Some sectors will win but many will lose as volatility continues
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Wilson Asset Management currently dislikes more of the Australian market than it likes, but there are silver linings despite the clouds of volatility that continue to hover.
Real estate investment trusts and telcos are out, and banks are back in, according to Geoff Wilson, chairman and portfolio manager, Wilson Asset Management.
While the fund manager has for some time held a rather sanguine view on Australia's big four, its outlook is shifting.
"We're not overly bullish on the banks, but we're not bearish," Wilson says, pointing out one of its funds, for the first time, owns all four Australian banks.
"We have been very negative on this sector, because it was going to have to raise between $30 billion and $40 billion of capital. And we were concerned about a deteriorating economy and bad debts.
"But all the signs we're seeing, from the companies we speak to, is that the economy is improving slightly. And talking to the banks, bad debts aren't increasing."
The impending roll-out of the Basel IV capital reserve standard for international banks had dragged down performance expectations for the sector--both abroad and at home.
"In the last week or so, APRA [the Australian Prudential Regulation Authority] has come out and said Basel IV isn't going to be as stringent as everyone had thought. And it won't be implemented for 18 months at least--so another negative has been removed for the banking sector," Wilson says.
He also nominates the healthcare sector as an area of opportunity.
"The market PEs [price-to-earnings multiples] are a little over 15, but if you take the banks and resource sectors out, then the industrials, per se, it's getting close to PE multiples of around 20," Wilson says.
"So there's a lot of industrials that are expensive ... if they trip, then the share price is going to get sold off very strongly.
"We don't like REITs--they're trading at big premiums to NTA [net tangible assets]--you're really taking a lot of risk at the moment."
He is bearish on interest-rate sensitive stocks generally, including infrastructure, "because we think they'll continue to underperform--we'd be going away from those".
According to the ebullient, outspoken founder of Wilson Asset Management, he dislikes more sectors than he likes--and he's only half-joking.
"That's probably why we're holding the cash we're holding!" laughs Wilson.
The fund manager has a 42 per cent weighting to cash in its largest LIC, WAM Capital (ASX: WAM)--which reflects the current environment of volatility and uncertainty.
"Our cash level moves around a lot ... but we're higher cash than normal, because we're finding it really hard to find value," Wilson says.
By way of comparison, he points out WAM's 17-year average weighting to cash is 34 per cent, and 35 per cent during the global financial crisis.
"In the really short term, over the next month or so, it looks like the market will be pretty strong. I still think that a Christmas and early January rally is on the cards within the equities market. But I'm nervous ... everyone is very nervous, which probably makes me feel the market may go higher," Wilson says.
On a macroeconomic level, he believes volatility will soon set in again.
"With all the uncertainty on a global basis, the rebellion against the status quo--we saw that in Brexit, in Trump and in the Australian election, with the big swing against the Liberals--and we'll probably see that in Italy in December and in France, that could be the real nail in the coffin for the euro," Wilson says.
"Logic tells me that record low interest rates ... which have pushed asset prices to very high levels ... are going to reverse.
"So the risk is that an adjustment is coming, that at some point in time the unwinding of this free money is going to be a very painful exercise. I just have no idea when that will be."
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Glenn Freeman is Morningstar's senior editor.
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