2013 Australian Equity Market Landscape
As we turn from 2012 to 2013, investors and analysts alike look to see where the next green shoots will arise within the marketplace. For Australian equity investors, the winning trade has been to buy yield, as has been covered extensively throughout the year. The defensive-yield trend appears to have been a key driver of Australian performance in 2012, topping earnings growth. Property stocks have fully participated in the yield based renaissance too. But the lynchpin to the upcoming performance of the equity markets may just lie in the performance for the Australian dollar.
A big contributor to 2013 performance will be the mining sector’s spending habits. The Credit Suisse analyst team highlighted in their Global Equity Strategy 2013 Outlook report recently, “Over the past year, around 65% of GDP growth has come from mining capex, but there are signs that mining capex will peak over the next year. Projects under consideration have been cut by around 30% and tend to lead mining capex by 12 to 18 months.” Couple this with the fact that a significant gap has opened up between the level of mining capex and the sector’s pre-tax profits, which have started to fall, and you can see the problem with the dependency on declining capital expenditures of the mining sector.
The analyst community likes to examine prior performance to gauge expectations for upcoming performance. So we reviewed a bevy of year-end reports from numerous analysts to get a sense as to any consensus on past 2012 performance drivers. According to UBS analyst David Cassidy, “Australia’s outperformance versus global equities is interesting in the context of the poor 2012 performance of our large Resources sector and the continued upward grind in the Australian dollar. Australia’s aggregate earnings performance in terms of both consensus estimate revisions and delivered CY12 growth was worse than for global equities, with the Resources sector the key drag.” Yet, we know there are, however, plenty of other pockets of opportunity, and some smart money investors are looking to ‘operational excellence’ stocks going forward.
Portfolio manager Andrew Fleming, of the Schroder Australian Equity Fund, recently commented, “Much focus on the Australian equity markets should be on price makers and management teams showing an ability to generate productivity gains, called the operational excellence candidates. Many of the companies deemed to be doing a good job on this front have significant operations in the Northern Hemisphere. Many domestic industrial stocks, such as manufacturers, telcos and retailers have started down the productivity path.” One of Australia’s prominent sectors, Resource stocks, has only recently started to concern themselves with such matters, but is quickly making their market power felt.
It is a widely-held view that Australia’s growth in the medium-term is inextricably tied to that of China. With more encouraging signs coming from the Chinese economy, house prices continuing to hold up and a new leadership team confirmed in mid-November, taking over in March next year, the outlook for Australia in relation to Chinese growth appears to have turned more positive.
Lastly, to tie back into my statement from the opening paragraph, all of these points could be overshadowed by the performance of the Australian dollar. If the Australian dollar were to fall, as many expect it to, growth would be boosted, but it would be a negative for domestic Australia as purchasing power is eroded due to the weaker currency. It would also lead to losses for investors holding Australian assets. As a consequence, some prefer to be underweight exposure to the domestic exposed stocks, in retailing and banks, in particular.
A review of Thomson Reuters proprietary institutional flow data indicates that in January of last year, Growth-oriented investors were the most dominant market participants in supporting ASX 200 stocks. Conversely, Core Value investors, including the likes of Perpetual Investments and Capital World Investors, led the supply-side of the ledger, accounting for roughly 45% of the sales among ASX 200 stocks. This was after a year (2011) in which the ASX 200 Index fell 14.5%. Thus, one would expect that with the index’s 2012 yearly performance of a 14.6% advance, a reversal of the aforementioned trend is likely to play out.