Investors Must Accept Lower Returns for Longer
Three fund managers have nominated corporate bonds, unconventional investment approaches, and the healthcare and consumer discretionary sectors, respectively, as the most likely sources of growth for individual investors in the current environment.
The trio of managers were: Bill Bovingdon, chief investment officer, Altius Asset Management; Prasad Patkar, head of qualitative investment, Platypus Asset Management; and Chad Padowitz, chief investment officer, Wingate Asset Management.
“If you look at the equity market as a whole, it’s quite expensive, but within it there’s a substantial divergence of valuations,” says Wingate’s Padowitz.
“If it looks safe and comfortable, then you’re probably in the wrong place. You have to get a little bit uncomfortable if you want the outcomes going forward. You need to look at some things that might be a bit unconventional.
“At the moment, equities are the most expensive they’ve been in 90 years. We think people that cannot buy fixed income are buying these kinds of shares … you have segments of the market, on a global basis, where you’re generally going to get pretty poor returns out of those.”
He points to consumer staples like Johnson & Johnson and Colgate as examples of attractive stocks offering long duration, cash flow and solid dividends.
On the value side, he nominates US financials “as the cheapest they have been in 75 years”.
“If you’re taking very long-term assessments of value, the market’s very expensive on one hand, and very cheap on the other–so there’s a gap between value and growth/quality–it’s the greatest it has been in some time,” Padowitz says.
Central banks’ role increasing
Looking from a broader macro perspective, Altius’s Bovingdon looks at the effect of central bank monetary policy on market activity.
“One of the things we’ve been struggling with after Brexit is the growing impact of politics on investment returns and investment policy,” he says.
“We’ve always had an eye towards effective monetary policy … and how it can promote growth. What we’re seeing now is another context with respect to how annoyed the public has become … and the dissatisfaction with central bank activity.”
Contrasting the current environment with that of the 1980s, Bovingdon highlights the convergence of technology, globalisation and lower inflation.
“The increase in world trade caused a lot of trade imbalances, big increases in foreign exchange reserves. We also saw a lot of pressure on wages, which has led to negative wage growth and increasing inequality,” Bovingdon says.
“You would characterise this as not really achieving the monetary policy aims.”
He believes these factors have combined to create negative wage growth and increasing inequality, and a “bigger gap between the haves and the have-nots”.
Bovingdon also contrasts the “go early, go hard and go retail” advice of the Australian treasury to the government after the GFC with what central banks around the world have done.
“They went late, they went lame, and they went to the banks–and they got nothing out of it,” he says.
“Ahead, we think we’re on the cusp, and again it depends on the political environment that we’re seeing–with the heightened impact of Brexit and the rise of Donald Trump … if we start to see a response from government which increases redistribution and involves some fiscal spending, then we think that could actually start a more productive period.
“A lot will depend on what companies do–at the moment it’s all about cost-cutting, with no view on boosting the bottom line.”
Lower for longer
Prasad Patkar of Platypus Asset Management believes the low-growth environment will persist for some time.
“We believe that further reform and fiscal support from governments is unlikely, and there will be greater reliance on central banks to sustain economies,” he says.
“While the US remains relatively resilient, we would continue to avoid UK and European exposure, and we also believe that Chinese growth momentum has peaked post-stimulus.”
He believes a bottom-up focus, which seeks structural growth stocks, will be vital for investment outperformance.
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Source: Written by Glenn Freeman, Senior Editor at Morningstar
