When looking at Australian stocks to determine their investment prospects, today and tomorrow, it's also important to look at how they are being impacted by shifts within the Australian and global economies.
These are the thoughts of Paul Taylor, head of Australian Equities at Fidelity Worldwide Investment.
“We think we’re picking up a lot of good companies that are being negatively cyclically impacted,” he said.
“There is some confusion in the market about what is being caused by Reserve Bank of Australia interest rate settings – and resultant high Australian dollar – and what is being caused by larger structural shifts.”
He added that, traditional bricks and mortar retailers, for example, are facing structural headwinds that have more to do with changes in consumer preferences, focus on value for money and channels to market and have very little to do with interest rate policy.
“The significant structural headwinds facing large parts of the automotive sector, aluminium smelting, steel and media will be there for a prolonged period regardless of interest rates,” said Taylor.
“Over the long term there are still very good companies that we think should return to normal profitability levels, and we’re picking several up very cheaply and see strong earnings growth over the next three years.”
He believes that, in contrast, when a company is in structural decline it’s a lot more difficult to work out what is the right price – because how far those structural declines go extremely difficult to work out.
A cyclical decline, on the other hand, “is much easier to value and work out where and when you think the company becomes good value,” he said.
Taylor noted that changes are being prompted by technology, such as online developments and shale gas recovery. There were also major changes underway in the retail, health care, insurance and media sectors.
While he believes that macro issues, such as global sovereign debt and politics, will drive markets in the short to medium term, it’s important to keep sight of individual company fundamentals.
“How we’ve managed to outperform over the last nine years, I think is from not spending time focusing on the macro, but by being a bottom-up stock selector,” he said.
“What you see from the macro is a lot of volatility. The market goes up for a couple of weeks, then it goes down. But if you actually focus on which companies are gaining market share; what their balance sheet looks like; the quality of their management team; their strategy. We think all of those factors are important all the time, but incredibly important in this sort of volatile environment.”
Taylor believes that there are still opportunities for Australian investors to generate income and returns, but added that we will still experience volatility issues from European sovereign debt issues, the US ‘fiscal cliff’ or China’s slowing growth.
“But at the end of the day, there’s great value, there are strong cash flows, and there are pretty strong balance sheets – which is why we focus on company fundamentals. We think at the end of the day, that’s what’ll drive markets,” he added.