The end of the ‘easy money era’

Despite low earnings growth, Australian listed company share prices have rallied due to low interest rates. Entering an environment where liquidity is drying up and yield is no longer a differentiator, BT Investment Management’s Head of Equity Strategies, Crispin Murray, believes earnings growth and reliability will be even more crucial.

The combined effects of a sluggish economy and an array of disruptive forces translated into a lacklustre performance for corporate Australia in the June half.    

This reporting season will be looked back on as disappointing; while companies remain focused on returning capital to shareholders, with subdued revenue growth leading to a small fall in earnings with no sectors standing out on the upside.  

Fears of the Chinese slowdown and a premature US rate hike are driving volatility in equity markets globally. Back home, there are concerns the nation will slip into recession as the broader economy struggles to offset the mining slowdown. Reporting season saw growth expectations fall from all parts of the market, with earnings outlooks for FY16 falling from 4.0% to 3.2%.

The global interest rate policies that have supported equities markets for the past four years are shifting. Recognising the super-charged returns of the ‘easy money era’ are coming to an end, the Australian market de-rated, falling back in line with its long-term average. Additionally, the reporting season saw sector performance become less predictable - yields across the market have converged and are no longer a reliable performance differentiator.

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Entering a market that will be driven by stock specifics, it is important to identify the companies that can best adapt to a low growth environment. We have one of the largest Australian Equities teams in the industry researching stocks that can surprise on earnings or have room to improve the quality of earnings. In this environment we look at changing industry structures, capital allocation decisions, cyclical trends, business innovation and those undertaking self-help measures.

A great example of this is Qantas, a stock which has benefited from an improving industry structure as competitors ended capacity wars, management wrangled costs and fuel prices fell. While Qantas’s share price slipped in August, we believe continued cost discipline will see sizeable earnings growth to come.   

Crispin manages the BT Wholesale Focus Australian Share Fund, which has returned 5.38% above the market over the past 12 months*. Visit btim.com.au/enhance to find out more.

*As at 31 August 2015; returns net of fees; past performance is not an indicator of future performance.