Local equities look good despite increased volatility
The local equity market looks strong heading into 2019, but investors should expect more volatility than H1 of 2018, according to T. Rowe Price head of Australian equities, Randal Jenneke.
Jenneke said while inflation, rising funding costs and trade tensions were like to be hot topics dominating discussions in August, the outlook for Australian equities remained steadfast.
He said assets like infrastructure and other bond proxy parts of the markets would face their most challenging environment given the low inflation, low growth and low interest rate environment of the last decade had gone.
“This will put upward pressure on the interest rates and downward pressure on bond proxy valuations,” he said.
Jenneke added that this year was a good example of Australian equities generating solid positive returns and outperforming most other global equity markets.
“The fact is that the Australian equities market typically generates good returns, is more stable and less volatile than many other markets, has tax advantages for local investors and provides a good dividend income stream, so in times of heightened risks and market stress, people tend to have more money in Australia than not.”
The FE Analytics chart below shows the performance of the Australian equities sector as compared to its global equity peers for the year to 30 June.
The firm’s head of relationship management, Murray Brewer, said that active management was also critical to generating attractive return potential, and suggested it was time for investors to review their managers and avoid index-huggers.
Jenneke and Lonsec also spoke to capacity and how it affected returns, warning that a higher amount of funds under management would lead to a decay in alpha.
“It is harder to manage more money than it is less,” provided Lonsec.
The research house likened increased capacity to a heavier jockey on a horse: “Eventually there’s a point where the horse can no longer win.”
The chart below shows the performance of the T. Rowe Price Australian Equities Fund, which sat in the second quartile for returns for the six months to 30 June, as compared to the sector average.
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