Positive signs within Australia's economy could prompt investors to rethink their exposure to Australian equities, Fidelity Australia head of Australian equities Paul Taylor has said.
Taylor said there a lot of positive signs for the Australian stock market, with it trading below the historic average of more than 16-times.
"The market is trading cheaply on a 12-times price-to-earnings ratio, which is below the historical average of over 16-times. It is offering a dividend yield of about 4 per cent to 5 per cent, which is historically attractive. Australian companies are in good shape," he said.
"They [Australian companies] have repaired their balance sheets; in fact, some have built up such large cash reserves you could say they have lazy balance sheets. The Australian economy is in relatively good shape."
Taylor said while Fidelity is positive on the outlook for the Australian market in 2011, there are some "black clouds" about.
He said one potential negative is the European sovereign debt crisis, which began as concerns around Greece, has spread to Ireland and could engulf Portugal and Spain.
"Another is the instability or geopolitical risk in the Middle East and north Africa that is boosting oil prices. A third is that the Chinese government is trying to slow the country's economic growth to control inflation. Then there are the repercussions from Japan's earthquake," he said.
Taylor said another concern is the question mark still hanging over the United States economy even though many economic indicators show improvement.
He said in the next 12 months, Australia's economy is likely to continue its 'two-speed" nature with a strong resources sector, a strong Australian dollar and higher interest rates with negative consequences for other segments of the economy.
"We could also see further merger and acquisition activity as companies with strong cash flows and balance sheets identify value in the market and potentially look for more growth opportunities. This could be both onshore and offshore activity," he said.
