Six reasons to buy the Australian equity market
This year’s sharp bear market and the Federal Government’s unprecedented fiscal response provides an attractive entry point into the Australian equity market. We see six positives for the Australian market:
- Signs of effective containment of COVID-19 in Australia, with the growth in cases slowing from 20-30% per day to below 10%, and recent preventive measures likely to reinforce this positive trend;
- The Reserve Bank’s monetary support and stimulus proving better-than-expected, with effective zero rates and A$27 billion, or 1.4% of GDP, of asset purchases in the first eight days of yield curve control;
- The Federal Government’s unprecedented fiscal support and stimulus totalling ~10.5% of GDP – very likely to significantly outweigh the headwinds from the COVID-19 shock;
- Significantly reduced risk of a major bad debts cycle, as fiscal support curtails the risks of widespread business closures and unemployment;
- The oil price collapse windfall from the Saudi-Russia price war adding about 1% to real GDP; and
- Attractive valuation, even with the bounce of the past week. The dividend yield of 5.3% outstrips bills and 10-year bonds by a record 4.8-5.1%. Price-book value at 1.5 times is 21% below average.
Investment implications: We turn bullish on the Australian equity market, projecting a 6000 target for the ASX 200 on a 12-month view, a total return above 20%. Within our Australian portfolio we are emphasising resilient businesses, those with strong market positions and balance sheets. Select stocks meeting these criteria include financials such as Macquarie Group, IAG and Commonwealth Bank, materials and energy stocks BHP and Woodside Petroleum, and industrials Amcor, Aristocrat Leisure, Goodman Group, James Hardie and Wesfarmers.