Australian Equities: Why You Should Invest Now

Investing in Australian equities is a popular option for many investors, with 58% of Australian investors holding Australian shares. Australian equities offer opportunities for growth and strong returns. They are also a good option for investors seeking to protect their wealth and income during periods of heightened inflation. The Australian equity market is one of the country's largest financial markets, with the total value of companies listed at almost $2 trillion. The market has grown rapidly over the past 20 years and equities are an important part of Australians' retirement savings. Additionally, the Australian government's focus on the green transition presents an opportunity for investors as the country aims to achieve net-zero emissions by 2050. Furthermore, Australia's well-regulated and capitalized financial sector provides stability and confidence for investors.

Potential for strong returns

Australian equities are popular with investors due to their potential for strong returns. They tend to deliver higher total returns over the long term compared with cash or fixed-income investments.

Returns from Australian equities

Holding Australian equities in your portfolio brings the potential for returns from capital growth and dividends. As the market value of a company increases when its share price appreciates, your equity investment in that company grows in value too. You may also receive dividend payments, which are paid to shareholders from company earnings.

Long-term returns

As a growth asset, Australian equities also offer the potential to deliver long-term returns that can protect your wealth and income during periods of heightened inflation.

Tax savings

When companies pay dividends to shareholders, this payment is usually made from their earnings after tax. This means you may be able to receive a tax offset – called a franking credit – when you receive dividend income from your Australian equity investments.

Diversification

By investing some of your wealth in Australian equities as well as other asset classes, you’re diversifying your portfolio to protect overall investment returns.

Historical returns

Historically, equities have been worth much more to investors than other investment options. Over the long run, they have returned about 5 percentage points more than long-term bonds on average each year. This accumulates to a very large amount of money over a long period of time.

Compared with overseas

Average annual returns on stocks in Australia, the United States and the United Kingdom since 1900 have been very similar. At around 10%, these returns are higher than the average annual inflation rates for the three countries, which were 3¾%, 4% and 3% respectively.

High dividends

Australian companies pay high dividends, due in part to the specific tax treatment they receive. Taking this into account, Australian stocks have generated above-average returns over the past 25 years.

High dividends

Australian equities are known for their high dividends, which are paid to shareholders from company earnings. Dividends are a significant component of equity investments, and the potential for strong returns makes them appealing to investors.

Australia's stock market has historically provided attractive dividends, and this is partly due to a system of dividend imputation, or "franking credits", introduced in July 1987. This system ensures that company profits distributed as dividends are taxed only once, rather than at both the company and personal tax rates. As a result, investors may be eligible for a tax offset when they receive dividend income from their Australian equity investments.

The high dividends offered by Australian equities are particularly advantageous in an environment of rising consumer price pressures. By investing in companies that grow their dividends, investors can stay ahead of inflation. Many Australian companies have a solid track record of payouts, with dividend payments from ASX-listed companies being high by international standards.

The average annual returns on stocks in Australia have been around 10%, including both dividends and capital gains. While Australian stock prices have increased slightly less than those in other countries over the past 25 years, the high dividends paid by Australian companies have resulted in above-average returns over this period.

Investing in Australian equities provides access to companies with strong market positions and the potential for long-term growth. The country's abundant natural resources, particularly minerals such as iron ore, coal, gold, and various metals, are in high demand from China, Australia's largest trading partner. This demand is expected to increase as China strives for greater economic growth, benefiting the mining and energy companies in Australia.

In summary, Australian equities offer attractive dividends and the potential for steady dividend growth, making them a compelling investment opportunity for those seeking income and long-term capital growth.

Well-regulated and capitalized financial pillars

Australia's financial pillars are well-regulated and well-capitalised, with strong capital positions, solid liquidity levels, and diversified funding mixes. This position of strength allowed the banks to absorb some of the COVID shocks during the pandemic, with the regulator allowing them to draw on their buffers.

The Australian banking sector's strength and stability are evident through its ability to withstand challenging economic conditions. During the COVID-19 pandemic, the sector demonstrated its resilience by drawing on its buffers with the regulator's approval. This showcases the robust regulatory framework that underpins the financial system and ensures stability even during crises.

The current challenge of more expensive and constrained funding in a rising rate environment further underscores the importance of well-capitalised financial institutions. Australia's banks possess solid liquidity levels, enabling them to navigate these funding constraints effectively.

Additionally, the diversified funding mixes of Australian financial institutions contribute to their overall stability and ability to manage risks. By not relying solely on one source of funding, they reduce their vulnerability to market fluctuations and enhance their capacity to adapt to changing conditions.

The well-regulated and well-capitalised nature of Australia's financial pillars provides a strong foundation for investors, fostering confidence in the stability and reliability of the country's economic system. This regulatory environment supports long-term growth and protects investors' wealth, making Australia an attractive destination for those seeking steady dividend yields and long-term growth potential.

Stake in China's recovery

Despite political differences, Australia and China are closely linked through trade. Australia's rich natural resources, including minerals like iron ore, coal, gold, and various metals, will continue to be in high demand as China pursues its economic goals. A boost in China's economy could increase consumer confidence and spending, which would increase demand for commodities and benefit Australia's mining and energy companies.

China's recovery is expected to be slow, partly due to a struggling property sector that has reduced demand for commodities. However, China's government has signalled a shift towards pro-growth policies, pledging to improve the business environment, boost capital markets, and increase investor confidence.

China's clean tech sector is also a significant opportunity for Australia. China dominates the global clean tech ecosystem, producing 90% of solar and 75% of battery capacity worldwide. As China moves towards net-zero emissions, there will be increased demand for Australian resources, and the clean tech sector will play a crucial role in this transition.

In addition to the demand for natural resources, China's growing middle class presents a consumer market opportunity for Australia. The premiumization of China's consumption will benefit Australian sectors such as agriculture and healthcare.

In summary, Australia has a significant stake in China's recovery due to their close trade relationship. China's economic growth and consumer market potential will create demand for Australian natural resources, benefiting sectors such as mining, energy, agriculture, and healthcare.

Green transition opportunities

The Australian government has termed this decade as a defining moment for the resource-rich economy to transition to cleaner, cheaper, and more reliable energy. This transition is expected to unlock Australia's renewable energy superpower potential. The government has already made a head-start with various green initiatives in the 2023-2024 Federal Budget. It is allocating A$2 billion to large-scale renewable hydrogen projects and A$1.3 billion to improve household energy efficiency through double glazing, battery-ready solar systems, and reducing industrial emissions.

If the economy reaches net-zero emissions by 2050, GDP could increase by A$890 billion over the next 50 years, according to Deloitte Access Economics modelling. This transition will also create 195,000 additional jobs. Australia's abundant, reliable, and affordable clean energy will power new generations of manufacturing and industry.

Australia is well-positioned to support Southeast Asia's energy transition, positioning clean and cheap energy as its competitive advantage. Southeast Asia's clean energy transition presents opportunities for Australia to provide project engineering, design, construction, and advisory services, and technology. The total value of this market could be up to US$10 billion per year by 2030.

Australia is also investing in its own clean energy manufacturing, including through the National Reconstruction Fund, the Australian Made Battery Plan, and the Clean Energy Finance Corporation, to support the necessary supply chain expansion for its decarbonisation and export goals.

Frequently asked questions