"I'm still cautious": Peter Warnes' best ideas for income investors |
Tweet | ![]() |
<p><em><a href="https://www.morningstar.com.au/Video/Story/207142">Click here</a> to watch part one of this video.</em></p>
<p><strong>Lex Hall:</strong> Let's take an individual look what sort of cash level you want at the moment? And what sort of sectors do you think will offset any trouble ahead?</p>
<p><strong>Peter Warnes:</strong> Yeah, well, I'm still running cash, but I've reduced my cash from about 40 per cent to probably 20 per cent. And that money has gone into stocks that I think were beaten down and beaten down too much, and looking at – and with I think, you know, good business, relatively good business models or they've got tailwinds, or what have you. So, the things that I put my money into a Challenger, I've got some CIMIC. I've always had a reasonable exposure to energy. I'm looking at a few other situations. But I think that I'm still cautious. I still think there's a long way to go. We're not out of the woods yet. We've kind of got out of the woods, but the recession in the US is technically over, well tell the 7.7 million people that are still getting continued benefits. We've got 900,000 plus people unemployed, and about the same number who want more work. Well, tell them the recessions over. And the level of debt out there is palpable, and I don't know how long it will take to get it back to normality. I suspect decades, not years.</p>
<p><strong>Hall</strong>: And that piece of paper in front of you, you've got a few ideas on companies that people may wish to consider for income for yield.</p>
<p><strong>Warnes</strong>: Well, I think if you're getting nothing at the bank, and again, you've got to have something in the bank, because I'm saying, hang on a second, I don't care if I'm getting nothing on it. I've got the option to buy something that I really do think can turn, it can make me some – give me a return that I think is acceptable for the risk I'm taking. I'm not taking any risk with money in the bank, and I'm getting no reward. No risk, no reward, that's fair. Understand that's what you are getting. But you can't price optionality. You are getting optionality, which is an intangible. You can't spend it, but you ultimately can. If you haven't got it, you can't spend it.</p>
<p>So, I think that what you want to look at is if I can get 4 per cent on an investment that is sustainable and if it's sustainable, then the market will probably pay for that sustainability. So, let's add another couple of percent because I think, annual returns now are going to be – anything more than 6 per cent you should be jumping up and jumping for joy, because don't forget you're being pushed out the risk curve. And you don't want to be there. If you haven't got any time – if something happens, the branch snaps, you haven't got time to regroup your capital. Whereas a bloke at 30 has, but bloke at 70 hasn't, hasn't got the time to regroup.</p>
<p>So, if I'm looking at, let's say, 4 per cent then might be too high, and might even only be 3 per cent. But you know, and the one at 3 per cent probably got more growth potential than the one at 4 per cent, one might be much more mature and the other ones still in – but the one at 4 per cent it will be growing with GDP or what have you. So, they're the ones – and the ones that are sustainable or necessities or those things that 65 per cent of your GDP goes into. So, the companies like an Amcor, you don't go into a supermarket and come out with something that hasn't been packaged, no matter where you are in the world, maybe (indiscernible). So – and even ice blocks have to be packaged. So, the thing is that they're the stocks that you should be looking at. What do I need every day to make life comfortable? And what's the value? What value am I getting? What am I paying for? What am I paying for?</p>
<p><strong>Hall</strong>: Well, we need banks every day, but you're less hot on banks.</p>
<p><strong>Warnes</strong>: Well, the only reason I'm not warm on banks is because with the interest rates where they are the official rate will be probably 10 basis points on Tuesday afternoon. With the interest rates going down, it drags the net interest margin down, it drags it down. Because what happens is that despite the fact that they're paying you the depositor nothing, the competitive pressure is downward also on the rate they can charge.</p>
<p>Now, their tailwind is costs through digitisation, all that whole thing – they're basically in the infancy of that. But the headwind is the top line, the net interest income line, which is 80 per cent. It used to be about 70 per cent of the bank's total income. The other one was non-interest income where you usually are probably charged fees left, right and center, well buddy no banks charging fees anymore? And so, net interest income has become a bigger path or a bigger portion of banks' total income. That is going to be had, unless you all of a sudden get a big spike in credit growth, which has been doing nothing for three or four years, where they were actually growing portfolios, loan portfolios significantly, and that through volume rather than price and margin drives total income or net interest income. But I don't see that happening.</p>
<p>Yes, we're going to have an economic recovery. And yes, we want people to spend and we want people to invest and what have you. But I want to see those financial aggregates that come out every month from the Reserve Bank, they're the ones you should be watching. What is happening – rather than have a, it's going to be one month out of date. But you want to see them turn and when you see them turn if we don't see those turning by December, and certainly by March, and they probably will start drifting up, all that money that the Reserve Bank has set and the government's up against the wall. It hasn't done the job they wanted it to do. So, bankers, are bankers to the economy. If the economy is doing nothing, the banks can't participate.</p>
<p><strong>Hall</strong>: Well, Peter, we'll leave it there. Thank you very much for sharing your insights today. I should remind everybody that you can go to <a href="https://www.morningstar.com.au/">Morningstar.com.au</a>, and you can click on <a href="https://premium.morningstar.com.au/">premium</a> as well, you can see the <a href="https://premium.morningstar.com.au/news/topic/your-money-weekly/article/206748/unscrambling-the-2020-omelette-and-the-us-election">Peter's overview</a>. And you can also see a piece that Brian Han, our colleague, wrote a week or so ago, which has a very nice <a href="https://premium.morningstar.com.au/news/topic/stocks/article/206549/searching-for-equity-income-that-yields-a-sustainable-outcome">list of some of the stocks we're alluding to today</a>. So, check that out. I'm Lex Hall for Morningstar. Thank you very much for watching.</p>

