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Super-low rates driving equities: AFIC
Mon 22 July 2019 - 2:37 pmNews
Very low interest rates are making for “quite extraordinary times” in the share market, the Australian Foundation Investment Company’s investment boss says.
Historically low interest rates will be the driving factor for equities going forward, the managing director of Australia’s largest listed investment company says.
“These are quite extraordinary times at the moment,” Australian Foundation Investment Company chief investment officer Mark Freeman told AAP.
“It’s almost unprecedented.”
The Reserve Bank of Australia three weeks ago cut interest rates for a second month in a row, and there are indications the US may be about to reverse recent rises.
Mr Freeman said investors are struggling to understand why central banks have decided to slash interest rates given that the global economy may be slowing but does not seem to be in terrible shape.
“There’s a view that ‘are they seeing something we’re not?” Mr Freeman said of central banks.
“There’s always the concern about losing levers to pull if things get really bad.”
The rates are so low that they are forcing investors to move money from bonds and fixed-term investments into equities in search of yield, Mr Freeman said.
From historical price/equity valuation, shares look expensive but compared to bond yields they look cheap, Mr Freeman said.
Still, with Australia’s company reporting season beginning next week, there could be “troubled times ahead” if companies underwhelm following the share market’s seven months of gains, he said.
The Australian Foundation Investment Company reported its own results on Monday, reporting a profit of $406.4 million in the 12 months to June 30, up 45.6 per cent from the past year.
The company, which invests in Australian and New Zealand listed equities, reduced its holdings from 91 to 76, and reported an 11.4 per cent return over the year, compared to 13.4 per cent for the ASX200 index.
The company’s investments in BHP, Commonwealth Bank, Transurban, Telstra, Brambles and CSL were winners but its shares in CYBG and Challenger were not and it does not own gold stocks, which have rallied in recent months.
Looking forward, Mr Freeman declined to say what companies he liked other than NAB, which as of June 30 was AFIC’s fifth-biggest holding at $341 million, behind CBA, BHP, Westpac and CSL.
AFIC added to its position in NAB by $88.9 million about six months ago, and Mr Freeman said the bank appeared to have the right team in place with new chief executive Ross McEwan and chairman Phil Chronican to turn things around.
Mr Freeman was wary of the tech sector which he sees as overvalued.
“I’ve seen some [price/earnings] multiples I’ve never seen before, even during the tech boom,” he said.
“We’re not going to jump in and buy them now, that’s for sure.”
But if “quality companies” like CSL report disappointing earnings and their share price takes a hit, AFIC has set some cash set aside in its assets of $7.8 billion for a buying opportunity, Mr Freeman said.