In the past year, Australian equities experienced substantial volatility but yielded impressive returns, thanks to easing monetary policy, China's stimulus measures, and advancements in trade negotiations following US tariff concerns. Consumer sentiment showed improvement, reflecting optimism about inflation and interest rates, despite lingering challenges such as housing affordability and global risks. The Reserve Bank of Australia (RBA) reduced its cash rate amid easing inflation, which returned to the 2–3% target range. The recent Australian reporting season was characterised by significant volatility and notable differentiation in company performance, even within the same sectors. Some companies outperformed by surpassing earnings expectations, while those that fell short faced harsh market reactions. Overall, earnings results were somewhat under pressure, primarily due to cost and margin pressures. The financial sector outperformed led by gains in banks which show resilient earnings amid economic uncertainty. Information technology (IT) stocks also gained strongly, supported by solid earnings updates and renewed interest in AI-related stocks. Conversely, materials and energy sectors struggled due to weak industrial metal prices. Amid declining commodity prices, gold emerged as a positive outlier, acting as a safe haven asset in uncertain market conditions.
Over the period, the Fidelity Australian Equities Fund underperformed the Index, primarily due to stock picking in consumer discretionary (Dominos Pizza) and healthcare (Ramsay Health Care) sectors as well as being underweight industrials. On a positive note, robust security selection in materials (Gold miner Evolution mining), consumer staples (Coles) and financials (Suncorp and CBA) added value.
Looking ahead, the long-term outlook for Australian equities remains positive, supported by structural factors like population growth through immigration and the resulting rise in consumption. The RBA recently cut interest rates for the first time in three years, signalling easing inflationary pressures. If service sector inflation begins to decline, further rate cuts could follow, offering relief to younger Australians burdened by high mortgage costs and living expenses, while boosting discretionary spending. Older Australians remain a key driver of domestic demand due to their spending power.
Global trade tensions, particularly US tariffs, have created volatility. While Australia is less impacted due to its limited exposure to US trade, the situation varies by sector. Pharmaceuticals are exempt from tariffs, benefiting Australian manufacturers, while retailers importing from China may gain from reduced competition if Chinese exports to the US decline. Companies with US-based manufacturing are better positioned, while those reliant on high-tariff countries face challenges. Metals and mining could see indirect impacts via Chinese growth, while REITs and infrastructure may benefit from market volatility.
Our investment approach focuses on identifying high-quality businesses with compelling long-term growth prospects, rather than trying to time shorter-term market movements. This disciplined, research-driven approach helps us navigate market volatility and capitalize on the wealth-building potential of equity ownership. Our portfolio is strategically positioned to capitalize on companies that are driving productivity improvements through operational efficiencies and technological innovation.
Regardless of the broader economic environment, whether influenced by factors like geopolitical tensions or interest rate movements, we believe these companies’ solid business models and strong management execution provide a degree of resilience, making them compelling long-term investments within the Australian equity market.