15/01/2021 Morningstar's head of policy research Aron Szapiro explains what sort of changes a Biden government will make and how they will affect company valuations.

14/01/2021 Freight-rail, building temperature efficiency, and carmaking are among the sectors Aviva Investors' Jaime Ramos Martin has his eye on.

13/01/2021 Dividend investors had a hard time in 2020, but Morningstar analyst Dan Lefkovitz think the outlook is brighter for the year ahead.

11/01/2021 Morningstar Investment Management's Dan Kemp reveals the three investment themes on his mind for the year ahead.

06/01/2021 Morningstar equity analyst Allen Good looks at the prospects for oil and gas giants in the year ahead.

05/01/2021 China had a strong year after a rocky start, but can it continue—and what does a US President Biden mean for the region? Morningstar analyst Lorraine Tan explains.

04/01/2021 Morningstar equity director Alex Morozov considers the outlook for tech, travel and beyond for the year ahead.

01/01/2021 How to plan for things you can't plan.

25/12/2020 2020: we look back at the highs and lows of an unprecedented year in financial markets and explore the themes shaping 2021.

22/12/2020 Music streaming companies have seen stellar growth in user numbers. We ask Morningstar equity analyst Neil Macker if the trend can continue.

21/12/2020 While it stands as the largest addition in the index's history, this likely won't impact everyday investors all that much.

18/12/2020 Will there be opportunities to deploy cash in the new year? Will there be a reprieve from covid? And what will the incoming Biden administration mean for markets?

18/12/2020 Companies that specialise in solar, building efficiency and renewables underpin Aviva Investors' Climate Transition Global Equity Fund, says Jaime Ramos Martin.

16/12/2020 Why does liquidity matter to investors, and how can it affect your returns? Morningstar equities director Tom Whitelaw explains.

14/12/2020 Learn what we look for when rating a company.

14/12/2020 Morningstar's new approach unpacks the environmental, social and governance risks that companies face.

10/12/2020 Industrial companies typically generate better cash flows and can offer a steady income stream, says the IML founder.

09/12/2020 The lofty valuations of Tesla and Afterpay typify the effervescence and speculation in the market, says the IML founder.

08/12/2020 Car makers may not be an obvious investment choice for ESG-conscious investors, but Morningstar analyst Tancrede Fulop says some of the largest companies score highly in some measures such as safety and human capital.

07/12/2020 Janus Henderson's Matt Peron considers how the relationship between the US and China will evolve under a President Biden.

04/12/2020 What is active investing, and what is passive investing? We're at the whiteboard to explain the pros and cons of each

04/12/2020 Treasury Wine Estates remains an undervalued stock in spite of China's demand-destroying tariff on Australian wine. Morningstar director of equity research Adam Fleck explains why.

03/12/2020 And do any other assets currently compare?

02/12/2020 We're at an inflection point in ESG investing, says Sustainalytics founder Michael Jantzi. Here's why.

01/12/2020 Beaten-down travel stocks and BNPL providers featured heavily, says nabtrade’s Gemma Dale.

30/11/2020 Many people were waiting for the opportunity to buy shares at historic discounts, says nabtrade’s Gemma Dale.

27/11/2020 The 171-year-old wealth manager has had its scandals but there's merit to its turnaround strategy and the quality of its other assets, says Morningstar's Shaun Ler.

