TRANSCRIPTION OF FINANCE NEWS NETWORK INTERVIEW WITH AUSBIL DEXIA LIMITED DIRECTOR OF EQUITY, JOHN GRACE
Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from Fund Manager Ausbil Dexia for a year-end update is Director of Equity, John Grace. John welcome back. It appears as though markets are regaining their composure after one of the most volatile years since the GFC. Is that how you see it?
John Grace: Well in the short-term Clive, the markets have rallied quite strongly through the October period of just over 7% for the Australian Index. But over the course of the year, they’re down nearly 9%, so it has been quite a volatile period. So regaining their composure is not quite what we’re seeing, we’re seeing increased and consistent volatility throughout the Australian Stock Market and consistently across global markets of course.
Clive Tompkins: Thanks John. And generally, what happens to markets after a year like this one, can we expect to see lower of volatility next year?
John Grace: It’s difficult to assess Clive. Our assessment really is that there will be continued volatility going through into 2012, mainly because of the intensity of the macro uncertainty that’s out there at the moment. Particularly out of Europe and of course question marks coming over US growth as well. So we see continued volatility into 2012.
Clive Tompkins: Now to the local market. Resource stocks have had an indifferent year despite commodity prices generally remaining strong and earnings coming in at the upper-end of expectations. What is Ausbil’s view on resource stocks at these prices?
John Grace: Yeah Ausbil’s view on resource stocks is they represent reasonably attractive valuations at these levels. The stock prices as you point out have come down quite hard this year, the likes of BHP (ASX: BHP)and Rio (ASX:RIO)down close to 20% against the market down at around 9%. So the resource stocks have underperformed but valuations are reasonably attractive as I said. Commodity prices also have come down, copper are down about 30% and iron-ore down about 40% and its low, but it has rallied about 30% off those lows. So a lot of volatility in commodity prices and resource stocks, but valuations are reasonably attractive. The PEs of the big diversified miners around ten time’s earnings and very strong cash flows coming through, despite those slightly lower commodity prices. But volumes remain very strong.
Clive Tompkins: Good and have you been a buyer on the dips?
John Grace: We’ve been holding our overweight positions in resource stocks, so we haven’t been buying aggressively on the dips. But with certain cash flows we have been adding to positions here and there, i.e. very selectively. Our favoured commodities really remain copper, iron-ore and coking coal, and they’ve been the type of stocks we’ve been gravitating towards when we see good value on the dips.
Clive Tompkins: John you mentioned iron-ore prices recovering after a sell-off. What is your view on this key commodity?
John Grace: Yes we remain quite bullish on iron-ore; their prices have come down from $180 a tonne down to about $105/106 at its low in the spot price. But we’ve seen a rally back close to $150 over the course of the last month or so. So again there’s some more volatility in the iron-ore price, but the contract price still remains above spot. But there has been some gaming of markets given global macro uncertainty and some weakness in that spot price. Again we’ve seen a nice solid rally back from those lows. So our view on iron-ore prices is they will remain reasonably volatile but at elevated levels, around $150 a tonne which is consistent with the forecast from the Street.
Clive Tompkins: And John when you see Chinese interest in iron-ore stocks like Sundance Resources, does that give you confidence in the longer term?
John Grace: Yes it does. The iron-ore price again, has been volatile but the interest from the Chinese in particular in terms of volumes, remains very consistent. And they’re also very keen to attract volumes into their markets and have been acquiring resource companies, iron-ore companies and adding to their suite of supply across Africa, across Australia etc. So we see continued corporate activity and interest from the Chinese into our iron-ore markets.
Clive Tompkins: Now to other sectors of the market. Banks have recently reported record earnings without any hint of a change to their dividends, yet they appear out of favour. What is your view on banks and financials?
John Grace: Yeah banks have performed reasonably well in the domestic market and they’re roughly square against the market down nearly 9%. So the dividend yield of around 7.5/8% has been very helpful in its total return relative to the market. PEs are reasonably attractive around 8.5 times as well, so the valuations are solid. As you point out, the profits are at record levels but the concern really is on global funding from banks. Australian banks are reasonably well positioned into this market. But there are some pressures, offshore pressures in terms of wholesale funding which is increasing the costs and putting a little bit of pressure on margins. But our overall outlook for banks is reasonably positive; we do have an overweight position in our portfolio.
Clive Tompkins: And John, what about industrials, stocks with offshore earnings like Amcor (ASX:AMC) are up on the year. What do you like in the industrial space?
John Grace: Yeah the outlook for industrials is reasonably positive, depending clearly on the position of the company and the markets they’re operating in. Some of the stocks we do like and favour in our portfolio, particularly with overweight positions, are Amcor (ASX:AMC) which has made that great acquisition with Alcan through 2008/2009. And funnily enough its most profitable operating position is in Europe, it’s really in consumer stable packaging and going particularly well. The valuations attractive, earnings growth is very solid and well above market – a clear favourite in our portfolio. Brambles (ASX:BXB) has been another stock in our portfolio that we do like. The new management there has been winning back contracts in the US that they previously lost, and making some good progress in the pallet business. The valuations are attractive and they will benefit from a falling Aussie dollar as well.
Clive Tompkins: And do you have a comment on Telstra now that shareholders have backed the deal with NBNCo?
John Grace: Yeah, Telstra (ASX:TLS) has been in an improving position in our portfolio. It’s performed reasonably well ahead of the market returns; it’s up about 2% this year. Again the dividend yield has been very important in the total return from this stock. The NBN deal is very attractive for Telstra (ASX:TLS) shareholders, that cash flow should start to come through in the next few years. And we do believe that dividend is underwritten and we could also see some capital management coming through. So Telstra is in an overweight position in our portfolios and a core industrial position.
Clive Tompkins: And John, what about retailing?
John Grace: Yeah retailing is a tough industry, you’ve got some structural issues with online purchases clearly affecting like for like sales. You’ve got a more conservative economy out there with savings rates going up and therefore, the retails are doing it tough at the moment. However, the bright side is we’re starting to get an interest rate cut cycle coming through. And in terms of cyclicals, these retails should start to be positioned reasonably well in the equity market because valuations have come down quite nicely, balance sheets are in good shape and dividend yields are quite attractive. So we do see some upside from retailers at these lower levels. Overweight positions in our portfolios include the likes of David Jones (ASX:DJS), Myer (ASX:MYR) and the department stores. We do like Kathmandu (ASX:KMD)in the specialist retail space, particularly with the outdoor activities driving strong demand for its businesses. And other stock we have picked up is Super Retail Group (ASX:SUL) which just purchased the Rebel stores off private equity. We had not been in that stock before but saw it as a good opportunity to pick up a big stake in that group. And we do see some prospect from management to drive efficiencies through that acquisition and therefore, drive increasing sales and profitability through that business.
Clive Tompkins: Last question. What chance of a Christmas rally?
John Grace: Ah Clive, I’ve got my fingers crossed. We do believe that there could be a Christmas rally particularly in the domestic market, if we do get that rate cut cycle and a bit more confidence coming back. We’ll see retailers pick up a little as well. But it really is all about the macro uncertainty and the offshore negative news which is really impacting sentiment here. Nevertheless volumes are quite light, so a little bit of confidence coming back in and we could well see a Christmas rally - into 2012 also.
Clive Tompkins: John Grace thanks as always for the update.
John Grace: Okay thanks Clive, thanks for the questions.
ENDS
BHP Price at posting:
$37.16 Sentiment: None Disclosure: Held
(20min delay)
