Looking through the equity market noise... Where next?

Posted by IFS on August 31, 2015

Short-term volatility... Long-term opportunity

While it is inevitable that short-term volatility and market drawdowns can cause angst for investors, it is not all bad. It is important to remember that with volatility also comes opportunity and this period of weakness has been no exception.

The Australian equity market now looks better value than it has for some time, trading at 14.5 times one year forward earnings. Despite the reasonable valuation, we believe a selective and focused approach remains key to uncovering great opportunities.

In this environment, companies with robust “future yield” characteristics are well placed. Companies like Transurban, Contact Energy and Chorus Ltd all, in our view, have the desired attributes.

As an example, let’s look at Transurban.  We believe it offers one of the most transparent and robust earnings profiles in the Australian market. It has a staggered pipeline of value adding future projects and continues to generate synergies from its acquisition of the Queensland Motorways Ltd. The chart below depicts the “future yield” characteristic that we mentioned above. Despite having a dividend of ~4% in 2015, we expect the company to experience dividend growth for years to come. 

Equity markets have been very volatile over the last couple of months. Driven by an ongoing contraction in China’s manufacturing sector, turbulence in Europe and a falling Australian share market it’s no surprise investors are starting to ask…where to next?
Locally, the fall in the Australian market has been particularly stark, with the ASX200;
• down nearly 1.5% on Friday 21 August;
• down over 4.0% today (at close, 24 August); 
• having fallen 15% since its high in April 2015. 
Share prices of banks, resources and energy companies have been hit hardest. Earnings growth, especially for the banks, has been difficult to come by and falling commodity and energy prices have impacted the ongoing viability of a range of projects.
Transurban dividend yield forecast (cps)
Source: Macquarie forecasts, August 2015. Forward looking assumptions include 100% free cash flow payout which is historical norm, toll inflation and increased traffic volumes.
For the Macquarie High Conviction Fund, Transurban continues to offer a significant medium- and longer-term opportunity, and hence is one of the largest positions currently in the portfolio. It has also proven its worth during the recent market volatility, falling less than half as much as the market in August (as at 24th August 2015).
Looking forward

We expect more volatility in both global and domestic investment markets driven by:
• the timing of the US Federal Reserve’s decision on interest rates;
• European stability;
• questions around Chinese growth; and 
• ongoing weakness in commodity prices, especially iron ore and energy.
But within this noise, we see considerable opportunity. By taking an unconstrained approach and focusing on what matters, we believe that the outlook for an investment in Australian shares remains strong.

If you wish to speak to one of our Brisbane or Gold Coast Financial Advisers to review situation please contact us on 075562 2200

This information has been prepared by Macquarie Investment Management Limited ABN 66 002 867 003, AFSL 237492 ("MIML").The information in this email is provided for general information purposes only and does not take into account the investment objectives, financial situation or needs of any person. 

Future results are impossible to predict. This report includes opinions, estimates and other forward-looking statements, which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. Forward-looking statements constitute our judgement as at the date of preparation of this report and are subject to change without notice.

None of the Macquarie entities noted in this document are authorised deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of Macquarie Bank Limited. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise



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