Australia: The world’s most attractive developed market?
Jason Pidcock and Sam Konrad explain why they think Australia offers some of the best equity income opportunities in the Asia Pacific region, and arguably, the world.
When many think of investing in Asia Pacific (ex Japan), they often – incorrectly – picture an emerging markets (EM) strategy. However, we believe that taking an EM-only approach can mean missing out on some of the best investment opportunities the region has to offer.
Top-down stock picking
As “top-down stock pickers”, we take into consideration the macroeconomic environment, though we do not try to make economic forecasts. We consider geopolitics, political and legal systems, demographics and business environments, along with other risks a country might face, including environmental risks. This allows us to form opinions on the countries that we will consider investing in, as well as those that we view as too risky, so choose to avoid. Within our preferred countries, we then try to identify the best “quality income” opportunities – those companies that are highly liquid, with strong balance sheets, good governance, solid barriers to entry, and an ability to pay, and grow, dividends.
As a result, the Jupiter Asian Equity Income strategy has significant exposure to developed markets (particularly Australia, Singapore and Taiwan), given a favourable macro backdrop, combined with our ability to identify many highly attractive income and growth opportunities in these markets.
Australia’s strong fundamentals
The country’s demographics are a huge tailwind; its population growth rate is one of the highest in the world given a combination of 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. The median age of the Australian population is also a significant 3-years younger than the OECD average, at 37.9 years; this gap is expected to widen to 5 years by 2050.
Australia is a land of oligopolies – in many sectors you will find a small number of very strong companies with a very high combined market share, which are able to fend off attempts from other companies to break into those oligopolies because they are so well managed. Australia has very few state-owned enterprises (SOEs), and no large listed SOEs. Its companies generally have strong corporate governance, with a high free float meaning that their shares are also highly liquid.
Australia’s retirement savings system, featuring mandatory contributions into the superannuation system, along with strong population growth, is supportive of asset prices, and it provides a rapidly growing pool of retirement savings, which is already the fourth largest in the world. Furthermore, investors there have always had, and continue to have, a strong preference for stocks, with over half of Australian pension fund assets invested in listed equity markets.2
Given that Australia is a fully functioning democracy, with freedom of the press and an independent judiciary, if the government did try to change rules arbitrarily, companies would be able to appeal to the courts. We also believe the country faces lower environmental risks than some of the other countries based in the region.
Attractive – and growing – dividends
Australia is one of the highest-yielding equity markets in the world. As of 30 June 2023, the trailing 12-month dividend yield of the S&P/ASX 300 was 4.5%, which is the highest yield among major developed markets.3
Source: Betashares, Bloomberg, as at June 30 2023. Markets represented in order: S&P/ASX 200, FTSE 100, Euro Stoxx 600, A&P/TSX, Topix, S&P 500
Our strategy’s Australian holdings yield 4.7% versus 4.0% for its “risk-free rate”, or 10-year government bond 4. As well as offering attractive dividends, we are also confident that many Australian companies will be able and willing to grow their dividends over the coming years.
Strong domestic and global demand
We have exposure to several Australian domestic-demand companies, as well as a number of its world-class exporters.
Within the natural resources sector, we hold miners BHP and Newmont (following its acquisition of Newcrest), and energy company Woodside Energy; all of these companies have strong balance sheets and offer attractive dividend yields. Elsewhere, there are several leading financial services companies based in Australia which export their services globally, including Macquarie Group.
In terms of domestic demand, we have exposure via positions in Wesfarmers, Suncorp, Dexus and Transurban Group. These businesses operate in the retail, insurance, property management and toll road sectors. 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.
Holding examples are for illustrative purposes only and are not a recommendation to buy or sell.
2 Source: UBS
3 Back to fundamentals: Squeezing more out of the Australian equity market | Betashares
4 Source: Jupiter & Bloomberg, to 31.01.24
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This document is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.
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