Australian Equity Income Strategy Commentary Q3 2026

Key Takeaways

• The Australian equity market (as measured by the S&P/ASX 200 Accumulation Index) rose 1.3% over the September quarter, despite weakening into the close.

• The Strategy generated a positive return for the quarter and posted a significant franked dividend yield premium over its Index income return for the previous 12-month period.

• Australian equity market valuations and valuation dispersion remain elevated, although spreads have narrowed from the extremes seen a year ago. This continues to create opportunities for disciplined value investing and active stock selection.

Market Overview

Inflation and interest rates remained the dominant market drivers. Renewed Middle East tensions pushed oil prices sharply higher, adding to inflation concerns and driving a material rise in bond yields. In Australia, persistent inflation and persistent capacity pressures culminated in the RBA raising the cash rate by 25 basis points to 4.60% in late September.

Market leadership rotated significantly through the quarter. Health care, energy and gold-related exposures performed strongly at different points, while technology, banks, consumer discretionary and property were more sensitive to higher yields and changing risk appetite. AI and data centre investment remained an important structural theme.

The domestic growth picture was mixed. Services and business investment remained relatively resilient, while consumer sentiment weakened as higher rates, energy costs and affordability pressures weighed on households. Reporting season results were generally better than feared, although forward guidance was more cautious amid higher costs, softer demand and funding pressures.

Factor performance was volatile. Momentum reversed sharply in July before recovering in August, while valuation and profitability were the strongest factors over the quarter. Commodity exposures also benefited selectively, particularly gold, while stock-specific earnings and expectation changes remained an important driver of returns.

Performance Overview

In absolute terms, the ClearBridge Australian Equity Income strategy was up in the third quarter 2026, and posted a significant franked dividend yield premium over the S&P/ASX 200 Accumulation Index franked income return for the previous 12-month period¹.

At the sector level, Health Care, Energy and Metals & Mining were the largest positive contributors to the portfolio’s absolute return for the quarter, while Industrials, Consumer Discretionary and Communication Services were the biggest detractors.

At the stock level:

• Biopharmaceutical company CSL was the top contributor over the quarter, supported by improving confidence in its immunoglobulin outlook. Stronger-than-expected immunoglobulin performance, positive FY27 guidance and supportive industry trends drove a sharp rerating, which continued into September amid strong institutional demand. Plans to commence Horizon 2 clinical trials and the launch of an A$1.15 billion share buyback provided further support.

• Australasian fuel refiner and distributor Ampol outperformed over the quarter as tight regional refining capacity, low inventories and disruption to global fuel markets supported elevated refining margins and stronger earnings expectations. A record result and dividend also reinforced the cash generation from the favourable refining environment.

• Oil and gas producer Santos benefited from higher global oil and LNG prices and improving investor confidence in its Barossa and Pikka projects.

• Rail freight operator Aurizon Holdings fell as its FY27 outlook pointed to lower coal earnings, reflecting reduced contracted volumes and softer yield despite broadly flat expected haulage volumes. This outweighed a solid FY26 result and the prospect of higher Network returns from its 2027 regulatory reset as interest rates rose.

• Lottery and keno operator The Lottery Corporation weakened as investors reassessed its valuation ahead of results, before a softer FY26 outcome highlighted subdued lottery revenues, higher funding costs and a more muted near-term earnings outlook. Weak jackpot conditions and pressure on discretionary spending also weighed on sentiment.

• Retailer JB Hi-Fi weakened following its FY26 result. While sales and earnings grew, softer fourth quarter and July trading raised concerns around FY27 earnings momentum, with ongoing consumer affordability pressures and a more subdued demand outlook weighing on sentiment.

Portfolio Positioning

We initiated a position in commercial explosives provider Orica, supported by a positive medium-term outlook for mining volumes amid firm commodity prices and new copper project development. A tightening supply-demand balance for ammonium nitrate is supporting higher recontracting prices, while recent supply issues in the US are considered relatively minor and unlikely to materially affect the medium-term outlook.

We initiated a position in large format retail landlord BWP Group. Higher land and construction costs have materially increased economic rents across large format retail, while BWP remains under-rented. This creates upside as vacated Bunnings sites are re-leased at higher rents, sold at premiums or redeveloped at attractive returns, alongside defensive income with inflation protection.

We exited the position in retail drinks and hospitality business Endeavour Group, reflecting increased downside risk as earnings come under pressure from its price reduction strategy. With elevated debt levels, we see a material risk that a weaker operating environment could place pressure on the company’s dividend.

Outlook

Australian equity market valuations and valuation dispersion remain elevated, although spreads have narrowed from the extremes seen a year ago. This continues to create opportunities for disciplined value investing and active stock selection. While August reporting season was generally better than feared, the outlook was softer, with higher costs, weaker demand and funding pressures increasing the importance of resilient earnings and disciplined capital allocation.

The global backdrop remains supportive but increasingly challenging. Strong US activity and AI-led investment are underpinning profits, but persistent inflation, higher oil prices and rising bond yields are putting pressure on valuations. Australian valuations and margins are less stretched than in the US, although local markets remain exposed if higher rates begin to weigh on investment and earnings.

AI continues to reshape the investment landscape, although the benefits will accrue unevenly. In this environment, starting valuation, company-specific fundamentals and durable competitive advantages remain critical. We remain focused on quality businesses trading below intrinsic value, with resilient earnings, strong balance sheets and sustainable cash flows.

On a forward-looking basis, the strategy is expected to provide a franked dividend yield of 6.1% over the next 12 months, compared to the 4.6% expected franked yield for the S&P/ASX 200².

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