Perennial Value Management has warned Australian investors against falling into over-negativity, saying that despite market volatility, falling property prices and fears of recession, the recent market sell-off is opening up opportunities for investment in 2019.
The year began with a fall in the share market in the December quarter, the firm noted, where the sell-off mirrored what was seen in offshore markets as a result of uncertainty around issues such as the US/China trade war and Brexit, as well as rising interest rates.
Perennial Value managing director John Murray said 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,” Mr Murray said.
“The budget is heading back into surplus and both interest rates and inflation remain at low levels.”
He added other boosts to the economy were unemployment being low, activity being robust in the infrastructure sector on the back of a number of major projects and an increased investment in the resources sector being likely.
“The weaker Australian dollar is also acting as a buffer, benefitting export industries and 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 the recent sell-off has taken the Australian stock market P/E to slightly below the long-term average of 14.0x.
Further, the overall market gross yield of 6.5 per cent remains compelling compared to term deposit rates, he said.
“Within the market itself there remains a wide valuation dispersion, with many growth and momentum stocks remaining expensive while many value stocks are trading at cheap levels,” Mr Bruce said.
“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.”
Perennial is forecasting moderate earnings growth for the market more broadly 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,” Mr Bruce said.
“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 says the global macro environment remains challenging and for investors the investment timeframe is a critical piece to consider.
“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,” Mr Murray said.
“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 and Perpetual and Event Hospitality and Entertainment.
Discussing Perennial’s resource holdings, Mr Murray commented: “We are holding a spread of gold producers – Newcrest, Evolution and Northern Star – who 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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