In a recent investment outlook – Prepare for more volatility: navigating investment markets in 2016 – AB said one of the ramifications of volatility is the creation of fear in the market, causing valuations to “vary widely”.
As a result, AB argued that Australian investors will need to simultaneously identify sectors that both protect against and benefit from volatility.
“From the point of view of protecting against volatility, we regard healthcare as positive, given that Australia has some world-class healthcare companies which are well established in their markets, locally and globally,” AB stated.
In terms of infrastructure, AB said lightly regulated sectors like transport infrastructure, airports and roads are favourable over highly regulated sectors like energy.
AB chief investment officer, Australian equities, Roy Maslen also warned investors to avoid “value traps”.
Although there has been a significant fall in the share prices of mining companies, AB said it is "wary" of the resources sector.
“Our main concern is China. Even though our outlook for the country is more balanced and less pessimistic than consensus, our expectations of a cyclical recovery in the country’s demand for commodities are modest at best,” Mr Maslen said.
“This is because China’s economic rebalancing could lead to a structural decline in such demand in future.”
AB also pointed out that while many investors see consumer staples as a defensive, the sector is likely to face increasing competition and disruption.
“Investors who are not constrained to limiting their portfolios to the Australian market may consider as an alternative blue-chip consumer staples in Europe and the US,” AB said.
AB reiterated the likelihood of volatility in 2016, indicating that the Australian equity market has in fact been below its historical average for 80 per cent of the last three years.
“For this reason alone, it’s reasonable to assume a return to more normal levels, or higher, in future.
“With more volatility likely, the focus stays firmly on an active, research-driven approach to investment,” AB said.
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