Many Aussie fund managers are piling up on cash unsure of which stocks are safe bets. Cash levels for some managers are up there with levels reached during the height of the global financial crisis in 2008.
The fear for fund managers and investors alike is jumping into the market too early and seeing capital erode as the Aussie market continues to slide. Capital preservation is taking precedence over winning returns, particularly when cash in the bank can still earn 5%.
There’s no doubt that some stocks are looking cheap based on multiple valuation metrics, but stock-specific news at the moment is deafened by the relentless noise coming out of Europe and the US. According to Alphinity Investment Management there’s little or no reward for stock picking at the moment. “The market at present is highly correlated, meaning there is little differentiation between stock performance,” the fund manager reports.
For many investors this is a troubling stgelopment. Friendly sharemarkets are when correlations are low, in that stocks move independently of each other for reasons specific to the stocks. This isn’t the case at the moment as stocks ride on the fortunes of fear and greed regardless of their underlying profitability or outlook.
Not all stocks are in free fall, however, and many are posting solid earnings numbers and healthy dividends. So considering that fund managers can’t be entirely in cash, which stocks are they buying?
The favoured sector for Alphinity Australian Share fund is energy – oil and gas companies such as Santos and Oil Search as well as coal producers such as New Hope and Whitehaven Coal. “We see several reasons to be optimistic about the energy sector,” Alphinity notes. “We expect the market in thermal coal (which is used to generate electricity, as distinct from metallurgical coal used in steel production) to continue to be tight. Demand will be supported by seasonal factors in the short term, and in the medium and longer term a number of forces:
(a) India, whose domestic production struggles to keep pace with its demand growth;
(b) China, which faces rising costs and ongoing infrastructure bottlenecks; and
(c) by Japan, which will progressively shift its energy mix away from nuclear post Fukushima.
Supply on the other hand, could be negatively affected by yet another El Nina weather pattern this year (affecting 80% of the seaborne volume) and by Indonesian policies favouring domestic coal consumption. This price dynamic bodes well for our coal exposures New Hope and Whitehaven, which should also benefit from their own production expansion programs,” it noted.
Additionally, the manager argues that the Liquefied Natural Gas (LNG) market has shifted from a buyer’s market to a seller’s market; the Fukushima disaster as well as the ongoing quest for greener/cleaner energy has prompted this. “We expect this market to remain tight for another few years which bodes well for companies negotiating new long term contracts. We believe the margins will be further supported by an elevated Brent oil price environment as new sources of oil supply will have to come from more expensive oil sands and deep sea sources, and an increasing reliance on OPEC production.” Santos and Oil Search will benefit from such an environment, they argue. Santos will benefit from rising domestic gas prices and a significant boost in production; an active exploration program for Oil Search should underpin sufficient gas for a third LNG train.
Alphinity’s share portfolio also holds several resilient stocks such as infrastructure companies MAp Group and toll operator Transurban, plus Telstra, which is not only an attractive dividend play but has ‘turned a corner in terms of the company’s outlook,’ the manager argues.
Another fund manager, the Tyndall Australian Share Fund is also heavily invested in Oil Search. The fund has stocked up on defensive bets such as Woolworths, Telstra and Amcor.
A leaning towards more defensive stocks is definitely a theme we’re hearing in fund manager circles. Ganes Capital Management has deliberately moved to a more defensive profile with higher cash levels and a preference for larger companies with stable earnings such as Woolworths and Coca Cola Amatil. Ganes Focused Value Fund has its biggest holding in four-wheeled drive accessories manufacturer ARB Corporation, which recently posted 16% gain in reported net profit and 12% boost in sales. “The company’s manufacturing plants in Thailand and Australia are operating at near full capacity and management have announced they will expand the Thailand plant to increase production.”
Blackmores is also a favourite with the manager, especially in light of the company’s Asian expansion, which is contributing significantly to the business. Asia now contributes around 20% of the company’s sales and profits up from 2% just two years ago. “At this stage the company has entered four markets but is looking to expand further, particularly following its success in Korea. We think the company can continue to find growth opportunities in an environment where companies are likely to struggle to grow earnings.”
During the last quarter Tyndall took up a new position in beleaguered company Cochlear. The purchase was made following the announcement of the voluntary recall of its Nucleus CI500 range of implants. While many brokers have been shunning the stock, Tyndall argues that the problem should be remedied and the market leading stgice should be back on the market in three years’ time.
The Perennial Value Shares for Income Trust seeks high-yielding stocks for unit holders. Normally, the fund would focus on stocks like the major banks, but today they’re noticing good dividend opportunities from resource stocks like Orica and Woodside Petroleum. “The recent sell-off in resource stocks created opportunities to establish positions in these stocks at attractive valuation levels,” noted the manager.
“Orica is the global leader in the mining explosives industry. The company has a very strong market position, supported by strategically located manufacturing plants and strong customer relationships. Being a provider of key inputs to mining operations, the company is benefitting from increasing global mining volumes, while being relatively unaffected by swings in commodity prices…Orica provides a relatively low-risk exposure to rising commodity demand and has a very strong medium-term earnings growth profile also likely to lead to dividend growth over time.”
Another favourite dividend play is Woodside Petroleum. The manager says: “Woodside Petroleum operates the North West Shelf Venture in Western Australia, one of the world’s largest oil and gas production operations. As such, the company provides high-quality exposure to what is expected to be strong energy prices going forward and production growth, as the Pluto LNG operation comes on line in early 2012.”
The Growth fund of Perennial Asset Management recently added Seek to its trust, and of particular merit is the company’s move into overseas markets. Seek is a market leading in online employment, classified, training and education. “The offshore businesses and the move into education provide a strong platform for growth for the business and we have taken advantage of recent share price weakness to initiate a position,” the manager noted.
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