MEDIA RELEASE: While earnings risk will become more pronounced for Australian companies over the coming six to 12 months, Australia’s economic fundamentals mean the local share market is relatively better positioned than most global peers, according to SG Hiscock & Company portfolio manager, Hamish Tadgell.

Mr Tadgell said Australia benefits from being a strong and stable democracy and its exposure to both hard and soft commodities in an environment of rising political and geopolitical uncertainty, and inflation concerns.

“Australia remains a leading democracy, as highlighted in the most recent Economist Democracy Index.

“In fact, there has been a growing middle ground versus the increasing polarisation between left and right and hollowing out of the centre in many democracies which is leading to more radical political uncertainty. As a result, the economic stability of these jurisdictions has been severely impacted,” he said.

The ASX has been one of the best performing stock markets year-to-date largely due to its overweight exposure to metals and mining. The ASX200 has around 23 per cent of the market exposed to resources versus the S&P500 which has less than one per cent exposure.

“We’ve also got a comparatively small tech sector, so we haven’t been impacted as much as the US for example - which is weighted 25 per cent technology - as valuations and long duration assets have derated in the face of rising interest rates.

“The current market selloff is not simply a correction to lower valuations but the market grappling with regime change, including geopolitical realignment and macro uncertainty.

“This is likely to see volatility and sector returns dispersion remain high and investors need to be active and selective in identifying opportunities while managing downside risks”, he said.

Inflation has proved stickier than anticipated, with the shift from goods consumption to services post COVID and increasingly being driven by higher wage pressure as a result of reduced net migration, ongoing staff shortages and tight labour market conditions.

“Once inflation gets entrenched the risk is it becomes sticky. Looking back over the last 40 years, where episodes of inflation have exceeded five per cent in developed countries, it has taken on average ten years to bring inflation back down to two per cent, which is the bottom end of the RBA’s desired range,” he said.

Mr Tadgell said while in periods of higher inflation real returns across all asset classes suffer, equities have historically outperformed bonds and cash. With inflation likely to remain sticker and volatility elevated for some time yet, investors will be well served to maintain a reasonable equities representation in investment portfolios.

“The world is changing and, as investors, we need to think differently about equity portfolios. However, we also need to maintain perspective and recognise that our market fundamentals are relatively strong and Australia is in a far better position than most other developed economies,” he said.