Doubts about China have failed to “hammer” the relative performance of the S&P/ASX200 accumulation index during 2013, said Ms Howitt, who is the portfolio manager of Fidelity’s Australian Opportunities Fund.
“It’s risen almost at the same pace of the S&P500 since 31 December, having only underperformed the US benchmark for those few months after April when news from China was bleaker,” she said.
There are several forces acting for Australian equities that “may well see them generate decent returns in the coming years, especially against alternative asset classes”, said Ms Howitt.
First, any China-induced slowing in Australia’s economic growth will be partially self-stabilising, as non-mining sectors benefit from lower interest rates and a lower dollar, she said.
The second argument is the age-old tax-effective dividend yield argument for Australian equities, which will be bolstered as the superannuation system matures and retirees increasingly demand income-producing assets, said Ms Howitt.
Another argument for Australian companies is the fact they have become much better managers of capital since the introduction of the franking credit system in 1987, she said.
“You had several decades of managers having this incentive to pay out a lot of their spare cash flow rather than reinvest it,” said Ms Howitt.
Because they have had a smaller portion of money available to invest, Australian companies have been frugal and only targeted “really good” projects, she said.
“And when you get management teams doing that across the economy for decades, then they’re investing in high grade projects … and you’ve got good quality businesses,” said Ms Howitt.
Australian companies have also learned their lesson from foreign takeover disasters – NAB’s US$1.7 billion play for US lender Homeside in 1997 and Crown’s disastrous $747 million purchase of three US casinos springs to mind – so they now prefer organic growth, she said.
Offshore takeovers are a one-off, upfront expenditure of capital whereas organic growth allows companies to dial up or dial down their exposure, said Ms Howitt.
“The drop in overseas takeovers is even more startling when you consider that a high Australian dollar over that time made acquisitions more compelling,” she added.
A final reason to be optimistic about Australian equities in the event of a China slowdown is the hunger for direct foreign investment in Australian property among high net wealth Chinese, said Ms Howitt.
The boost to property prices by such investment inevitably has a knock-on effect in the Australian economy, given that 60 per cent of our wealth is tied up in bricks and mortar, she said.
“The reality is that if [a slowdown in Chinese fixed asset investment] plays out, then you will see a lot of wealthy Chinese households looking for somewhere to put their money overseas – and you have to think that we would benefit from that,” said Ms Howitt.
