Shane Oliver Interview

Shane Oliver: AMP is remaining overweight Australian shares largely because we think the Australian sharemarket provides better return opportunities for investors than global sharemarkets in general.
Michael Pascoe: Does it worry you that you might be the odd man out? There does seem to be a swing against the Australian sharemarket among fund managers.

There certainly does seem to be a bit of a consensus building against the Australian sharemarket but that actually provides me a bit of comfort because it’s often the case that when the consensus you’re saying go somewhere else then it’s probably better to stay where you are. So I think as the year progresses and the Australian sharemarket continues to perform you’ll see some of those fund managers forced to come back the other way and put their money back into the Australian market.

Well the argument from the other side seems to be that Australian stocks are now priced at the same sort of level as international stocks; we shouldn’t invest in them. What do you say to that?

My response to the argument that Australian shares are now trading on a similar p/e [price/earnings multiple] to global shares after many years trading on a lower p/e is that the discount we had through the late 1980s into the 1990s is no longer justified. If you think back over that period '” I mean it started off back in the late 1980s, early 1990s '” there was a lot of concern about the Australian sharemarket being dominated by entrepreneurial cowboys, the Bondys and the Skases and so on. Those concerns are now gone.

There was also a concern that Australia was a high inflation country, which meant we had a lower p/e than global shares. That concern is now gone. In the latter part of the 1990s we had the IT bubble globally, which pushed up global p/es relative to Australian p/es. That issue has also now gone, so all of the factors that gave us that lower p/e in Australia are no longer present so I don’t think there’s any reason Australia should continue to trade at a lower p/e than global shares. In fact, you can make an argument that after a decade or more in which Australian companies have produced better profit growth and paid out higher dividends than global shares, and with less volatility, perhaps the Australian sharemarket should actually be trading at a premium to global markets.

Well do you think it will trade at a premium in 2006?

I think through much of the year it probably will trade at a premium and there’s one good reason for that: we’re in an environment right now that is very strong demand for resources. Commodity demand is being driven by strong growth out of China. Global growth generally should remain pretty strong. All of that should continue to push up the Australian sharemarket and I think commodity stocks, of which the Australian sharemarket is overweighted if you like, will remain in strong demand and as a consequence will see p/es pushed up, such that the Australian sharemarket trades at a bit of a premium relative to global markets.

Another factor for Australian investors of course is the issue of franking credits.

Yes, most investors seem to ignore franking credits whereas I actually think they’re quite important. Franking credits add 1–1.5 percentage points. So if, for example, Australian shares were to return 10% over the next year and global shares also returned 10%, after tax you’d actually be better off in Australian shares because the after-tax return from Australian shares will get that boost from franking credits. So the franking credits actually provide another incentive, another reason to be overweight or biased towards Australian shares.

Now the bottom line for investment of course is which company is going to be more profitable. How do you expect Australian equities to turn out there.

Over the next year or so we expect profit growth from Australian companies to be slightly ahead of global profit growth. I would see earnings growth in Australia at about 10–15% over the next months. A big driver of that will be the strength in the resources sector; and of course global shares don’t get that boost because they don’t have much of an exposure to resources stocks. When you look around the world you’re probably looking at profit growth of 5–10% '” a bit stronger in Europe and Japan and Asia and a bit weaker in the US. So all up we’re looking at stronger profit growth over the next 12 months from Australian companies than global companies.

The other thing worth mentioning is that Australian companies tend to pay out a higher proportion of their profits as dividends and I think that’s a good thing because it means that the company is giving the money back to the shareholder. They’re getting the dividend. That’s money in their hands, which contributes to the return they will get but it also means that the shareholder is then in a good position to then reinvest the money as they see fit rather than the company saying, 'We know what’s best for you, we’ll hang onto your money’, and more often than not, when companies do hang on to too much of the shareholders’ money they waste it. So I think it’s quite healthy that Australian companies pay out about 65% of their profits whereas global companies usually pay out about 40%, often less.

Well having said all that, AMP Capital still invest overseas '” it’s just a matter of percentages. What sort of percentage do you feel comfortable with?

Our flagship diversified fund has about 38% in Australian shares and about 22% in global shares and about 3% in Asian shares. So you can see there that we’ve got quite a hefty allocation of bias towards the Australian sharemarket relative to global shares.

Why do we still have global shares? you might ask, given that we think Australian shares will perform better; I mean, no one has a perfect crystal ball. There’s always a chance you’ll get it wrong or that one year global shares might do a bit better than Australian shares, so from a diversification point of view there’s still a case to have some global shares just in case something does go wrong or we get it wrong, but you can see that quite clearly we have a strong bias towards the Australian market.

To what extent is the Australian sharemarket now international anyway? I mean, when you buy shares in BHP Billiton, you’re not buying an Australian company, you’re buying an international company.

It’s certainly true that a big chunk of the Australian sharemarket does have a hefty international exposure. About 30%, maybe 35%, of Australian companies’ earnings are sourced from offshore, so in that sense when you buy the Australian sharemarket you are getting a good exposure to global shares or to the global economy anyway. So in that sense the sharemarket is not totally dependent just on what’s going on in the Australian economy. So at the end of the day it does come back to valuations and those sorts of things and franking credits, and despite that exposure to global shares you’re still getting a better return potential from Australia than you are from the global sharemarket.