Housing slowdown makes experts cautious on Aussie equities
The housing market slowdown and the tightening of credit standards has made experts cautious on Australian equities given the dominance of banks in the benchmark, according to Janus Henderson.
Janus Henderson’s Australian equities portfolio manager, Lee Mickelburough, also noted the banking sector currently had very low levels of bad debts in the sector, but while that’s a positive now, it could mean we would likely see an increase in bad debts next year.
Mickelburough similarly wary of the other dominant sector, mining, due to the slowdown in China.
“Given the headwinds for the banks and miners, which together make up about half of the Australian equity market, we’re looking outside these sectors for other opportunities,” he said.
And, perhaps some Australian broad cap funds have made the move away from financials already.
Data from FE Analytics shows that top-quartile fund, Lincoln Australian Growth, has returned 11.16 per cent for the year to last month’s end, and favours health care, telecom, media and technology, and basic materials over financials.
Another top-quartile fund, DDH Selector Australian Equities, invests primarily in consumer products, followed by telecom, media and technology, industrials, and healthcare.
The portfolio manager pointed to the consumer staples sector as a likely replacement, particularly Woolworths, which he noted hit an “air pocket” in the middle of the year due to a slowdown in sales, but was now “re-accelerating”.
Top-quartile fund, Platypus Australian Equities Trust, which returned 5.76 per cent for the year to last month’s end, holds Woolworths Group in its top holdings (4.92 per cent).
“In our view, it is a very well-managed business, a dominant player in its market, and the balance sheet is very strong,” said Mickelburough. “We also anticipate some capital return at some point in the early new year, so strong cash flows and capital returns are very positive in the context of a cautious backdrop.”
The manager said in a cautious market, he would be looking for bottom-up opportunities with some defensive characteristics. For example packing company, Amcor, had been recently added to the Australian equities portfolio as it was mainly exposed to the consumer goods segment, which was relatively defensive, but also benefited from a strong economy.
The chart below shows the performance of the top-quartile funds mentioned as compared to the S&P ASX 300 for the year to last month’s end.
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