The Australian equity market will survive the next year largely intact because although earnings growth will be no more than 5 per cent for most stocks, interest rates will not rise.
BT Investment Management's head of equities, Crispin Murray, says returns will be guided by earnings growth of 4 per cent to 5 per cent and the market's rating or price-to-earnings multiple staying flat.
"History says that low interest rates mean markets trade at high multiples and that's where we are today. We don't expect a dramatic shift in interest rates in Australia, a personal view is that rates will stay flat for the next 12 months and therefore we believe the rating can hold," he said on Friday at BTIM's annual meeting in Sydney. BTIM has $13 billion in Australian equities.
For Telstra, Commonwealth Bank of Australia, Wesfarmers and Brambles, "on average, these companies delivered zero EPS (earnings per share) growth in financial year '16 and that just tells you how tough the environment is for corporate Australia," Mr Murray said.
"Earnings growth in the current financial year will actually be quite strong, driven by resources, but the rest of the market still remains low single digit."
Among the fund manager's key positions are Caltex, Qantas, BHP, Amcor, Metcash, Resmed and ANZ.
"We've seen continued corporate disruption, we've seen the effect of Aldi on the retail sector, there's a lot of chat about Amazon coming in. The effects of NBN have been material, so this is very much a dramatically changing environment and as investors we have to be agile."
'Dramatic shift'
The outperformance of industrials and banks was evidence that three years of dominance from the bond proxies such as real estate investment trusts and infrastructure is "coming to an end". "That's a dramatic shift in the direction of what performs in this market."
Mr Murray described TPG as a "very good" telco that the market misread by giving it a high rating at a time when earnings growth was grinding lower. "At the very time that growth was slowing, the equity market was putting this stock at its biggest ever premium valuation," he said.
The situation ANZ finds itself in is the opposite of TPG, he said, because the momentum money is not behind the stock and expectations have been levelled. He favours the outlook for bad debts and the management team's focus on costs and better capital allocation to higher-return retail businesses away from low-return institutional business.
"What went wrong at ANZ? It was the wrong strategy at the wrong time. The move into Asia, it made sense at one point in the cycle but in recent years it's been a far more challenging environment."
Increased regulation and a deterioration in the cycle became a burden on returns. But that created an opportunity, the fund manager argues. "The double discount, re-based earnings, low valuation. And that's what attracts us, that's what makes us have a look."
He also described Metcash as fulfilling the "self-help" story, and BHP as being "is in a good spot at the moment generating huge amounts of cashflow".
Mr Murray has been at BTIM for 22 years. "If we'd stood here a year ago and talked about the Australian government effectively being in a gridlock, the UK voting to leave the EU and of course the one we all predicted, Trump to win the election, we would have thought 'that person's somewhat eccentric' and the equity market would have probably been down that year.
In fact rolling 12-month returns are up 15 per cent and that is a good reminder that headlines don't drive investment returns but ultimately fundamentals do," he said.
