Outlook looking good

The outlook for the Australian equities market over the next 12 to 18 months will continue to provide robust returns for investors, according to research by a recognised fund manager.

Speaking to the media at an Australian Unity Investments outlook report, chief investment officer for Platypus Asset Management Don Williams said that despite predictions of a downturn early next year, “in the midst of this high quality bull market, there are still years and not months of strong growth” to look forward to.

“Most professional investors are surprised at the market’s lack of volatility, especially compared to other bull periods like the one in the 90s. What we will see is a more schizophrenic market that will oscillate between worrying about valuation (due to the expected pressure on interest rates and inflation over the next two years), and celebrating the fact that the earnings numbers are so good,” he said.

According to Williams, the bull market is being supported by a strong earnings environment, investment flows, and the northern hemisphere recently entering a “bull phase”.

“The domestic economy is firing everywhere, both retail and media sectors are showing strong earnings per share over the next 12 months.”

He added that any imbalances will continue to be “modest and largely self-correcting. This has proven consistent over the last three years as investors rotate out of expensive sectors into cheap sectors.”

Despite this positive outlook Williams acknowledged that there were a number of issues to be concerned about, in particular the expected period of disinflation coming to a close.

“At the moment, the core Consumer Price Index (CPI) in Australia is easing back into the Reserve Bank’s 2-3 per cent comfort zone, but it will very likely reassert itself in 2008. The reason for this is the highly synchronised global growth we’re experiencing, which puts pressure on prices, which will put pressure on cash rates and bonds,” Williams said.

“The worst case scenario is a bubble market where we get a blow off with everything becoming too expensive. Unfortunately we do have all the preconditions for that to occur.”

Williams stated that even if a bubble market doesn’t occur, valuation will eventually kill the bull market as stocks get too expensive and other asset classes, such as cash and bonds look more attractive. “In the last 6 months, what you’re paying for a dollar of earnings has gone up over two PE points (more than 10 per cent),” he said.

“But that might be three years off . . . Although valuation is getting harder for equities, it’s not at levels where we would expect a bear market around the corner,” concluded Williams.