27/11/2020 BNPL products such as Zip Co help boost consumer spending but they come with risks and are overvalued, says Morningstar analyst Shaun Ler.

26/11/2020 The Magellan co-founder argues the ecommerce acceleration is here to stay and ponders the effect it will have on other sectors such as travel and commercial real estate.

25/11/2020 Greg Dean of Cambridge Global Asset Management explains why the consumer services sector has yielded healthy returns.

25/11/2020 Magellan's co-founder explains which tech behemoth the Magellan Global Fund no longer owns, why one was too tricky to value, and why regulation is no threat.

24/11/2020 Magellan's co-founder on why 2020 resembles 2000 and why covid-19 is a dry run for something that could be much worse without proper planning.

23/11/2020 Their shares have gotten hammered this year. Are they opportunities or value traps?

20/11/2020 Our new rating highlights the degree to which a fund or asset manager considers environmental, social, and governance issues.

19/11/2020 Morningstar's Grant Kennaway explains why sustainable funds are increasingly popular and why they're performing well.

17/11/2020 Morningstar director of equity research Johannes Faul looks at home improvement retailer Bunnings.

16/11/2020 From climate change to workers' rights, ESG is a big part of the investing world. We're at the Morningstar whiteboard board to explain what it means and why it matters.

12/11/2020 We're not out of the woods yet, says our head of equity research, as he looks for safety in businesses we can't live without and shies away from the banks.

11/11/2020 Perhaps it is time to have exposure to this economic powerhouse and its 1.4 billion population, says Morningstar's Peter Warnes.

10/11/2020 What happens when you buy something when your bank card? Morningstar analyst Niklas Kammer explains which companies are benefiting from your transaction.

09/11/2020 With travel bans and economic lockdowns, the luxury sector has been hit hard in 2020. But there are still opportunities, says Morningstar analyst Jelena Sokolova.

05/11/2020 A discussion of taxes, stimulus, regulation, and the likely market reaction as results from the 2020 poll come in.

03/11/2020 Why you should resist the urge to make predictions when there's a disconnect between the economy and security prices.

02/11/2020 Etoro analyst Josh Gilbert shares his thoughts on Beyond Meat and two other companies making inroads into the plant-based meat sector.

30/10/2020 The Magellan rainmaker explains why he doubts the Republican leader will prevail and why investors should brace for volatility—and ignore it.

29/10/2020 The market for plant-based meat is worth $14bn today and is expected to grow massively, says eToro's Josh Gilbert.

28/10/2020 Morningstar equity analyst Johannes Faul explores the flipside to the surge in growth in online sales.

22/10/2020 China and Hong Kong have been a happy hunting ground, says Longlead Capital Partners' co-founder Andrew West, who singles out tech, pharmaceuticals and power tools.

22/10/2020 These names stand to benefit from a resumption of leisure travel - and are all trading below our fair value estimates.

20/10/2020 Morningstar's Mark Preskett looks at three reasons why bonds are an important tool in your investment portfolio.

19/10/2020 A bigger stake in the online conveyancer PEXA could be the key to increasing Link Administration's revenue, says Morningstar's Gareth James.

16/10/2020 Longlead Capital Partners co-founder Andrew West reveals how his Asia-focused fund managed to make gains during the historic covid-19 sell-off.

16/10/2020 The investment board is back with an explainer on why you might invest in bonds.

13/10/2020 How to handle this decision—even when it is made for you.

12/10/2020 Nick Griffin of Munro Partners reveals why and where he sees opportunities in renewable energy, diagnostics and software.

09/10/2020 Take stock of your spending to determine if inflation is an issue for you.

09/10/2020 Morningstar analyst Chelsey Tam explains why investors are excited about the flotation of Ant Group and why it's different from Alibaba.

06/10/2020 Companies that address the growing demand for decarbonisation will have a 20-year growth opportunity, says Nick Griffin of Munro Partners.

30/09/2020 EXCLUSIVE EXTRACT: Morningstar's Mat Hodge and Lex Hall talk to the CEO of the independent producer and exporter about the company's fortunes and its future.

30/09/2020 Slow and steady wins the financial race.

29/09/2020 American Century Investments' low-turnover strategy invests in companies developing vaccines, treatments for neuro-cognitive diseases and innovations in telemedicine.

25/09/2020 By 2050, almost 20 per cent of the global population will be over 65 and demand for healthcare will climb, says Michael Li of American Century Investments.

