The grind continues
This morning the ASX200 trades at its highest level since pre the GFC (2007), and the S&P500 also remains within 3-4% of its all-time high.
Global investors continue to be encouraged by the relative value offered by equities when compared to low bond yields.
The outperformance of Australian blue-chip, big-cap names relative to small-cap shares indicates that much of the buying is coming from asset allocation and hence channeled into the bigger, most liquid Australian shares such as the banks, miners, CSL (CSL) and Telstra (TLS).
In Australia, the market is very enthused by the prospect for an improving economy, but might have to wait until 2020 before that kicks in.
Whatever the motivation, the momentum seen in share prices of late leaves little room for disappointment, particularly as we face the start of domestic full-year results season in a little over 6 weeks.
Last week’s economic data demonstrated the extent to which the slowing construction sector had collapsed, with building approvals and construction sector activity measured by the Australian Industry Group falling to new lows.
The Q1 GDP figure out last week showed the slowest rate of annual growth since the GFC at 1.8% and on a per capita basis, the figures showed the local economy already in recession.
But for immigration, Australia is already in recession.
Globally the market continues to ignore the threat of a slowing economy perhaps because in part we are yet to see signs of the latest tariff increases impacting U.S activity significantly.
Where the opportunities lie
Whilst momentum remains hard to compete with, we think the real opportunity across all of our asset class holdings comes from beyond those securities and strategies currently in favour.
We think the best value is emerging in those assets on the outer.
With a more favourable eye toward domestic economic momentum in Australia from next year onwards, we think that in domestic fixed income, the opportunities are best placed in both corporate lending and variable interest rate debt such as those lending into property.
Australian 10-year government bonds at 1.5% annual yield are likely at their peak.
In the international equity space, we believe the best returns are likely to come from markets or styles focused on long term valuations that are well below their long-run averages.
In that instance we have increasingly favoured the Orbis Global Equity fund and we have endeavoured to scale back, slowly, our exposures to momentum those over-exposed to high growth stocks.
Only last week it was announced that the US Government would conduct some early anti-trust investigations into the four large U.S technology companies, Apple (AAPL), Amazon (AMZN), Google (GOOG) and Facebook (FB), and the risk is that given both sides of U.S politics seem to think this group has become too dominant, we could see increasing limitations placed upon these companies’ ability to leverage market shares for profit.
We have increased our exposure in recent months to those funds willing to invest across emerging market economies, and in time, feel like we would add more exposures here.
We have been thrilled with the performance of the WCM Quality Global Growth (WMCQ) equity managed fund and its stellar performance since listing.
Aussie equity anomalies emerging in many sectors
In the Australian equity market we are firmly of the view that the best opportunities for outperformance in the coming year will come from stocks that have lagged and where there is material latent value relative to their peer group or more importantly, relative to a financial buyer.
We think the current share prices of each of Pendal (PDL), Oil Search (OSH), BWX (BWX), IOOF (IFL) and Nufarm (NUF) all make the potential for share price outperformance very real, and potentially, each run the risk of being taken over by external or third parties.
This morning we saw AGL Energy (AGL) announce a bid for telecoms company Vocus (VOC) at a price well over 100% above the level where we bought it for our equity funds 18 months ago, and in the case of BWX (BWX), we saw a UK-based hedge fund with strong private equity background acquire a substantial stake in the company.
With PDL, it’s a quality funds management group with an excellent international equity platform and several genuinely top-quartile fund managers, and in terms of its size and revenue line, it is of the equal of Magellan Financial Group (MFG).
Despite being a similar sized business, PDL has a market value ONE QUARTER of that of MFG, which seems ridiculous, particularly when you consider that MFG was being targeted for its weaker performance only 12-18mths ago themselves before they saw a huge uplift in performance and the subsequent share price rise.
PDL looks great value at $7.00.
In the financial services space IOOF (IFL) remains on the outer and for deservedly good reason short-term.
However, from September/October this year, IFL should have a far better guide on what liabilities for remedial payments exist, they should have a permanent CEO appointed, and, with some luck, we should have seen the APRA court action resolved.
Ideally the ANZ Wealth acquisition should look a little clearer too, although at current levels I genuinely think this is less a determinant of price than it has been in the past.
But at current levels IFL stands with a market value of $1.9bn and a P/E of 9-10x forward earnings, perhaps with net cash, depending on the outcome of the ANZ transaction.
Take that, in comparison to market favourite Netwealth, (NWL) which trades with a $2.3bn market valuation – 20% above IFL – but with half the funds under administration of IFL (only a quarter if the ANZ deal proceeds!), and without the profitable financial advisory, funds management and trustee divisions that IFL has.
Strategically too, NWL remains a provider of administrative services and hence will always be a price taker when compared to its peers within the major integrated financial advisory groups.
Again, another large-scale anomaly that over time we would fully expect to correct.
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