05 May 2021 – Please be aware of scammers falsely representing AMP Capital. AMP Capital is aware of an ongoing scam operation targeting customers and the broader community, offering inflated interest returns available through fictitious investment vehicles titled the Capital Protected Fixed Income Government Fund and the Woolworths Group Fixed Rate Bonds. Through the use of phishing emails, malicious operators are sending falsified e-brochures to people in an effort to entice them to invest in a false product that features AMP Capital’s branding. Please be aware this is a not a legitimate product from AMP Capital.

AMP Capital does not approach potential customers via electronic direct mail (EDM) nor does the company solicit personal or financial information via email. 
If you are concerned that you may have been targeted by scammers, please contact us on 1800 658 404 from 8.30am to 5.30pm Monday to Friday (Sydney time).
More information on scams can also be found on the ACCC’s website Scamwatch.

Economics & Markets

Six forces driving Australian equity portfolio returns

By Dermot Ryan
Sydney, Australia

We are now in the late stage of the business cycle when a range of risks and opportunities are being thrown up at Australian equity investors.

These reflect changes in fast-moving global markets, domestic policy choices and the evolving priorities of local businesses. These changes will create exciting opportunities for some Australian companies but throw up challenges for others.

1. The global economy is becoming more volatile

The US economy is now motoring, showing real wages growth and delivering full employment. We are seeing lower corporate taxes, cuts to personal income tax and fiscal stimulus that will also soon expand domestic infrastructure spending.

The strong domestic economy is encouraging the US Federal Reserve to continue to raise interest rates, well ahead of most other countries. This is pushing up the value of the US dollar, which is impacting its global trading partners as commodity prices become more volatile. This leads to funds flowing back from the edges of the global financial system.

Tensions over trade and tariffs exacerbate uncertainty in emerging markets, especially China. This has accelerated the gyrations affecting a number of such currencies, of which the Argentine Peso and Turkish lira have been the most visible.

Elevated commodity price volatility and currency uncertainty have also pushed down the value of the Australian dollar, where consumer weakness has delayed interest rate rises well into the future.

This creates an exciting opportunity for Australian companies with a domestic cost base but significant offshore earnings. This includes both exporters and those with profitable offshore subsidiary businesses.

2. China’s appetite for high-grade commodities is becoming insatiable

The increasing threat of trade wars poses a particular threat to the Chinese economy, which remains heavily focussed towards exports. However, as the country moves up the value chain and becomes more sensitive to the environment, its demand for high-grade commodities remains strong.

China’s energy demand continues to grow, yet the focus on reducing pollution through President Xi’s ‘beautiful China’ policy is seeing its fuel imports switch from coal to LNG. This policy is also seeing its vast steel industry switch to high-calorific coal and iron ore, which drive operating efficiencies and are less toxic to the environment. Meanwhile the desire to be central to the electric car revolution is driving demand for those commodities required in developing battery technology.

Australian miners that are well-exposed to changing demand for commodities are presented with a strong opportunity over the next few years. However, those dependent on ‘dirty commodities’ such as low-calorific coal or bauxite face more challenge times.

3. Mortgage rates are rising - regardless of RBA decisions

Rising US interest rates are impacting bank funding costs around the world, including countries such as Australia where banks depend heavily on offshore wholesale markets to fund their loan books.

The creeping rise in banks’ funding costs is leading to a squeeze in bank margins which is being passed onto borrowers through higher mortgage costs. This is despite the RBA being likely to leave its cash rate at its historic low of 1.5% until well into 2020.

Australia’s major cities, especially Sydney and Melbourne, are now seeing falls in the sale prices of residential property as highly stretched borrowers face higher costs at a time of rising housing supply. This trend is being accelerated by regulatory change as income multiples on lending fall and much closer scrutiny is paid to borrowers’ outgoings.

Banks are also under pressure to switch interest only borrowers onto principle and interest repayment mortgages, which will reduce systemic risk, but to the cost of borrowers’ disposable income levels. Any policy decisions to curtail negative gearing would likely further deter investment buyers, who are already facing falling rents in some cities.

Such a scenario requires caution not just towards property, but also to banking groups that are most exposed to marginal borrowers with lower income and home equity buffers.

4. Growth companies are becoming scarily expensive

A multi-century bottom in global interest rates is now beginning to unwind as funding costs start to accelerate.

However, this comes at a time when growth companies are trading at large P/E premiums to their 10-year averages, relative to the rest of the market. This suggests that many investors have become embroiled in overexuberance as the very best-case scenarios are being reflected in growth company share prices. This particularly applies to technology companies.

The recent reporting season was generally positive and gave scant indication that a major correction appeared imminent. However, this late stage of the economic cycle is the most hazardous moment in which to be fearful of missing out on the momentum of a non-discriminating equity market.

Investors may well be better advised to prioritise their longer-term investment goals over chasing short-term index returns. Lower-growth companies with visible and sustainable earnings are likely to offer better protection from volatility as the cycle turns. 

5. Some companies are focusing on their balance sheets

The end of the business cycle is a time that brings company balance sheets into focus.

There are signs that companies are accelerating their efforts to dispose of non-core parts of their business and to discontinue unprofitable product lines. This is currently being demonstrated in Australian retail and listed real estate businesses where the focus is on maximising flexibility to make acquisitions or other investments as they become available.

In the mining sector especially, debt levels have been reduced, making dividend payouts more sustainable and enabling a higher proportion of future free cash flow to be returned to shareholders.

Understanding company balance sheets is never more important than at turning points in the business cycle; accordingly, investors should identify those best able to support dividends, make opportunistic investments and prosper as debt costs increase.

6. Government priorities are creating opportunities

The Federal government continues to support a fiscal deficit which is supportive of consumer spending and select areas of the economy.

The recycling of infrastructure assets into new projects creates opportunities for companies with exposure in the construction, utility and transport sectors that are likely to endure through the electoral cycle.

However, Australia’s energy market remains somewhat dysfunctional as a policy framework to support long-term investment in new projects – either in conventional or green power generation – remains lacking.

Furthermore, the stability of earnings, that sectors such as healthcare and utilities might be expected to deliver, are however, heavily impacted by regulatory uncertainty. Such investments might offer more attractive investment opportunities following any market re-pricing that follows regulatory change.

Rather than predicting policy outcomes, investors might better identify and differentiate between regulated businesses that deliver earnings visibility through the cycle and those that can be better valued following a regulatory alteration.

  • Economics & Markets
  • Equities
Share this article

Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

Cookies & Tracking on our website.  We use basic cookies to help remember selections you make on the website and to make the site work. We also use non-essential cookies, website tracking as well as analytics - so we can amongst other things, show which of our products and services may be relevant for you, and tailor marketing (if you have agreed to this). More details about our use of cookies and website analytics can be found here
You can turn off cookie collection and/or website tracking by updating your cookies & tracking preferences in your browser settings.