CHRIS BURRELL ’ S BLOG
support measures meant that there would be few company failures in the year to date . Indeed the banks have begun to write back the COVID provisions they made in 2020 and the restoration of dividends from the banks is well advanced . This has seen the banks recover almost all of the COVID falls . The other factor at play is the low interest rates engineered by central banks for the 1-3 year period with cash rates in Australia at 0.1 %. The banks are flush with cash and so term deposit rates are at generation lows e . g . 0.25 %. In this environment , the restoration of bank dividends so banks will be paying 4 % fully franked means that some investors will simply say they are better to own the bank than to put money in a term deposit in their bank . This may well see the banking sector appreciate even further with ANZ , Westpac and NAB perhaps back to $ 30 per share .
There remain some lagged sectors of which oil and gas stocks are an obvious example . During the last month there were several commentators agreeing with your diarist that the oil and gas sector is oversold and has lagged the recovery in markets . With oil recently above $ 70 USD / bbl , LNG prices are also firming . This bodes well for holding an overweight exposure in Australian portfolios to the gas sector . The position is likewise in the UK with oil stocks there trading at material discounts to pre-COVID levels . The USA has seen more recovery in that sector .
c ) Mergers & Acquisitions ( M & A )
The falls in interest rates mean that industry and retail superannuation funds have lost one of the key drivers of performance . As interest rates fell , there were capital gains on bonds held by such investors . That game is now over and as the long bond recovers over the next few years , perhaps at time with some quite rapid increases , the capital losses on such long dated bonds are likely to be a detractor from superfund portfolio returns . Likewise , shopping centers are COVID impacted and it is more difficult to drive short-term alpha returns from that sector .
This is driving investment in more opportunistic areas such as private equity capital and increasingly looking for opportunities in listed securities . We have seen action for Boral , Challenger , Tabcorp , Link and Myer in the past month with the Australian merchant banks busy looking for deals for their hungry principals . We have even seen some quite unethical behavior such as the Australian Super raid on Altura Mining where senior debt holders sold out , despite having entered into a standstill agreement with the company , which had only signed off on a capital raising and was simply awaiting the formality of a key shareholder signoff .
d ) Defensive v Growth
The valuation multiples on some growth stocks have reached levels that are difficult to justify , particularly in the USA . This has seen a pivot to more defensive value stocks which have lead the market in the past six months . Some commentators see this return to more traditional investing based on fundamental analysis as pleasing . An interesting observation by one foreign commentator is that even within the technology sector , the older more established stocks on lower valuation multiples and paying dividends have performed better than the newer tech stocks on the block . It is to be hoped that corrections may be orderly and impact on those stocks and sectors which are overvalued , rather than leading to a sell down across the whole US market .
In the 2000 tech-bubble , Australia chugged along largely unaffected , while the USA gave up most of its gains in the years previous to 2000 . We again see value and growth at reasonable prices ( GARP ) in both Australia and the USA as attractive places to invest , as compared to some stocks trading at high multiples . High multiples are justifiable where stocks are showing strong growth and revenue and profits are growing strongly . It is the stocks that do not have these attributes based off independent research where investors need to show care .
The macro-economic settings are causing confusion for markets . The central banks have adopted expansive monetary policies with strong equity and low interest rates . Some including your diarist see such loose monetary policy as a fueling asset bubble in sectors such as property and some equities . The central banks seem fixated on core inflation being above 2 % and unemployment being at the equivalent of the full employment level , before they see the need to adjust interest rates . We at Burrell are more concerned about the 10 year interest rate as that is the risk free rate , which is the building block for valuation of all businesses and also for property . The central banks will first need to taper their bond buying programs , before longer term interest rates will increase . This tapering together with the inflation central banks are seeking is creating unease in certain quarters . Nouriel Roubini sees stagflation coming , which he defines , as inflation + low growth . He says it is a question of when not if , repeating the stagflation era in the 1970s . It is unlikely markets would be favorably disposed to a period of stagflation .
e ) Infrastructure
The March blog commented that infrastructure is a likely beneficiary globally as governments move from broad-based income support measures such as Jobkeeper to support the replacement of aging infrastructure . This is both an Australian and global theme . Major construction projects were interrupted by COVID . In contrast home building in Australia was strong .
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