Investors Can't Agree Whether to Stick With Australian Stocks

(Bloomberg) -- Investors are at odds on whether it’s a good time to stick with Australian stocks. Aberdeen Standard Investments is betting on the nation’s equities to outperform bonds in the coming years despite rising volatility. JPMorgan Asset Management is less convinced.

Stocks remain Aberdeen’s pick over bonds in its Australian multi-asset portfolio on improving return expectations, boosted by dividend payments. The firm, which oversees $736 billion in assets, currently invests about 20 percent of its Australian multi-asset portfolio in local equities and less than 5 percent in bonds, said Josh Hall, senior investment specialist.

“We still typically have a preference of Australian equities as they continue to deliver relatively high and predictable dividend streams underpinned by the backdrop of continued steady economic growth in the Australian economy,” Hall said.

Stocks have tumbled as much as 8.5 percent this year to touch two-year lows and are poised for their worst performance since 2011. Even so, the asset class has rewarded investors with an annual 11 percent return since 2008 as an economy that has managed to avoid a recession for 27 years, a red-hot property market and China’s demand for commodities have helped boost equity returns. That trumps the 4.4 percent netted by bonds during a multi-decade bull run driven by investors chasing yield and shelter from global trade tensions.

JPMorgan is less optimistic. The $1.7 trillion fund manager is trimming its stocks exposure, betting that the difference between bond and equity returns will shrink.

“It’s a case of caution and resiliency in portfolios rather than thinking that equities will roll over in 2019,” said Kerry Craig, Melbourne-based global market strategist at JPMorgan. “I would expect to see small but positive returns from the Australian equity market in the coming year, but driven by income more than capital appreciation.”

Future stocks performance may be weighed down by a government inquiry into financial industry misconduct, known as a Royal Commission, which has uncovered wrongdoings by banks stemming from greed. Banks -- which number among the biggest listed companies Down Under and have the largest weighting on the benchmark index -- may face further scrutiny which will weigh on future performance, according to Craig.

JPMorgan also prefers global equities to the South-Pacific nation’s as risks of slowing China growth and an upcoming Australian federal election dim the appeal of local stocks, Craig said.

“Love, like and loathe are the stages of equity ownership -- we don’t yet loathe the equity market, but prefer the international markets, and mainly the U.S., over the Australian market given the risk to growth and earnings,” he said.

This isn’t the first time strategists have had conflicting views. Last month, Morgan Stanley and Citigroup Inc. were at odds on their 2019 outlook for the Australian stock market, each predicting a starkly different view: Morgan Stanley downgraded the market to underweight citing valuations, slower economic growth and negative earnings revisions while Citigroup saw the prospect for “promising” returns.

Resilient Market

BNP Paribas Asset Management also remains bullish on Australia’s equities. The firm expects stocks to post “mid-to-single digit growth” going forward, said Arthur Kwong, head of Asia-Pacific equities in Hong Kong.

“On balance, Australia is a fairly resilient market and not subject to major economic events or external shocks,” he said. “The overview on the equity market is positive.”

Aberdeen prefers to hunt for income in higher-yielding bond markets outside of Australia, Hall said. The fund is typically underweight developed-market bonds and investment-grade credit.

“We have a preference for higher-yielding bond markets such as various emerging-market debt markets where we believe the risk-return proposition is superior,” he said.

--With assistance from Matt Turner.

To contact the reporters on this story: Ruth Carson in Singapore at rliew6@bloomberg.net;Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Andreea Papuc, Divya Balji

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