Aussies tough on corporates but yields enviable

-- | 12/03/2018

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Glenn Freeman: In this edition of "How We Invest Your Money," I'm talking with BMO Asset Management's Tony Cousins about the global investment environment, BMO's philosophy and the appeal of Asian markets.

Tony Cousins: Well, I think, overall, we are a value manager. So, that's the most important thing to us, how much you actually have to pay for equity assets, indeed, really, financial assets. I guess, we would be reasonably negative on the UK for a number of reasons. One is valuation. Certainly, compared to Australia, it's significantly more expensive. We do have some similarities in the economies; an overpriced property market. In the UK, I think that's actually been encouraged by previous government's driving loan to value ratios up and we have interest rates, which are just way too low relative to inflation. So, base rate, in the UK is 50 basis points. You have a higher number in Australia. So, less power to raise interest rates. So, I think, this is a more dangerous situation for the UK

Both equity markets now have a high payout ratio, but Australia has always had a high payout ratio. It's encouraged by the franking credit system, the tax system and this has actually led to tremendously strong capital discipline within the corporate sector. I know Aussies like to be tough on some of the corporates, but the actual track record of earnings and dividends growth out of Australia has been pretty good. The long-term dividend yield, dividend growth in Australia is one of the three best in the world, along with Sweden and the USA. It's nothing like as good in the UK. What we've seen in the UK is a big ramp-up in recent years in payout ratio from a reasonable level now to a very, very extreme level.

The UK has got other economic problems as well, whereas I think in Australia you've got a lot of good things going for you. You have low levels of government debt, certainly on an international basis. And one of the very positive things about Australia is you do not have a big black hole in superannuation or pensions that exists in many economies in the world, particularly those with an aging population.

In some economies in Europe, they just have a pay-as-you-go system. There is no funding at all. The UK is in a bit better position in that, but the funding just isn't adequate. In Australia, the decision was taken a long time ago to make pension or superannuation contributions mandatory and that has put you in a very enviable position. One of two companies in the world that have done, the other is Chile, and this has led to the absence of a pension time bomb.

Freeman: And also, you highlight the appeal of Asian markets and yet, BMO's philosophy precludes investing in some of the more frontier emerging markets. Can you just explain this for us?

Cousins: Sure. I mean, we are a sort of pretty conservative manager and it's very important for our management that you stick to what you know. And true emerging or frontier market investing is a specialist skill and it's not our skill. There are other people in this industry who are very smart and who are very good at that and it's a perfectly legitimate way of investing. We stick to markets which deliver, what we call, institutional quality, which have a whole load of criteria like acceptable accounting standards, auditing standards, investor protection regulation and legislation, listing rules, tax stability, lower levels of corruption. So, we invest in, what we'd say, is the higher echelon of emerging markets, places like Taiwan and Malaysia make the grade. Others such as Russia or Turkey, for example, are not in our investible universe.

We do lots of number crunching. So, we rely on reliable quality data. This is one of the problems we have with investing directly into China because the accounting and auditing standards just aren't up the scratch. When Chinese companies get a listing in Hong Kong where the listing rules have certain requirements regarding auditing and accounting standards, we are much more comfortable, and we are prepared to go and buy those stocks.

So, investment and certainly, our approach to investment is about eliminating risk. And if you stick to the higher-quality areas, you are taking less risk. Not saying that there's not grounds in some of these faster-growing frontier markets if you like to make money. It's just you need to be cognizant that you are taking a higher level of risk for which you should be rewarded.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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