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Investment outlook a mix of good and bad

Glenn Freeman  |  20 Jul 2017Text size  Decrease  Increase  |  

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Infrastructure assets in Australia and globally, local healthcare and tourism operators stand out as areas of investment opportunity, even amid a flat outlook for domestic markets, according to Bennelong Funds Management.

 

While he doesn't believe domestic markets will fall off a cliff, Julian Beaumont, investment director, Bennelong Australian Equity Partners, says: "Coming off a reasonable year, in which people weren't particularly optimistic, I think it might turn out okay."

He points to the expectation of "synchronised global growth" for Europe, the US, and Asia in the next few years, "but in Australia, I think we're now getting our come-uppance ... we haven't taken our medicine". Beaumont points particularly to investor risks among consumer cyclical companies.

Notwithstanding some pockets of growth in the tourism and healthcare sectors--the former driven by Asian tourism, the latter by the ageing population increasing demand--he sees the domestic economy as "muddling through".

"Consumer-facing businesses are finding things increasingly difficult. A lot will depend on increased rates, as far as how the market goes," Beaumont says.

He believes the market has been unusually late to look forward, tending towards short-termism in this year's company earnings cycle. He suggests businesses usually begin to forecast their earnings expectations much earlier in the fiscal year than they have in 2017.

"We are at a level where we [as an economy] can probably handle a measure of interest rate rises, though we don't foresee dramatic interest rate rises," Beaumont says.

He believes the outlook from most commentators is "constructive rather than bullish," and notes that many fund managers are currently holding relatively high levels of cash.

The infrastructure opportunity

Greg Goodsell, global equity strategist at listed infrastructure fund manager 4D infrastructure, points to high rates of infrastructure development, with the US and Europe all ramping up infrastructure after decades of under-spending in these areas.

At the same time, Asian economies--including China and India--are growing their infrastructure development as urbanisation programs push forward.

Goodsell believes the current situation creates considerable opportunities for private sector companies, with governments still debt-constrained. In terms of specific opportunities for retail investors, he highlights the two main types of infrastructure assets: user-pays and regulated utilities.

Distributors of water, electricity, or natural gas--such as Origin Energy (ASX: ORG)--are examples of regulated utilities. Electricity network owners Spark Infrastructure (ASX: SKI), AusNet (ASX: AST) and Transurban (ASX: TCL) are locally-based examples of user-pays assets.

He believes the attraction of infrastructure for retail investors is typically the predictability of earnings, and they also tend to be higher-yielding in terms of dividends or distributions.

While the global outlook for infrastructure is quite positive, he says "you can't ignore the geopolitical risks".

Goodsell also refers to the fundamental shift between the traditional global leader, the United States, with Germany and China emerging as the biggest sources of economic power: "This is the biggest shift in global politics since World War II".

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Glenn Freeman is a Morningstar senior editor.

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