Perennial cautions against over-negativity

Perennial Value Management has warned investors against over-negativity on the Australian economy as the recent market sell-off will open up new opportunities for patient investors even though the year started with increased share market volatility, continued falling property prices as well as talks around the possibility of the recession in the US and Australia.

On top of that, the December quarter in Australia followed the offshore markets which saw increased levels of uncertainty due to political tensions such as Brexit and the US-China trade war.

However, the outlook for the domestic economy should be more optimistic, as Australia was characterised by more favourable demographics, low government debt levels by global standards and had a AAA credit rating.

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According to Perennial’s portfolio director, Stephen Bruce, all these factors together helped the local economy and the Australian stockmarket P/E was only slightly below the long-term average of 14.0x, with the overall market gross yield of 6.5 per cent remaining compelling compared to tern deposit rates.

“Within the market itself there remains a wide valuation dispersion, with many growth and momentum stocks remaining expensive while many value stocks are trading at cheap levels,” he said.

“History shows that at some point these large valuation dispersions normalise and, when they do, there is the potential for a value style portfolio to deliver significant outperformance,” Mr Bruce said.”

Also, the Australian companies were looking strong, although the global macro environment remained challenging and investors should focus on the investment timeframe would be a critical piece to consider, Perennial’s managing director, John Murray, said.

“In terms of the market more broadly, our forecasts are for continued, moderate earnings growth over the coming year. In addition, corporate Australia has been paying down debt and balance sheets are in very good shape, which provides the flexibility to reinvest for growth, pay healthy dividends and weather any economic headwinds that may arise,” he said.

“Market sell-offs inevitably provide buying opportunities for the more patient investor and I believe that 2019 will provide such opportunities for those looking to build a robust share portfolio for the longer term."

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