The lack of earnings growth in the Australian stock market has prompted Montgomery Investment Management to park between 25 and 30 per cent of its funds in cash.
Speaking at an ASX-listed Product Accreditation Course (LPAC) event in Sydney this week, Montgomery chief executive David Buckland said Australian shares are “starting to feel a bit toppy”.
In the five years to the ASX 300’s peak in February 2015, only 20 per cent of the gains in the market can be attributed to earnings growth, Mr Buckland said.
The market jumped 26.54 per cent over the five-year period, he said. Of that, 19.97 per cent was attributable to price/earnings (PE) growth (ie. dividend compression) and 5.47 per cent was down to earnings growth, Mr Buckland said.
“It was earnings that contributed 20 per cent, and PE growth – or interest rate compression – that contributed around 80 per cent,” he said.
“Will earnings really come through in force at some stage? And if they don’t, it’s no surprise to us that when markets were starting to give 6,000 points a nudge that they were starting to feel a bit toppy,” Mr Buckland said.
“That’s one of the reasons all of our products are 25-30 per cent in cash,” he said – adding that Montgomery is currently “waiting for opportunities”.
Mr Buckland encouraged investors to put “money in the bank and wait for a rainy day”.
He also said investors should take profits in ‘bond-like companies’ that have a greater sensitivity to interest rates.
“Aim for companies with really solid, reliable, and sustainable growth rather than just buying bond-like companies,” Mr Buckland said.
He also pointed to the dangers of the “booming” residential property market that is being driven by record-low interest rates.
Household debt as a percentage of annual income is close to 200 per cent in Australia, he said, citing statistics from Barclays.
Australians are overweight the big four banks, which are in turn overweight property, Mr Buckland said.
“Real estate is less affordable in Wollongong, a steel town near Sydney, than in New York City,” he said.
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