Jamie Nicol

The Australian equity market continues to look relatively cheap, despite having produced positive returns for seven out of the past eight years, according to leading equity fund manager DNR Capital.

“This is an extended run by historical standards and the price-earnings multiple of the market is trading towards the upper band,” says DNR Capital Chief Investment Officer Jamie Nicol.

But Nicol believes this rally has been unusual in not being accompanied by the usual froth and exuberance of previous extended runs.

“It has been characterised by cautiousness, lower interest rates and strong support for defensive assets, such as property and utilities,” he says.

As a consequence, DNR’s view is that domestic equities continue to offer value relative to alternatives like term deposits and bond rates.

However, to capitalise on this value, investors will have to shift their focus.

Nicol says Trump’s economic policies, which include a lift in fiscal stimulus, should drive inflation higher.

“A critical question for investors is whether inflation is accompanied by faster growth. Either scenario – inflation or inflation plus growth – is negative for bond yields and defensive assets,” Nicol says.

“Many investors have not experienced an inflationary environment. It is one where corporate margins are likely to decline, especially for lower quality companies with little pricing power.

“We are inclined to continue to seek quality companies with earnings upside and we are exploring opportunities among cyclical industries. Cyclicals are trading below their average price to book.

“In addition we expect opportunities will emerge to buy good quality growth companies over the next quarter as the market continues to rotate away from these names,” Nicol says.

The DNR Capital Australian Equities High Conviction Fund produced a return of 19.8 per cent over the 12 months to the end of January, compared with a benchmark return of 17.3 per cent.

A top contributor to the performance of the portfolio has been Treasury Wine Estates, which has outperformed on strong brand management, and growth in US and China.

“Australian wine is recognised by Chinese consumers as a desirable, premium product that has great taste,” Nicol says.

A top contributor to DNR Capital’s Australian Equities Socially Responsible Portfolio has been BWX Ltd, a skin and hair care products manufacturer – another company enjoying sales growth globally.

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