Modest earnings growth expected for Aussie equities

Australian equities are expected to benefit from an improvement in the global economic outlook in 2020 as geo-political headwinds decrease, according to Franklin Templeton.

Alastair Hunter, Franklin Templeton’s chief investment officer, balanced equity management, said that geo-political events were in the past year at its most significant and going forward we could expect a substantive resolution of the two key uncertainties, Brexit and the US-China trade war.

“We think Australian equities will benefit from the resulting improvements in the geo-political outlook, particularly on the commodity front. However, the US presidential election remains a potential source of ongoing financial market volatility in 2020,” he said.

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From an economic perspective, Hunter said the capacity for fiscal stimulus in Australia was much different from it what we saw in other countries. Further to that, Franklin Templeton said it would expect a sustained period of low inflation, low economic growth and low interest rates in 2020 and this should, according to the firm, result in modest earnings for domestically exposed companies.

From a sectoral perspective, consumer-exposed stocks were likely to remain a weak spot, driven by subdued consumer confidence and repayment of debt, taking priority over discretionary spending, the firm said.

At the same time, for corporate credit, Franklin Templeton expected a declining profit cycle and a natural slowdown, albeit cushioned by very low rates and a lack of meaningful alternatives for debt investors.

Andrew Canobi, director, Australian fixed income, Franklin Templeton said: “In our view, while fundamentals had weakened, some technical strength to demand remains”.

“For high yield and riskier sectors, we are more cautious where cyclical pressures are more likely to impact performance, even as the search for yield remains strong,” he said.

“Our focus will remain on thorough and rigorous research analysis to help identify the real winners from the losers in 2020.”

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