Zurich investment specialist Angus Crennan said while the Australian ASX 50 index returned 22.1 per cent over 2013 and Zurich’s Small Companies Index declined by 0.76 per cent, this performance lag in small companies will normalise in time.
“Active private equity exits and high profile government privatisations, along with companies looking to raise fresh equity for expansion, should provide advisers and clients with multiple opportunities to unwind excessively defensive portfolio positions and put money back into the market,” said Mr Crennan.
According to Mr Crennan, the economy is still in a transition between the resources investment boom and a volume boom.
He said, while improvement in the domestic economy remains sub-par, a lower Australian dollar along with the uptick in traditional domestic drivers like residential construction and retail consumption was helping to generate growth.
Mr Crennan said earnings downgrades and continued reductions in mining capex spend saw this sector of the market suffer in 2013.
“In 2014 and beyond, this may be partly alleviated by the Abbott government’s infrastructure investment plans as well as the further $180 billion LNG projects still on the drawing board,” he said.
While yield curves will remain depressed in 2014, Mr Crennan said he expects some normalisation over 2014.
He also said Australian bank valuations were likely to remain firm as investors hold on to their franked dividends.
“Guidance from the banks has been reasonable, although an environment of low bad loan provisioning should be noted,” he said.
“From here, investors may also be disappointed with the level of future dividend growth as the regulator pushes for more earnings to be withheld in reserves.”
Mr Crennan believes AREITs still offer fair value, with attractive dividend yields and reasonable earnings growth.
He said earnings growth is expected to sit between three and four per cent, despite subdued leasing conditions in retail and office markets.
Falling interest and corporate costs will likely benefit many trusts, according to Mr Crennan.
“A recovery in residential real estate and stocks with exposure to funds management and development activities are our preferred exposures given they should continue to grow earnings at above-sector levels,” he said.
He also noted that domestic superannuation funds, sovereign wealth funds, wholesale funds and AREITS continue to show strong demand.
