Perennial Value cautions against over-negativity on the Australian economy
In a new year that has begun with share market volatility, continued falling property prices and increased talk around recession both in Australia and the US, Perennial Value Management (Perennial Value) cautions against too much over-negativity on the Australian economy and says that the recent market sell-off is opening up opportunities for the more patient investor to invest in quality companies at attractive prices in 2019.
Investors have begun the year with a high level of nerves due to the fall in the share market in the December quarter, where the sell-off mirrored that seen in offshore markets as a result of heightened political uncertainty around issues such as US-China trade and Brexit, as well as rising interest rates.
Perennial Value Managing Director John Murray says that with all the negative sentiment floating around, it’s easy to lose sight of the fact that the Australian economy is arguably in better shape than many other economies.
“We have strong population growth, albeit it is easing, favourable demographics, with a relatively young population compared to most other developed economies, our government debt levels are low by global standards and we are one of the few countries boasting a AAA credit rating. The budget is heading back into surplus and both interest rates and inflation remain at low levels,” Mr Murray said.
“Unemployment is low, activity is robust in the infrastructure sector on the back of a large number of major projects and there is likely to be increased investment in the resources sector. The weaker Australian dollar is also acting as a buffer, benefitting export industries and also our key education and tourism sectors,” he said.
Looking to the share market in 2019, Perennial Value’s Director of Portfolio Management Stephen Bruce says that the recent sell-off has taken the Australian stockmarket P/E to slightly below the long-term average of 14.0x. Further, the overall market gross yield of 6.5% remains compelling compared to term deposit rates.
Mr Bruce said, “Within the market itself, there remains a wide valuation dispersion in the market, with many growth and momentum stocks remaining expensive, while many value stocks are trading at cheap levels.”
“History shows that at some point these large valuation dispersions normalise and, when they do, there is the potential for a value style portfolio to deliver significant outperformance,” Mr Bruce said.
“In terms of the market more broadly, our forecasts are for continued, moderate earnings growth over the coming year. In addition, corporate Australia has been paying down debt and balance sheets are in very good shape, which provides the flexibility to reinvest for growth, pay healthy dividends and weather any economic headwinds that may arise,” he said. Interestingly, this theme was reinforced in late 2018 when Perennial Value analysts visited a wide range of companies in the US, with Mr Bruce saying, “ What struck us is that, in comparison to US companies, Australian companies growth prospects seemed relatively solid and our balance sheets generally seemed to be in better shape too.”
Mr Murray said, “Clearly, the global macro environment remains challenging and, from a sharemarket investing perspective, what is critical is your investment timeframe. Market sell-offs inevitably provide buying opportunities for the more patient investor and I believe that 2019 will provide such opportunities for those looking to build a robust share portfolio for the longer term. Many of these opportunities are to be found at the value end of the market and the key is to be seeking companies which are well-managed, possess strong balance sheets, have sound earnings growth prospects and are delivering reasonable dividend flows. These are the companies that will inevitably carry investors through tougher times.”
Perennial Value’s more favoured stock holdings currently include gaming stocks, Tabcorp and Star Group, Link Holdings, Nufarm, fund managers Janus Henderson (“very cheap on a P/E of 8.2x and a strong balance sheet”) and Perpetual and Event Hospitality and Entertainment. With regards resource holdings, Mr Murray said, ” We are holding a spread of gold producers, Newcrest, Evolution and Northern Star and they are benefitting from an A$ gold price which is trading at an all-time high. We also see a lot of value in a range of mining services companies, including Ausdrill, ALS and Monadelphous.”
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