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Excited by the prospect of blockbuster profit results and dividend bonanzas during the August 2017 reporting season? You may need to temper your expectations, according to Julian Beaumont, Investment Director at Bennelong Australian Equity Partners (BAEP).
Against a backdrop of subdued economic growth, Beaumont says the picture for domestic equities - particularly large companies - was less rosy than international markets.
"While there is good evidence of a synchronised global recovery, this is not the case in Australia. It is a continuation of muddling through,” he says.
“We’re seeing that business sentiment is strong but unfortunately words are not resulting in action. This is clearly evident in the lack of business investment and merger and acquisition activity.”
Beaumont predicts it’s unlikely that resources companies would impress as the rally in metals prices since late last year has tapered off, and the market has already priced in cost reduction initiatives in the sector. Accordingly, he says this part of the market appears “fully valued” and Bennelong’s funds currently hold negligible exposure to mining or oil shares.
He expects no dividend growth for banks as the benefits of productivity initiatives made by lenders are likely to be offset by factors such as the bank levy (announced in the 2017 Federal Budget) and fresh capital requirements imposed by the Australian Prudential Regulation Authority.
As for Telstra, Beaumont says the telco’s dividend will likely be unchanged when it announces results on 17 August. But he warns: “Telstra will likely have to deal with whether its dividend is sustainable over the long-term, whether it’s in August this year or next year.”
So where should investors look?
The key for investors is to find companies which are not subject to the whims of external forces such as iron ore and dairy prices. “We want more predictable franchise businesses that can grow earnings and value over time,” Beaumont says.
“The current themes throughout our portfolios include a heavy concentration to ‘all weather’ businesses selling relatively defensive products and services such as hospital services, wine, pizza, and electricity, and a heavy concentration to global businesses with exportable competitive advantages expanding in offshore markets”
Across BAEP’s funds, this view is reflected in significant exposure to companies such as Domino’s Pizza Enterprises, Treasury Wine Estates, BWX, CSL and Ramsay Healthcare. He says there was probability of “upside risk” that some of these companies could top their own earnings projections, and attractive buying opportunities may be presented in those who don’t.
“In the current economic climate, the best opportunities are outside the traditional names,” Beaumont says.