This week I attended an investment conference where a number of fund managers presented on their funds. While of course there was an element of salesmanship in the presentations (each manager made a compelling case why investors should choose their fund), I thought I would note some of the insights and observations that came from the presentations.
In no particular order, fund manager observations:
- The outlook for NZ equities: Risky. NZ equities have been driven up by the quest for yield and the growth in ETFs (passive, index tracking funds). Witness foreign ownership of NZ equities which has risen from ~30% in 2012 to over 50% currently. Watch out if US long term interest rates go over 3%; investors will no longer own equities for income. The solution: look for value stocks and those with pricing power.
- Australian equities: Expensive. Currently there is a historically wide gap when comparing market prices to earnings/dividend yields. Contrarian investing is essential (but its not easy to do).
- The case for global equities (excluding US): Little correlation between NZ economy and global equities, therefore necessary for risk mitigation. Over the last 7 years, US returns have averaged 12% pa v rest of world 4% pa. Look for this to swing around. US$ at 15 year highs, unlikely to go much higher. There is a wide opportunity set. Look for owner operated businesses (skin in the game) and those with real competitive advantages.
- Investing in global infrastructure: Interest rates are likely to rise; historically 2/3 driven by inflation. What does this mean for infrastructure businesses? Overall negative, as investors may seek yield elsewhere. But positive for infrastructure businesses where the cost base is mostly fixed, but where they have the ability to increase prices with inflation. The trick is to find these infrastructure companies – good sectors are toll road companies, airports, CPI linked businesses.
- The case for investing in AREITs (Australasian commercial property funds): This sector will be fuelled by Asian growth – population growth, urbanisation, growth in middle classes. Will drive demand for commercial property across the region, including Australia & NZ.
- Natural resources stocks: Low correlation with other equity market sectors – diversification benefits. Commodity prices have recovered, but expected to keep increasing, supported by supply constraints caused by low capex spending. Electric vehicles, batteries expected to drive growth in lithium, copper resources. Aggregate (stone chips) another growth area.
- The case for India: In 10 years, India’s economy will be 3rd largest in world. Inflation is under control. Regulatory environment improving. Household debt is low and education levels/living standards are improving. Currently penetration of consumer goods is low. India is also a domestic driven economy – largely immune from global shocks.
- The case for downside protection: The environment for equities worldwide has deteriorated: increased political risks, interest rates rising, profit margins falling, declining globalisation, less favourable demographics. Holding both long and short positions can insulate against market turbulence. Less upside in rising markets, but provides downside protection in falling markets.
And finally, please note that none of the above constitutes investment advice or should be considered as recommendations – just interesting observations from a diverse collection of fund managers.