX-listed companies for the 2019 financial year.
Beyond the noise of the stock market some seasoned industry watchers are relatively optimistic as well.
Phil Ruthven, founder of research firm IBISWorld, has been studying the industrial make up of the Australian economy since 1971.
He believes the Australian economy will remain resilient thanks to the size of its services sector and its proximity to three of the fastest-growing global economies – China, India and Indonesia.
“They are not going to give up capital expenditure on roads and infrastructure which uses all the minerals that we supply them,” he says.
Brokers such as Deutsche Bank agree by continuing to promote an overweight call on resources on the grounds that China is stimulating its economy against the backdrop of concerns about global growth.
Domestically Ruthven says the prospects for the health sector (the ASX’s best-performing sector in 2018) also remain robust. The ASX offers exposure to the health sector through a variety of sub sectors including private hospitals, pharmacy, insurance, product manufacturers and biotech.
Ruthven notes that the Australian health sector employs 1.6 million workers, more than the country’s retail and manufacturing sectors at their peak. “It can be very competitive and not necessarily easy to make a big profit but it’s a healthy industry in terms of its prospects,” he adds.
Another sector likely to get good traction over the next four or five years is professional and technical services.
“Engineering consultants are going to do quite well because of all the infrastructure growth at [Australian] state level,” says Ruthven.
He says select parts of the telco sector are likely to do well out of the rollout of 5G technology.
In an environment of consumer uncertainty, listed companies are going to have to look to productivity gains to boost earnings.
Kuba Tymula, managing director of digital strategy advisory firm Harris Partners, says that in a country with many oligopolies it is worth watching companies prepared to embrace technology to gain market share.
“Too many companies are talking about it rather than doing it,” he adds.
One exception is CBA which now offers a world-class digital experience for its customers that will create value for the bank, he says.
One of the country’s biggest retail brokers Morgans is telling clients that its high conviction calls for 2019 include waste company Cleanaway, sleep technology firm ResMed, plumbing play Reliance Worldwide, Westpac and copper play Oz Minerals.
“Overall we think the weakness at the tail end of 2018 will prove to be another ‘reality check’ for a market that had run a little ahead of itself, rather than a precursor to something more serious,” the broker says. “The increased volatility in the market as a result of rising macro uncertainty and tighter financial conditions argues for a greater focus on portfolio resilience.”
Another local broker, Wilsons, focuses on industries where it believes Australia has competitive advantages, such as agriculture, financials, healthcare, resources and technology.
Companies which the Wilsons research team like include software solutions player Bravura Solutions, specialist women’s retailer Noni B, KFC franchise holder Collins Foods, medical device steriliser Nanosonics, trustee services provider EQT Holdings and mining and civil contractor NRW Holdings.
However there remain plenty of asset allocators recommending that the best returns are in overseas markets.
Morgan Stanley’s global investment committee favours Japanese, European and emerging markets.
“While markets don’t feel great right now, that makes us more comfortable, not less,” says chief investment officer Michael Wilson. “It’s the opposite of last year when we warned that speculation was appearing in many assets like cryptocurrencies, fine art and wine, trophy properties and high-priced growth stocks.
“While it may still take some time for the rolling bear market that began almost a year ago to play out, we think 95 per cent of the price damage has been completed.”
In the emerging markets, Brazil and India were among a handful of larger stockmarkets to post gains in local currency terms in 2018.
Damien Klassen, head of investments at Nucleus Wealth, argues that Australian investors should hold minimum weights for Australian shares at this point in the cycle.
“We retain relatively large cash and bond balances to hedge against volatility and to look for a cheaper entry point,” he says. “If markets continue to be weak then we will look to buy more international equities. We are concerned about the potential for trade wars or an emerging markets crisis. These will be a key focus for us over the next few months.
“Recent months have been a reminder for investors about the benefit of positioning and of taking profits when markets rise. Markets are still clearly not without risk.”