Tightening credit environment influences stock preferences across DNR Capital’s Australian equity funds

From

Jamie Nicol

Leading Australian equity investment manager, DNR Capital, has factored in a possible reduction in credit growth in determining the current positioning of its Australian equity funds including being underweight bond proxies and higher price-earnings (PE) stocks.

DNR Capital Chief Investment Officer Jamie Nicol said: “There can be little doubt that we are looking at a period of reduction in credit growth and that this will have a headwind effect for consumers. It seems most likely that this will have some incremental flow-on effect on the housing sector and consumer behavior.

“The bigger risk would be if the reduction in credit availability snowballed into a fully blown credit crunch. Whilst we don’t believe it is the regulator’s intention to drive a material reduction in credit availability, macro prudential initiatives have already targeted investor and interest only loans.

“The banking and financial services Royal Commission has turned the spotlight on the banks’ responsible lending obligations.

“In this environment our suite of Australian equities portfolios – ‘High Conviction’, ‘Socially Responsible’ and ‘Income’ will be managed in accordance with a number of key considerations.

“Given the inflation outlook DNR Capital’s Australian funds are underweight bond proxies and we are reducing exposure to higher price-earnings (PE) ratio stocks. With regard to elevated household debt to GDP we are underweight consumer stocks and banks.

“We are maintaining exposure to companies invested in mining and infrastructure spending, noting corporate debt is low and capex is rising.

“With the resource cycle turning we are overweight major resource stocks and we are overweight offshore earners due to our belief the interest rate differential to the US suggests AUD weakness.

“In terms of specific stocks, we have been building positions in quality names like Woolworths Group (ASX: WOW), which offers good defensive characteristics and good growth, and have found opportunities in companies like CYBG (ASX: CYB) and companies whose balance sheets and outlooks have improved substantially, like Woodside Petroleum (ASX:WPL),” said Mr Nicol.

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