It is certainly a very interesting time to be an investor in the Australian equity market. The recent reporting season has left advisers and investors with a lot to think about particularly from a global macroeconomic standpoint.
Post reporting season state of play
The US-China trade war has continued to make its mark on global investment markets and with both markets likely heading toward a period of significant slowdown, trade talks could be back on the table. The US manufacturing sector has been under a lot of pressure, but the consumer and services sectors have appeared to weather the storm and at this stage a global recession may be avoided.
In Australia, 10-year treasury bonds rallied in September, reflecting a general concern about the outlook for the Australian economy coupled with growing expectations that central banks will have to continue easing monetary policy. This is reflected in historically low interest rates from central banks in most established markets and we are now seeing the real impact on the global economy.
Many retirees and those approaching retirement are looking for income to support this transition and are realising that the yield they are used to from fixed interest and term deposits is falling. As a result, we are seeing many investors looking to equity markets for reliable income streams.
The risk tolerance of such investors is often low, as they primarily look to preserve capital and modestly build income. This has resulted in a significant number of investors seeking yield in more stable companies and industries. Infrastructure, healthcare, property trusts and consumer staples have demonstrated consistent earnings streams this year and are typical areas of investment for this type of investor.
Market challenges and opportunities
One of the big questions in the current macroeconomic landscape is why are the central banks continuing to lower rates? Most commentators are pointing to major concerns about the outlook for economic growth and weakening business and consumer confidence. There has been very low M&A activity in Australian equity markets, with global macroeconomic uncertainty impacting confidence and deterring company boards from undergoing large investments.
However, things aren't all bad. This reporting season has demonstrated that quality companies with good fundamentals and a long growth horizon are the winners in tough times. AFIC has always pursued companies with strong market positions, stable balance sheets and good management. We have a bias toward companies with consistent earnings streams and hold on to those, with a view that volatile markets are often an opportunity to acquire a greater stake in these companies when stocks trade at lower prices.
Gold has been another big winner in this uncertain landscape and over the last 12 months returns from gold stocks have been significant. We know that uncertainty can drive investors into gold, but there are risks in trying to time the market or over-allocating as the downturn for gold can be just as aggressive.
What the current investment market points to is the need for a well-balanced portfolio with strong allocations to quality companies. Diversifying exposure across companies and industries with a history of consistent earnings streams, low debt-to-equity ratios and good management, through a structure like AFIC, can enable investors to participate in a potential market upturn whilst smoothing a lot of the volatility from macroeconomic instability.