Exercise caution and let some cash build

Nicholas Grove  |  24/10/2016Text size  Decrease  Increase  |  

Nicholas Grove: I'm Nick Grove at the Morningstar Individual Investor Conference in 2016 and I'm joined by Morningstar's head of equities research, Peter Warnes.

Peter, you've said in your recent Overview that you think we're approaching the end of a three-decade bond bull market. What are the implications of this for equities markets?

Peter Warnes: Well, Nick, that's right. I do believe that we have probably seen the bottom--or the top of the bond bull market certainly and the bottom of yield. That doesn't necessary mean we're going to see a big reversal. I think that's completely off the cards. I wouldn't get too concerned about the long-term implications for the equity markets, but I do think there could be a short-term disruption and that's one of the reasons why I'm a little bit cautious. But this bond market, as I said, 35 years of the bull, it is not going to be all of a sudden all over. It will bottom and it will consolidate. Inflation and low economic growth are still going to be front and center and that's not going to allow bond yields to rise too much.

Grove: And you said, Peter, over the next six months given a few of the major significant events that are going to be happening around the world, you are happy to let cash build over the next six months. Why do you think this is a wise move?

Warnes: Well, Nick, equity markets are relatively expensive compared to the bond market. I think you should be very, very careful pricing equities off bond yields that are officially low and pushed down by the central banks, have a normalised bond yield would probably 100 basis points higher, therefore I think the equity market should be a little bit lower. I also think that with Janet Yellen almost certain to pull the trigger in December--whilst the market should be quite conditioned to that happening, the event may well be a bit disruptive and you've got all sorts of things. You've got Deutsche Bank; you've got Italian referendum; you've got possible Trump. All those things suggest to me that just be a bit prudent and a bit more cautious and let's cash build.

Grove: And just to go off on a little bit of a tangent, let's talk poultry. What do you think of the indicative price range for the Ingham's IPO?

Warnes: Well, Nick, this has got private equity fingerprints all over it and I think this chicken has already been plucked when you had close look at it, but I just don't like the way that 2016 profit was up 60 per cent on 2015 and then this year it's going to be up another 18 per cent. The revenue hasn't moved all that much. It's been costs taken out and I don't think that's sustainable and I think I'd be very, very cautious. But we are doing an in-depth look at it and we'll have that research out next week.

Grove: Peter, thanks for your time today.

Warnes: Pleasure, Nick.

Grove: I'm Nick Grove at the Morningstar Individual Investor Conference for 2016.

Video Archive...

Exercise caution and let some cash build
24/10/2016  Morningstar's Peter Warnes provides a near-term outlook for equities markets, while also sharing his thoughts on the upcoming Ingham's IPO.
Bogle forecasts low stock and bond market returns
21/10/2016  Warning of "much lower market returns" ahead, Vanguard founder Jack Bogle urges investors to seek low-cost investment products. From Morningstar US.
Finding the right flavour ETF amid expanding ETP menu
13/10/2016  From a relatively vanilla selection of exchange-traded funds (ETFs) on offer in the early 2000s, Australian investors can now choose from a wide range of exchange-traded products to suit various tastes.
Bright outlook for Aussie banks despite parliamentary committee and looming Basel IV regulations
12/10/2016  Australia’s ‘big four’ banks’ share prices have held up after their CEOs last week fronted a parliamentary committee, and have already absorbed the potential impact of more stringent capital requirements
Dividend, cashflow challenges hit investors but yield opportunities remain
06/10/2016  Technology, healthcare and telecoms hold opportunities for global equity investors even as utilities and energy stocks disappoint, says Jane Shoemake, director for global equity, Henderson
No place for set-and-forget asset allocation
04/10/2016  A 2016 company reporting season overview and explanation of why dynamic asset allocation is so important, from Dr Shane Oliver, chief economist and director of investment strategy, AMP Capital.
The search for bond yields
27/09/2016  Morningstar's Hybrid Handbook: Navigating the Australian Hybrid Market pulls back the curtain on corporate and bank hybrids, as John Likos, Morningstar's senior credit analyst, explains.
Here's which stocks will be the real winners in FY17
15/09/2016  Morningstar's Peter Warnes reflects upon the most recent corporate earnings season and shares his thoughts on which stocks could deliver strong performances in the near term.
Resolution Capital Global Property Securities
13/09/2016  Morningstar's Ross Macmillan examines a number of outstanding qualities that sets Resolution Capital apart from other managers.
India: Economy slows but stock market outlook is bright
07/09/2016  Despite poor recent performance, India remains a key investment for emerging market investors. Fidelity's Medha Samant explains the position.
China rally will continue but prepare for volatility
07/09/2016  Last year, volatility in the Chinese stock market spilled over into global stocks. This year, the market has been more encouraging--will the rally last?
Helping SMSF trustees negotiate super complexities
19/08/2016  Peter Hogan, head of technical at the SMSF Association, shares his insights on the changing super environment and how it will affect SMSF trustees.
Chasing income in a low return world
10/08/2016  Paul Reisz, Pimco's executive vice president and income product manager head, gives his insights on where bond investors may find yield in the difficult global market environment.
US stocks offer most attractive income, says Investec
03/08/2016  Investec's UK-based global equity income investor Blake Hutchins says despite the stock-market rally raising valuations, the US offers the most attractive options for income investors.
US stocks which will continue to rally
28/07/2016  The US stock market looks fairly valued as a whole, admits JP Morgan's Dennis Ruhl--but there are some sectors which will deliver further growth.
Xero underlines returning popularity of technology stocks
19/07/2016  The success of accounting software company Xero is part of a broader resurgence of technology companies, contrasting with the shifting fortunes of Australia's resources sector.
Zurich Investments Global Thematic
18/07/2016  Morningstar's Kathryn Young explains what sets Zurich Investments Global Thematic apart from rival global equities strategies.
Gold Managers: Platinum International Fund
15/07/2016  Morningstar's Kathryn Young explains what makes Platinum International a standout strategy and the rationale behind the fund's Gold rating.
Gold Managers: Magellan Global Fund
15/07/2016  Morningstar's Tim Wong explains why the Magellan Global Equities was upgraded to Gold and why there is more to the strategy than Hamish Douglass.
Is this graph to blame for Brexit?
13/07/2016  Britain's vote to leave the European Union seems to tie in with a feeling across the Western world--a rebellion against globalisation and those in power.