Paul Taylor
Investors in the Australian share market should expect returns closer to its long-term average of 12 per cent rather than the 20 per cent plus returns seen in recent years, according to Fidelity head of Australian equities Paul Taylor.
Taylor said that although economic data indicates a US recession could be imminent, strong fundamentals mean the Australian share market should perform well for at least the next decade.
He stressed that strong population growth, thanks to more births and immigration, an excellent natural resource base, good quality companies with strong corporate governance and a culture of high dividend payouts that requires companies to be efficient with their capital have made the Australian share market one of the world’s best performers over the past 100 years and continue to drive it.
“So, over the next 10 years or so investors can expect a nominal return that bounces around the longer-term average of about 12 per cent.”
According to Taylor, the biggest risk to the Australian economy would be if China experiences an economic downturn while the US economy is still struggling.
He said that while a recession in the US would negatively impact the Australian economy, he does not believe the US is as dominant in terms of global growth as it once was.
Still, he acknowledged that the sub-prime crisis highlighted how interconnected we are today, with poor lending practices in the US sending shockwaves around the world.
According to Taylor, investors would be well advised to focus on stocks with strong fundamentals.
“When risk is repriced upwards, the impact on stocks can be significant and happen quickly. These fundamentals, at the company level where I approach investing, are the quality of balance sheets, the strength of management, a company’s position within an industry and the outlook for that industry.
“If you own poor quality stocks, especially ones with low liquidity, you can get caught out in these situations.”
Taylor said he expected earnings growth to remain “reasonable” (around the high single-digit percentage rates) going forward with good dividend yields.
“I expect the economic environment in Australia to remain good even if interest rates continue to rise. Unemployment is low, we have tax cuts coming through, spending on infrastructure is rising and high commodity prices are likely to support mining companies.
“We are likely to see a compression across sectors … but you will see more dispersion in individual companies. I think there will be a greater opportunity at a stock level to pick the quality companies.”
