Australian equities
Quality is the best defence
2008 proved to be an historic year, with the S&P/ASX 300 Accumulation Index falling 18% in the December quarter to record its worst ever calendar year return (-39%) since 1876, when the All Ordinaries began.
All market sectors fell over the quarter but listed property trusts (-33%), consumer discretionary (-25%) and industrials (-21%) were hit the hardest.
These market movements were influenced by a sharp deterioration in global growth prospects for 2009 and the efforts of many companies to reduce balance sheet debt via capital raisings in equity markets. This provided investors with a timely reminder of the risks associated with too much debt.
Except for gold, all commodity indices recorded double digit losses in the quarter. The CRB Commodities Index declined by 28% over the quarter.
The market did show some signs of improvement over December on very light trading volumes. Globally, all the key market indices traded well below their five-year historical average price-to-earnings levels (12 month forward) during the quarter. The Australian sharemarket is currently trading 32% below its historical average.
Poor economic reports continued to filter in, with the US confirming that it is officially in recession. Investors are becoming increasingly confused about what to do next, as such bad news is being offset by investment opportunities that are opening up – many stocks are now trading at valuations not seen for several years.
With 2009 global economic prospects remaining weak, profit margins will remain under pressure in the wake of lower top line revenue growth and sustained costs pressures. In this environment, companies will continue to monitor and contain costs to ensure they are aligned for a weaker economic climate. The Australian sharemarket has been priced for a particularly negative earnings environment in 2009 and some quality stocks have been oversold and represent good buying opportunities for the patient investor.
These quality companies have lower risk profiles as shown by their high degree of earnings certainty and strong balance sheets and we will continue the search for stocks of this type that have attractive valuations. Our Australian share portfolios are positioned conservatively in high quality companies with sustainable business models that have been proven to work in difficult economic times, have low levels of debt and deliver strong cash flows to investors. These low-risk stocks are likely to receive increased attention from investors as they seek to reduce portfolio risk. Many of these stocks are trading at levels not seen for many years and we continue to find good opportunities across a broad range of sectors.
