Investors must focus on companies with resilient business models that have the balance of power over their suppliers and customers, says Pengana Australian Equities Fund manager, Rhett Kessler.
Pragmatic investors need to be alert for well-managed companies with the business models and balance sheets to take advantage of three dynamics.
‘The first is the US economy’s ability to consistently re-invent itself combined with the potential ‘game changer’ of becoming energy self-sufficient due to its recently accessible (and massive) oil shale reserves, followed by the Chinese authorities’ efforts to reinvigorate (or at least stabilise) economic growth may be successful.’
‘The third factor is the significant reduction in interest rates domestically may be creating a base for consumer confidence,’ Kessler says.
Investors need to focus on companies with resilient business models that have the balance of power over their suppliers and customers . Examples include:
- Ryman Healthcare with high-quality aged care facilities and capital-efficient business model
- Resmed with its dominant global position in sleep-apnoea medical device solutions
- Telstra as the provider of superior wireless communications services and scalable fixed-line construction services
- Caltex with its position as an integrated liquid fuel procurer, storage and distribution facilitator and marketer
- ANZ Bank through its Asia Pacific banking services network – in particular for five reasons:
1. a high-quality member of the domestic banking oligopoly
2. management’s focus on improving productivity
3. results to date in this area have provided a key underpinning to after-tax cash earnings
4. the after-tax-cash-earnings yield generated by these businesses deserve focus
5. a resilient business model due to the scale required to create a robust technology platform and diversified funding base.
‘Our reliance on structural competitive advantage allows for shareholder benefits as weaker competitors fall by the wayside,’ he says.
‘Australian businesses are still fighting cyclical and structural factors such as a cautious consumer, lack of confidence in the Government’s policy decisions, the increasing effects of a strong Australian dollar on domestic business’s competitive position and growing uncertainty in the mining and related sectors,’ Kessler adds.
Continuing attempts by the US, European and Japanese monetary authorities to dilute their respective currencies (to de-monetise their debt and stimulate their export sectors) will translate into “higher values” for hard assets and companies with well-diversified and robust cash flows.
‘Robust share prices have narrowed the investable opportunity set, and business activity levels continue to be muted with many sectors reporting evidence of a deteriorating operating environment.
‘The re-rating of many companies’ share prices may be due to the (not immaterial) impact of a lower cost of money environment and the resulting positive effect on long duration assets (particularly off a low base) rather than the improvement in the outlook for revenues and earnings.’