Equity and property markets are continuing to adjust to changing economic drivers, meaning investors must do their research carefully if they are to manage risk, according to Bennelong Funds Management’s boutique managers.
Julian Beaumont, portfolio manager at Bennelong Australian Equity Partners (BAEP) said reporting season was largely as expected, but there were signs of challenges for investors ahead.
“Consumer exposed stocks are performing well, particularly housing as well as housing-related retailers such as Adairs, Beacon Lighting, JB HiFi and Bunnings.
“Likewise, the old stalwarts offering defensive growth, such as infrastructure and healthcare, continue to perform well operationally.
“However while such companies are still lifting dividends, current market conditions show that investors are increasingly concerned with their delivery.
“An example of this is BHP being bid up despite a big dividend cut, and investors no longer chasing the banks despite tempting yields.
“All companies are cutting costs to get earnings growth despite sluggish top lines; however margins are at highs and the cost-cutting efforts are puttering out,” Julian said.
John Campbell, portfolio manager at Avoca Investment Management, pointed out that reporting season saw some extreme volatility in stock prices at both ends of the spectrum.
“Daily price movements throughout reporting season were extremely volatile both for stocks that disappointed – such as Cover-More, Super Retail and Billabong – as well as those that exceeded expectations, such as Breville and Primary Health Care.
“This was primarily triggered by the confused global macro environment, combined with the dominant passive style of investment management.
“As a result, many extreme-priced quality growth names are struggling to sustain lofty (indeed generationally high) valuations, regardless of the fact that most met expectations,” John said.
Both Julian and John saw some positive news for the resource sector.
“Commodity prices may be bottoming – the risks for commodity stocks are now mainly skewed to the upside,” John said.
Julian added that the driver for the resources sector is clearly commodity prices rather than operating results, and this will continue to be the case.
“While reporting season saw savage cuts to earnings for the sector, and estimates for next year were also heavily reduced, the resources sector remained the best performing overall, lead by gold equities,” he said.
Global property markets are also displaying some mixed signals, and are heavily influenced by ongoing attempts by governments to trigger growth through interest rates.
Chris Bedingfield, portfolio manager at Quay Global Investors, said that the global property market is looking strong in a number of areas but the impact of interest rate decisions are still playing out.
“Despite the fact that any economic benefits from central bank policies are still to be fully realised, it seems that the quantitative easing approach is not yet done and we are still seeing countries such as Japan cutting rates, while in Australia the Reserve Bank of Australia is keeping rates at historical lows.
“Interest rates are likely to be lower than expected around the world, but despite this, capital markets are still finding it difficult to obtain cost-effective funding.
“One impact of this is the limited supply in a number of property sectors, particularly in the multifamily and storage sectors.
“In addition, new drivers for industrial property demand are underwriting good rental growth.
“On the other hand, fundamentals in the office property sector are weakening in a number of key markets, such as the US, UK and Hong Kong, as supply catches up with demand,” Chris said.
Bennelong Funds Management was established in 2001 and nurtures a growing suite of boutique asset management teams that currently manage almost $6.5 billion.
It provides a holistic range of services to its boutiques, allowing them to focus on what they do best – manage money. As equity partners in their individual businesses, each asset manager’s goals are aligned with those of their investors.
Bennelong is a wholly owned subsidiary of the Bangarra Group (formerly the Bennelong Group), a privately owned company encompassing a number of independent businesses.
Avoca Investment Management was established in 2011 and manages the Bennelong Avoca Emerging Leaders Fund which primarily selects stocks from the S&P/ASX Small Ordinaries and S&P/ASX Mid-Cap 50 Indices. It typically holds 30 – 50 stocks and is actively managed with investment decisions driven by the team’s assessment of relative value.
Bennelong Australian Equity Partners (BAEP) focuses on investing in Australian listed equities and was founded in 2008. It manages four funds, on behalf of retail and institutional clients, as well as on a pro-bono basis for charitable organisations.
Quay Global Investors was launched in 2015 and is focused on the preservation and creation of wealth through investing in global real estate securities.