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Many investors think mainly of an emerging markets portfolio when thinking of investing in Asia Pacific (ex-Japan). However, this might be the wrong approach, as the region has more to offer, such as Australia.
Jupiter Asset Management argues that Australia might be the most attractive developed market in the region and maybe the world. “We think the fundamental outlook for Australia remains very positive, yet we believe it is overlooked and is often underrepresented in portfolios; many global and Asian investors dismiss it as a commodity-dependent economy, which we think misses the full picture,” says Jason Pidcock, Investment Manager, Asian Equity Income at Jupiter.
With a gross domestic product (GDP) of around $1.7 tn last year, Australia is the twelfth largest economy in the world. The country has recorded considerable growth over the last twenty years. Between 2001 and 2012 alone, Australia’s GDP more than quadrupled. According to the International Monetary Fund (IMF), this growth could continue. The organisation expects Australia’s GDP to be over $2 tn by 2025.
Jupiter notes that Australia’s demographics significantly bolster its economic prospects. The country enjoys one of the highest population growth rates globally, driven by migration and natural increase. “Migrants to Australia are generally wealthy and/or skilled, meaning that they are often able to contribute to the economy from the moment they move there,” says Pidcock.
Themes for Australia in the investment portfolio
As per Australian fund manager Betashares, the Australian equity market’s dividend yield has consistently been the highest among the world. As of 30 June 2023, the trailing 12-month dividend yield of the S&P/ASX 300 was 4.5%. Higher than Europe (3.4%), Japan (2.3%) and the US (1.6%).
The 2023 Investor Sentiment Report by multinational law firm MinterEllison highlights six sectors that drive Australia’s economy and offer promising incentives to foreign investors: financial services, Energy and resources, Health, Infrastructure, Real Estate, and Agribusiness.
“Despite global economic headwinds, Australia’s investment outlook continues to remain comparatively positive. In‑bound investment remains strong in a number of industry sectors, led by technology being ranked as the most attractive with least risk, followed by financial services, real estate and energy and resources. The least attractive
sector ranked was infrastructure,” the study found.
As per MinterEllison, there are several key drivers for considering Australian technology investments. These include access to innovative startups, opportunities for collaboration with research institutions, government backing for innovation, access to the Asia-Pacific market, and a high-quality workforce.
Jupiter further underlines the promising prospects of domestic demand companies. “Given Australia’s fast-growing population, with a considerable proportion of millionaires, there should continue to be an expanding customer base to whom companies can sell their products and services,” says Pidcock.
Australian equities fund manager IML sees that the tables are turning for small caps, especially industrials. “With Covid having washed through the economy, and the interest rate outlook stabilising, two of the major headwinds over the last few years for small industrials have abated,” a recent insight opines.
“Small cap valuations remain attractive compared to large caps with superior earnings growth forecasts,” the asset manager says. “On an individual stock level there remain plenty of quality small cap industrials trading at attractive valuations.”
