Speaking on a recent episode of the Relative Return podcast, Adam Alexander, portfolio manager of Australian equities at Schroders, reflected on the challenging landscape for Australian equities over the past year, particularly in comparison to their US counterparts. Mr Alexander attributed the market’s struggle to a distinctive composition, emphasising the absence of influential large-cap technology stocks that have buoyed the US market.
“Our market has really lagged behind the US market and part of the reason for that is just we don’t have the same composition of our markets the US does. The US is being really held up by a lot of those big cap large technology stocks [such as] Apple, Microsoft, Alphabet and stocks like that,” Mr Alexander explained.
“We don’t really have that in the Australian market. [We’re] definitely more dominated by banks and resources and those two sectors of the market have lagged. If we look at banks, they are a bit dependent on what we think about the housing cycle and the consumers and their ability to repay mortgages”.
But despite housing prices holding up surprisingly well, he said uncertainties linger around the sustainability of this trend.
“There’s still that expectation that at some point the consumer will crack and will, particularly on the discretionary retail side, start to let down, whether or not that starts to see bank delinquencies start to move up a little bit. And in that regard it’s made it harder to invest in the Australian market because we just don’t have a number of those sort of big global companies that are really being driven by technology at the moment,” Mr Alexander said.
Investing in Australian equities does offer distinct advantages, however.
“Locally we’re a much higher yielding market, so probably a little bit lower growth. You do get a higher level of income in our market, particularly at the moment around the banks and resources,” he said.
The proximity to invested companies also provides a unique understanding of their operations, driving factors, and management teams, which ultimately influence share prices.
“When you’ve got local companies, they’ve got local operations. A lot of the analysis can involve actually going to their sites, having a look at their operations, meeting management teams,” Mr Alexander said.
This hands-on approach, from supermarkets to lithium mines, allows for a comprehensive assessment of companies and their potential for value creation.
“You certainly learn a lot, you kick the tires, and you can see how management teams bring these projects to life and then watch them sort of create value over a period of time to benefit us as shareholders,” Mr Alexander explained.
Looking ahead, he assessed that the next six to twelve months will be pivotal, with the hope that easing inflation and stabilising rates will bring the focus back to fundamentals.
“If we can start to cycle over some of these higher prices, get inflation down, get the expectation of rising rates sort of out of the market, then I think we head back to sort of fundamentals and the companies that we want to be invested in, then are those that have got their future in their hands,” Mr Alexander said.
“So, over the next shorter term, I think into Christmas will be a good lead indicator on how the consumer is going and then beyond that, if we’re at peak rates, then the outlook starts to, I think, look a little bit better from where we’ve been”.
To hear more from Mr Alexander, click here.
