Considerable risks still remain in international markets, and investors shouldn’t assume that the recent strong performance will continue, warns Chad Padowitz, chief investment officer at Wingate Asset Management.
“At Wingate, we are surprised that the market isn’t pricing the very high level of economic and financial risk around the world into equities valuations,” Mr Padowitz said.
“While there are undoubtedly opportunities, many investors seem to be assuming that global equity markets will repeatedly produce the kinds of returns they did in the last financial year, which at Wingate we believe is unlikely.
“In reality, there are four unprecedented fiscal and monetary experiments happening around the world at the moment, of which the consequences are still unknown, and Wingate is focussed on responding to these.”
Mr Padowitz said Wingate sees the activities in the US, Europe, China and Japan as experiments aimed at restoring growth and financial stability but with uncertain outcomes.
“There is no precedent to what is happening in these financial markets and their economies, and each has come up with an approach that can really only be described as an untested experiment.
“The US is applying a transparent form of extreme monetary accommodation alongside increasing fiscal restraint, while Europe is desperately trying to keep monetary unity amongst countries with differing fiscal and competitive positions. This is forcing ‘on-the-fly’ solutions to each unique crisis with no well-defined broad approach other than ‘whatever it takes’.
“Meanwhile, in Japan we are seeing a frantic attempt to conjure up long-lost growth through its ‘three arrow’ initiative – essentially, spend more, print more, and add flexibility to the economy, and China, while regarded as the growth engine of the world, appears to be doing anything but grow. Turning around a $5 trillion machine, weighted in favour of investment spending over consumer spending, is a difficult proposition.
“Each of these activities are basically massive quantitative easing experiments taking place in nearly every major financial market, with policy makers themselves acknowledging that they are uncertain about their efficacy and whether there will be unintended consequences.
“On top of this, these experiments are occurring concurrently in a world where equity market correlations have increased from 50 percent to 70 percent over the last 10 years. Only one experiment needs to fail for the impact to be felt globally.
“Neither we nor the policy makers know what the benchmarks are for success or failure of each of these,” Mr Padowitz said.
He said in light of this, it is surprising that the market is pricing in double digit earnings growth rates for the US and Western Europe, and even stronger growth in Japan.
“Personally, I am uncomfortable with many of the assumptions underpinning these growth forecasts, and my view is that the risks surrounding quantitative easing and corporate earnings growth are being mispriced.
“There are opportunities available but investors have to be very selective and really do their homework.”
“The Wingate approach is to be prepared for valuations to come down, while remaining selectively invested in companies that possess legitimate competitive advantages.
“Even if we are wrong, there is still little scope for valuations to increase, and we are comfortable leaving something on the table for the ‘fear of missing out’ crowd,” Mr Padowitz said.
Wingate Asset Management is a joint venture between Australian Unity Investments and Melbourne-based Wingate Group. It is a boutique international equities fund manager with a large-company, value-based, investment philosophy. Its investment process seeks to produce positive compounding returns for investors over the medium to long term.
Wingate’s approach is to invest in a concentrated portfolio of high-quality companies from around the world.
For more information please contact:
Chad Padowitz – Phone: 03 9913 0704
30 July 2013