Industrial stocks are offering much better long-term value than resource companies, according to Avoca Investment Management.
The boutique's managing director, John Campbell, said that while many industrial sectors had underperformed due to weak consumer spending, high interest rates, the strong Australian dollar and other factors, their valuations were near 10-year lows.
For instance, segments such as consumer discretionary, transport, gaming and media currently traded at 12 times earnings.
In contrast, energy stocks were currently trading at more than 20 times earnings, while materials and gold were around 15 times as the share market was pricing in high commodity volumes and high commodity prices into perpetuity, he said.
"Our view is that the risk-return of industrials versus resource stocks is very much skewed in favour of industrial stocks at the moment," Campbell said in Sydney yesterday.
"The market is pricing in bearish conditions for industrials but not more normal conditions in the outer years."
He said industrials would be re-rated and more attractive to investors again when business conditions returned to more normal levels and resource prices fell.
"It is our opinion that commodity prices are not sustainable. They are at generational highs, but they are so attractive to potential commodity companies to build new supply that the supply response is coming," he said.
"On top of that China is a force for good in commodity markets, but it is not a linear force for good and China is going to suffer growth hiccups along the way. I think we're seeing that at the moment with inflationary issues coming to the fore.
"So we see both the supply response and the risks in China, maybe it's a short-term risk, but certainly a combination of those two will bring commodity prices down some time over the next three to five years."
Avoca was formed by Campbell and Jeremy Bendeich in partnership with Bennelong Funds Management.
They both formerly helped manage the UBS Australian Small Companies Fund.
