Bailouts not helpful to market health, Fidelity says
By
Wouter Klijn Thu 04 Feb 2010
Proper company management was not rewarded during the last downturn, Fidelity says.
The government's decision to provide bailouts might have supported the economy in the short term but has not helped companies that prepared for the downturn, according to a Fidelity Australia fund manager.
The intervention of the government meant the banks did not have to let defaulting companies fail, Fidelity Australian equities portfolio manager Kate Howitt said.
"We didn't actually get a lot of the benefit that you would hope to get from a down cycle," Howitt said.
"The way the cycle should work is that in ebullient times there is a lot of job creation, entrepreneurial activity, and new businesses are formed and then in the down cycle those things are tested and the weaker die and the stronger get stronger.
"If you don't actually let the down cycle occur to anyone you end up doing a disservice to the economy more broadly in a medium-term view."
This was especially clear in the commercial property space, Howitt said.
Companies including Westfield and Sunland Group saw in 2006 that the market was reaching unsustainable valuations and positioned their businesses for a downturn in the expectation they would be able to buy assets at cheap prices.
"Those companies who managed themselves for the down cycle were not rewarded," Howitt said.
This also made it difficult for investment managers who look for sustainable business models to outperform the market, because once it became clear the weaker companies would not fail, they regained strongly in value.
"All of those companies with the weaker business models, with the weaker management, they were suddenly all the companies that you need to own," Howitt said.
But overall she is positive about the Australian market in the years to come.
"We have rebounded about 55 per cent from March, but ... that was not impressive compared to other markets that did 70, 80, 90 per cent," she said.
"The good thing about a moderate rebound is that it gives us more room to move up from here."
The two non-consecutive alphabetic letters encountered most often last week caused more controversy than the underlying policy they represented, Wouter Klijn writes.... read more »
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