Jamie Nicol
DNR Capital likes Macquarie, James Hardie, Seek and others with pricing power as defensives lose their shine
Investment markets are at a turning point according to DNR Capital Chief Investment Officer and Director Jamie Nicol and there are some clear ramifications, particularly for self-directed investors.
“Bond yields are up 80 basis points since the lows of mid last year and the level of pessimism regarding debt deflation and stagnation has eased significantly over the past year as the growth outlook has improved”, said Nicol.
Nicol adds, “Since the GFC, portfolio decisions have been driven by a combination of factors whose time has arguably passed, or is about to.
There has been broad risk aversion following the volatility and capital loss experienced as a result of the GFC. Low interest rates have caused a squeeze on savers and there has been a scarcity of growth as a result of the modest global growth environment.”
“Generally there has been a high allocation to defensive assets such as bonds, property, infrastructure and utilities, whilst a premium has generally been paid for identifiable growth assets and high yielding assets”, notes Nicol.
“The search for yield has driven outperformance by utilities, property trusts and infrastructure. As a result of this strong outperformance valuations now appear expensive for defensive assets.”
“To borrow from the classic Castrol oil marketing campaign of the 1980s which featured the famous line: ’Oils ain’t oils, Sol’, we believe ‘defensives ain’t defensive’. They are now relatively expensive and their growth outlook is inferior to other options.”
“The world is changing. The economic environment is becoming more inflationary and there is an expectation, post-Trump of growth accelerating and inflation picking up. Global growth expectations have advanced, with 3.8% forecast this year. US unemployment claims are at 45-year lows.”
“Whilst Trump’s ultimate success implementing his policy vision remains under a cloud the ongoing influence of his shock election win influences politics across the globe. There has been a notable shift away from supply side monetary policy to fiscal stimulus.”
“At DNR Capital we are underweight bond proxies such as infrastructure, property and utilities and are now focused on companies that we believe can pass on inflation to their customers. Margins in low quality businesses, we believe, will be squeezed as inflation rises. We believe earning growth is likely to come from cyclically exposed companies or growth companies” said Nicol.
“Our move from defensives is to diversified financials, construction and resource exposed companies such as Macquarie Bank James Hardie; and ALS, added Nicol.
“Other quality companies which we believe offer good growth prospects in this transitioning environment include internet models such as Seek, Treasury Wine, which has good exposure to the Chinese consumer growth story and other stocks with very strong market position such as Brambles”, Nicol said.
