A lot of investment managers had trouble navigating the ups and downs of the Australian equity market last financial year, with its big sell-off in the December quarter and strong comeback in the second half of the year.
Some believe record-low interest rates have propelled segments of the market to an unsustainable position. One of them is investment manager Steve Johnson, who says “we are all losing out to the speculators”.
Johnson is the chief investment officer at Forager Funds Management, and in the firm’s latest quarterly report he points to a number of ASX-listed companies that each has less than $50 million of revenue but market capitalisations of more than $500 million.
These companies include skin cell therapy developer Avita Medical, know your customer specialist iSignthis, medical devices company Polynovo Ltd, a maker of drugs to treat skin disorders Clinuvel Pharmaceuticals, imaging It provider Pro Medicus, IT company Megaport, stem cell researcher Mesoblat, audio networking company Audinate Group, dairy producer Bubs Australia and industrial hemp and medicinal cannabis producer Elixinol Global.
Johnson says: “As a group these companies lost $227 million in the most recent 12 months. This speculative pocket – there are many more than these – is a bubble.”
The Forager Australian Shares Fund lost 19.7 per cent in the year to June, compared with an 11 per cent rise in the All Ordinaries Accumulation Index.
Johnson is in no doubt that the force that is propelling this rise in speculative stock prices and making it hard for conventional value investment managers to make headway is record low interest rates.
“Globally, whether zero interest rates and quantitative easing have had their desired effect on economic growth and inflation is debatable. There is unequivocal evidence, on the other hand, that the impact on asset prices – equity and property in particular – has been in one direction: up.
“The yield on 10-year Australian government bonds has fallen from 2.8 per cent to 1.3 per cent in the past 12 months, interest rates on deposits have been slashed and the RBA has suggested several more rate cuts are likely this year.
“Is it any surprise that investors have rushed headlong into dividend paying stocks?”
Johnson argues that the case for investing in strong businesses with reasonable dividend yields and the ability to withstand an economic downturn remains compelling, despite the rally in ASX stocks this year.