Australian equities have good return potential

Australian equities are quite cheap at the moment, but the return potential is particularly high going forward, according to Fidelity Worldwide Investment.

Speaking at a media briefing yesterday, Fidelity portfolio manager Kate Howitt said that global stocks are not looking particularly attractive at the moment, but the market dividend yield for Australian equities is currently sitting around 5 per cent.

While Howitt concedes that the price to earnings ratio for Australian equities is the lowest ratio since the early 1990s, she said bonds and term deposits are only short-term solutions to building strong retirement savings.

"Bonds have been quite low, so the risk there is that the yield you're getting on the bond is not going to get you where you need to go," she said.

"The return rate for term deposits in Australia is around 5 per cent pre-tax, but there is no capital growth to help you offset inflation."

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The four major issues looming over most markets are the events in Europe, the US, China and the rise of the Australian dollar, said Howitt.

On a positive note, she believes the boost to liquidity in both Europe and the US is likely to strengthen the Australian equities market, while global markets are unlikely to find themselves in the grip of a major downturn in confidence and activity if Greece were to pull out of the euro zone.

In regards to China, she said that while China has been investing sub-optimally for a number of decades, the growth in infrastructure projects is providing significant scope for investment.

"Our market is cheap but none of us feel like jumping in to buy," Howitt said.