22/09/2020 The destruction of an indigenous cave shelter was unforgiveable but there are other reasons why the iron ore heavyweight is overvalued.

21/09/2020 Morningstar equity analyst Kristoffer Inton on the outlook for the seven producers under coverage.

18/09/2020 Morningstar's Seth Goldstein singles out three undervalued stocks that span the entire electric vehicle supply chain.

18/09/2020 The bumps and bruises of election time may tempt you to shift your portfolio strategy.

17/09/2020 UK-based Premier Miton's Simon Evan-Cook says the tech rally of 2020 is reminiscent of the dotcom boom, but inflation could be a bigger threat.

16/09/2020 By 2025, the cost of batteries and manufacturing will fall and EV functionality will improve, says Morningstar's Seth Goldstein.

11/09/2020 Estimating the length of your retirement with personalized information will help you save the correct amount.

09/09/2020 Morningstar's Chelsey Tam reveals which stocks and sectors have shone—and which have underwhelmed.

28/08/2020 Products, services, what is what in the world of finance—and how to look out for yourself

24/08/2020 A raft of companies have cut their dividends this year, leaving income investors concerned. But Morningstar's Dan Lefkovitz says there are still plenty of options out there.

18/08/2020 DNR Capital's chief investment officer Jamie Nicol profiles some of the top ten holdings in his Australian Equities High Conviction fund.

17/08/2020 Morningstar's Brian Han explains why he has trimmed his fair value estimate for Australia's dominant telco and the future of its dividend payout.

14/08/2020 DNR Capital's Jamie Nicol reveals how his Australian Equities High Conviction fund finds quality businesses that will endure difficult conditions.

13/08/2020 Put your money to work if you're looking for financial freedom.

10/08/2020 Learn how to picture your goals so you can better reach them.

05/08/2020 Morningstar's Gareth James identifies three sector names trading at attractive discounts in an increasingly 'essential' sector.

05/08/2020 Reports of the strategy's demise are greatly exaggerated, says Morningstar's Christine Benz.

04/08/2020 Investors may assume a fund's yield to determine how much income it will pay, but it's not always so simple, warns Morningstar analyst Rajesh Yadav.

03/08/2020 It depends on your expectations and timeframe. Look at bonds as being portfolio stabilisers—sources of cash flow you can draw on when your equities are down, says Christine Benz.

28/07/2020 When utility stocks plunged during the onset of the pandemic Lazard Asset Management's Warryn Robertson knew it was time to jump in.

24/07/2020 Lazard Asset Management's Warryn Robertson looks at how the pandemic has affected toll roads and airports and what the future of travel holds.

23/07/2020 Morningstar analyst Tancrede Fulop singles out a few companies that have performed well and also led the way in looking after staff.

21/07/2020 New stock-pickers are prone to lose money. Are the lessons worth the price? We ask Morningstar's Christine Benz.

20/07/2020 Elevated iron ore prices have lifted mining company earnings to eye-watering levels but this doesn't make them income stocks, says Morningstar's Mat Hodge.

17/07/2020 Local miners should deliver stellar fiscal 2020 results but such outperformance is unlikely to last, says Morningstar’s Mat Hodge.

17/07/2020 --

16/07/2020 How to make some upgrades during this down time.

16/07/2020 Covid-19 has made the intended public offering impossible, says Morningstar's Andrew Willis.

15/07/2020 JPMorgan's Nicholas Weindling talks opportunities in Japan and reveals the stock that has been his largest holding for almost a decade

15/07/2020 The asset class has a habit of outperforming but Morningstar's Ross MacMillan sees signs of a bubble.

13/07/2020 Rachel Winter of UK fund manager Killik & Co talks payments, social media and investing in her monthly stock pick round-up

09/07/2020 And what we expect to see moving forward.

07/07/2020 Large growth maintains its supremacy in the Morningstar Style Box during a volatile first half for mutual funds.

06/07/2020 Nikko Asset Management's Peter Monson looks for strong sustainable returns and he sees that in Asian stocks that span financial exchanges, computer game makers and condiments suppliers.

02/07/2020 China’s ongoing recovery from COVID-19 presents solid investment opportunities, says Nikko Asset Management.

01/07/2020 Aviva Investors' Mark Robertson on the 'second wave', the widening gap between the West and China, portfolio protection and how covid has accelerated the tech revolution.

29/06/2020 Does the rise in smartwatches show that data, not diamonds, are a girl's best friend?

26/06/2020 They may be 'boring' says Fidelity's Bertrand Lecourt but these names offer solid and long-term returns by delivering essential services.