Australia’s softer economic environment sets the stage for quality companies

According to VanEck’s Head of Investments and Capital Markets, Russel Chesler, investors need to reassess how they are investing in Australian equities as financial conditions are expected to become more restrictive. 

“Inflation in Australia remains stubborn and we expect tomorrow’s release of September’s CPI numbers to reflect the ongoing challenge the RBA’s faces to tame inflation back to its target range of 2 to 3 percent. We are operating in an environment in which inflation is being hit from two sides. First, we have the imported or international effect mainly driven by oil prices. And secondly home-grown cost pressures.

“With inflation still at the high end we believe another rate hike from the RBA this year is on the table,” said Chesler.

In this macroeconomic backdrop Chesler adds that investors need to be selective in how they position their Australian equities exposure.

“Now is not the time to rely on beta. By investing in the S&P/ASX 200, investors are buying a passive benchmark that is market-cap weighted. This can overexpose investors to certain sectors or stocks that make up the highly concentrated index rather than positioning their Australian equities exposure to the factors better placed to support performance in this environment.

“For investors, we think the justification for investing in “quality” businesses, those that can sustain earnings through the cycle, is more compelling now than it has been in years. In our view, investors should be looking for selective exposure to Australian quality companies that demonstrate price stability, strong balance sheets and can withstand earnings pressure. These are the companies that perform well during market downturns,” said Chesler.

VanEck’s Australian Quality Plus ETF (ASX: AQTY) gives investors access to a portfolio of ASX-listed companies selected for their fundamental quality characteristics supported by valuation discipline and lower relative volatility.

AQTY’s quality approach targets companies with strong fundamentals to withstand tougher financial conditions. The companies currently held by AQTY exhibit higher return on equity and dividend yield than the S&P/ASX 200, while trading at a lower price-to-earnings multiple. 

“Relative to the S&P/ASX 200 index, AQTY is currently overweight in consumer staple names including Woolworths and Coles, as well as insurers including QBE and IAG. It is also underweight in materials. For example BHP is 5 per cent underweight compared to the index,” said Chesler.

“A tougher economic outlook demands greater discipline in Australian equities. Investors need to understand exactly what they own and how their allocation is distributed across sectors and individual stocks within the Australian market.

“In our view, a quality approach to Australian equities is key in ensuring consistent long-term performance throughout different market cycles,” said Chesler.