Whether recent market volatility presents a good buying opportunity or is a precursor to more turbulence straight ahead depends on how you look at the world of equities, the views of two prominent money managers show.
The benchmark S&P/ASX 200 Index has plunged almost 6 per cent in the last 10 days, bringing it close to the year’s April nadir of 5751 points, but while some asset managers see it as a good time to make calculated bets on equities, others are wary of an even bigger downturn and remain reluctant to jump in ahead of it.
A look at two of the nation’s prominent investment firms shows the divide in current investment opinions. Wilson Asset Management describes itself as a “research-driven” manager with a focus on “identifying undervalued growth companies”; Bennelong Australian Equity Partners (BAEP) calls its investment style “core quality”, and eschews value and growth metrics in favour of company fundamentals.
Wilson Asset Management’s Geoff Wilson says diving into recent market adjustments doesn’t make sense. One of the downturns will be the start of a bear market, he says, which could be just around the corner.
“Somewhere in the next period, we’re going to enter into a bear market,” Wilson explains. “One of our models is saying that it’s midnight – so in theory the market’s topped – and the other one is saying it’s 11:30. The one that says 11:30 thinks that we won’t go into a bear market for 12 to 18 months.”
Wilson says there is “no use in jumping too early”, because there will be “significant adjustments in valuations”.
“That’s when we get excited as an investor,” he says.
Wilson explains that his firm uses listed company structures with closed-end pools of capital, so it isn’t inclined to be “biased on the bullish side” in its commentary, unlike other fund managers, which have it in their interests to encourage people to invest with them. “We don’t carry that bias,” he says.
Wilson says his funds have a high level of cash holdings – now 32 per cent. Even as recently as a month ago, the level was “25 or 26 per cent”, he says, but the increased cash level now is no incentive to jump back into the market.
“There are some stocks we’ll be nibbling at, but in terms of a wholesale allocation to equities – we won’t be doing that,” Wilson explains. “What I’ve learnt in 38 years in the market is that there are no prizes for going early.
“You want people to be really scared and I don’t think they are at the moment.”
Bear market no given
Julian Beaumont, investment director at Bennelong Australian Equity Partners, provides a counterpoint to the reluctance of investors such as Wilson.
For one, he says, it’s not a given that we’re about to enter a significant bear market.
“I don’t think we are on the cusp of a big downturn,” Beaumont says. “I say that because the fundamentals seem to be reasonably strong; corporate profitability is on the rise and we’ve just gone through a pretty robust reporting season.
“Aggregate [2017-18] numbers are up 8 per cent and projections on the street are about 7 per cent in the coming year, so that presents pretty well,” he continues. “Valuations are supportive at around 15 times, on the PE model, so that’s slightly above historical average of about 14 times. In the context of where we are more broadly in the investment landscape, that seems pretty attractive.”
Beaumont admits the feeling in the investment community is a strange one at the moment.
“It’s sort of an odd mood, where people are kind of complacent but broadly concerned or cautious around what might be,” he says.
Nevertheless, he says the fundamentals on quality stocks have not changed and many of them are in “reasonable valuation territory”.
“Equity stacks up well. A number of stocks have done pretty poorly over the last week, so if you liked them, then you should like them a lot more now,” he says.
Beaumont names Flight Centre Travel Group (FLT), Aristocrat Leisure (ALL) and Costa Group (CGC) as a few of the stocks that present good opportunities, “to the extent that they’ve been knocked down a bit”.
Emotional perspective
Both Wilson and Beaumont acknowledge that retail investors – predominantly mums and dads or unsophisticated investors – have played a big role in the recent market swings.
Casual investors, Wilson says, are vulnerable to the kind of froth churned up by sensational media reporting – especially when market information is so quick and available. Beaumont says there is a significant “scare price” in some sectors as a result, which is making stocks more attractive.
“The average investor can get swayed, from an emotional perspective, a lot more than IN the old days,” Wilson says.
Dale Gillham, founder and chief analyst at investment consultancy firm Wealth Within, says unsophisticated investors tend to have these emotional reactions because they still haven’t acclimatised to having so much information at their fingertips.
“In June 2008, the iPhone hit, and we had the world in our hands,” Gillham says. “Since then, we’ve had all the information in the world in our hands and we’re constantly hearing stuff.”
It’s been a double-edged sword for investors who are still acclimatising to their information-rich environment, he says.
“The news cycle is generating so much of this short-term volatility,” he explains. “We’ve got incredible speed of information these days and I think we’re still getting used to that.”
