Where to look beyond blue chips
Australian investors have favoured blue chip stocks and bond surrogates during the protracted post-GFC market recovery, but other companies now drive growth, says Bennelong's Julian Beaumont.
Australian investors have favoured blue chip stocks and bond surrogates during the protracted post-GFC market recovery, but other companies now drive growth, says Bennelong's Julian Beaumont.
Almost 10 years on from the 2009 nadir of international markets, low volatility driven by central banks have created a long-running goldilocks situation for markets.
"We're in a scenario, still, where the goldilocks situation presents, but we're probably getting hotter there…and really, that comes down to a scenario where this has all been orchestrated by the Fed and the central governments around the world.
In terms of equities, Beaumont says, "we're around about where we've started every year…this is not untoward: rates remain very low at around 2.8 percent, valuations are reasonably attractive, with the market trading at around 16-times, yields of around 14-times gross for the next 12 months, and that's not a bad scenario when you compare other asset classes."
"Coming out of the GFC, investors were scared, and it's taken a little while to get over that 'wall of worry'…investors have really chased what's been safe, including the bond surrogates like Telstra (ASX: TLS) and the banks, and low volatility has helped that investor sentiment," Beaumont says.
Other companies he names in this context are Wesfarmers (ASX: WES) and Woolworths (ASX: WOW).
As sentiment has shifted, he points to a gradual move away from "some of those old, more boring comfortable blue chips" toward companies that "might be a little bit more glamorous: tech stocks, lithium stocks, pre-concept innovation stocks--anything that's disruptive".
While Australia doesn't have a large-scale credit market comparable with the US or Europe--where investors crowded into fixed income investments--Beaumont believes bond surrogates within the equities market played a similar role.
"If you think about the banks and [real estate investment trusts] REITs, it's very much a play on residential property, to a large extent. And they really reduce the PE of the market, taking those sectors away, it trades in the order of 18-times.
"In terms of opportunities, I think one needs to be careful of those safe sectors, in yield sectors, particularly if interest rates decline," Beaumont says--though this isn't Bennelong's base case scenario.
Specific companies he names are Channel 9 (ASX: NEC), Metcash (ASX: MTS), JB Hi-Fi (ASX: JBH) and Domino's (ASX: DMP), "that are actually performing really well, and are some of the best performers, particularly over the end of last year".
Among those pockets of opportunity with more international focus, he points to CSL (ASX: CSL), Aristocrat (ASX: ALL) and Treasury Wine Estates (ASX: TWE) as "strong innovators, strong brands".
"While Australia might not be as prosperous as some overseas markets, there are companies in Australia that really stand for something in terms of brand, innovation and other competitive attributes that really play well into the offshore markets," Beaumont says.
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Glenn Freeman is Morningstar's senior editor.
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