For equity investors who worry about the prospect of dislocation in the Australian sharemarket in the year ahead, asset manager Aaron Binsted shares your concern. And he has a few suggestions.
Binsted is an Australian equity portfolio manager at Lazard Asset Management. He says global monetary policy has trumped what we are seeing in the economy, with extraordinary low monetary policy fuelling investor demand for risk assets.
Lazard’s view is that historically low interest rates should not be a justification for soaring equity markets.
“Interest rates are low for a reason. Many equity market investors seem to be falling into the trap of thinking that interest rates are low purely for their benefit,” Binsted says.
Lazard’s view is that investors in the Australian market are paying a higher premium for growth than in other markets. Some stocks in that category include CSL, Cochlear and Resmed.
“When we look at Japan, we see that low interest rates do not necessarily mean that growth will perform better than value. Our view is that the low interest rate/growth nexus is simplistic,” Binsted says.
“The market is ignoring the golden rule, which says that nominal interest rates equal nominal GDP.”
Binsted sees opportunity in high-quality resources stocks. He has Rio Tinto, Woodside, Whitehaven Coal and Alumina in his portfolio. He likes them because they have low cost operations and strong balance sheets.
He likes some growth stocks, which he believes have attractive valuations. These include Reliance Worldwide, Domino’s Pizza and Flight Centre.
He also like some defensive and infrastructure stocks that have good cash flows. These include toll road operator Atlas Arteria, Spark Infrastructure and Transurban.
Binsted says: “We have been underweight banks for some time. In 2016 we said they were expensive. Since the GFC, capital requirement and regulatory constraints have gone up a lot. They were overvalued for a long time.
“It has taken a number of years for their returns to come down. It is very hard to see credit growth coming back soon. It is going to be a while before they pick up again. Ad there is a chance that dividend payments will go lower.”