Buoyed by easy monetary policy, Australian stocks have been on a tear for a decade. The Reserve Bank of Australia has cut interest rates no fewer than 15 times since 2011.

This allowed firms to borrow at lower rates to build their businesses. Consequently, investors have backed companies in high-growth sectors such as consumption, health care and technology.

But with Australia’s cash rate at 0.75%, authorities are running out of firepower. Without this buffer, companies whose share prices have run ahead of their earnings potential risk a material correction.

Already we have seen investors rotate out of growth and into companies with tangible assets that appear undervalued. It will be vital to choose firms with real earnings growth to underpin their valuations over those whose prices have re-rated due to cyclical factors such as lower discount rates.

However, global growth is slowing and the domestic economy fragile. High household debt, a near-zero savings rate and low wage growth continue to squeeze Australian consumers. At least surging commodity prices have afforded the government budgetary room to provide fiscal support, such as income tax cuts. That could provide a catalyst to stimulate spending.

Two areas for real growth

We see two areas investors might target for real growth in 2020: 

  1. Companies with non-discretionary offshore earnings; and 
  2. Self-reliant domestic firms that don’t depend on external stimulus.

Examples of the former include Cochlear, CSL and Pro Medicus. Each provides essential health-care products or services and has strong penetration overseas. This points to sustained demand.

For the latter, Monadelphous provides services to the resources and energy sectors, and Bapcor parts and accessories to the auto industry. Reliable client bases and promising business pipelines equate to earnings growth into 2020.

As monetary policy loses potency and authorities turn increasingly to fiscal stimuli next year, identifying companies with above-industry earnings growth will be key. 

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This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.

Aberdeen Standard Investments 

Mark Dawson

Thanks Michelle, don't be surprised when the reserve bank cuts interest rates again. Also don't be surprised when the Australian dollar bounces back next year. Fake growth may stick around for longer than we'd think possible. Does anyone know when the markets going to crash?