The 2012 financial reporting season was not as bad as some investors had feared with investor’s expectations having been largely reset, according to the Goldman Sachs Asset Management Australian Equities team.
Despite an encouraging valuation level for the broader market, the team believes in a targeted approach given the uncertainty that exists locally and globally.
Outlining the key themes to emerge in Australian equities over the period the Goldman Sachs Asset Management Australian Equities team has identified an excessive focus on ‘yield at any price’ as a cause for concern, which has potential to unwind. While overall results largely reinforced the team’s sector ratings, a significant change was to exit most holdings in the REIT sector.
“The number of companies who missed expectations, was broadly in line with the long-term historical average, with the bad news having been broadly factored in,” said Dion Hershan, Head of Australian Equities at Goldman Sachs Asset Management. “Despite this the reality is that there are a number of cross currents buffeting the Australian economy and we believe that a targeted approach is required to identify value.”
The Goldman Sachs Asset Management team consists of 10 analysts, eight of which are sector specialists. It manages $2.8 billion on behalf of Australian institutional and individual investors. The team adopts a long-term, active, research-driven approach to managing domestic equities which includes more than a thousand meetings with Australian companies per annum.
“There are a number of themes playing out in the market at the moment,” Hershan said. “On the positive side interest rates are falling, balance sheets have largely been strengthened, although a few weak outliers persist, and sectors exposed to higher growth regions have been resilient.”
“On the negative side most companies are experiencing cost pressure, low productivity and the impact of a strong Australian dollar. Miners in particular are facing rising input costs, and lower commodity prices with a negative flow on effect for investment in new projects. Perhaps unsurprisingly companies are also being reticent about providing guidance which we think is a function of lower levels of confidence in uncertain markets.”
“As a result of this uncertainty, many investors have become pre-occupied with yield and so-called ‘safe haven’ stocks,” said Hershan, “We have a strong view that ‘yield at any price’ is a flawed concept, and without valuation support, an unwind is likely. Over the long term we prefer to focus on the total return of an investment, with capital growth being critical in addition to yield.”
“We believe that there is value to be found at the moment but you have to be extremely selective to find it. You can’t rely upon an economic recovery or normalization across the board, at least in the short-term. We are focused on identifying companies we believe can thrive irrespective of the operating environment, whether that be through organic growth, quality of the management team, or through control of the cost base and productivity gains.”
“From an overall sector perspective the results season largely reinforced our key positions. We remain underweight metals and mining, insurance and telecoms. By contrast to our position on resources we are overweight energy. That’s a reflection of our view on energy prices and the level of confidence we have on some of these LNG projects progressing to market and delivering against return targets. We are also overweight transport where we see opportunities for increased productivity and efficiency, and banks which we think remain stable and resilient and which offer strong total returns.”
On the team’s position on REITs Hershan added; “We were an early re-entrant back into REITs in 2009 with a view that balance sheet issues had been addressed, the underlying properties were performing well and the steep discount to asset backing was unsustainable. The valuation opportunity has largely played out and headwinds are emerging for property fundamentals with regard to rental growth and vacancies, given the broader economic environment. With the risk/reward now unfavourable we have moved to a significant underweight position.”