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Volatile times: What to tell your clients about the stock market

The Australian stock market is likely to remain in volatile territory over the coming months - but there are some tried and true ways to ensure good returns on your investment. Wealth Professional's Donna Sawyer speaks to Kate Howitt of Fidelity for her top tips on what makes the ideal stock.

Video transcript below:

Donna Sawyer, Wealth Professional
Donna Sawyer:
 Kate Howard of Fidelity, thanks for joining me.  You take a bottom up approach to choosing stocks, why is that?

Kate Howard, Fidelity
Kate Howard:  In our experience, if you base your investment decisions on your projections of how the macro economic situation is going to play out, it’s a very unrealiable source of alpha.  Those prognostications are extraordinarily difficult to get right, time after time after time.  So we find this much more reliable to generate alpha for our clients, by focusing on where we have a bit more of an edge and that’s understanding the economics of specific businesses and understanding how the world might play out for individual stocks, that’s what we are better at and that’s where we can generate high returns.
 
Donna Sawyer:  Due diligence is a huge part of the equation when investing in equities, what makes your ideal stock?
 
Kate Howard:  There are a lot of different ways that you can make money in the stock market, but one of the more reliable ways is to find companies that are going to grow their value over time.  Now through the medium and long term, companies can only sustainably grow at a rate that equals their return on equity.  So if companies are low returning, the only way they are going to be able to grow is by also growing their balance sheet and then it has a lot of risk and then maybe dilution.  So if you can find a company that has a high return and some low risk ways to reinvest that return, then that’s a good starting point and then we would also like to do our due diligence around management and the quality of the balance sheet, the industry dynamics and the company’s position within that industry to get some conviction of that growth potential going forward.
 
Donna Sawyer:  You have mentioned Seek, Navitas and Domino’s as being your ideal stocks, why is that?
 
Kate Howard:  Because the common characteristics that those stocks shares is that they have had that combination of high returns and then high re-investment capability, the ability to re-invest at a low risk rate to grow the returns over time.  And what you see is that stocks like that can really compound their value over time.
 
Donna Sawyer:  We have just had reporting season, which sectors outperformed?
 
Kate Howard:  We saw a bit of a relief rally for some of the cyclicals where expectations were very low.  Conversely some of the defensive stocks we saw that just delivering in line wasn’t enough for those to sustain their price levels.
 
Donna Sawyer:  Kate can you tell me the outlook for the Australian market over the next six months?
 
Kate Howard:  Well really there is a number of factors that impact there.  The only thing we can say with certainty is that there is going to be more volatility.  On the one hand we have got the impact of recent stimulatory measures on to [Littles Prices] and that’s obviously buoyant for our market, but then we have got some slowing in global growth rate and that’s going to be a bit of a drag on fundamentals for most stock markets around the world.
 
Donna Sawyer:  Kate Howard of Fidelity, thanks for joining me.
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