Investment Views Update Q1 2018 – Equities - Peter Vickers Business Group

Investment | 21 Mar 2018 |

Interest rates rising will be a key factor for 2018. If they rise quickly we will see all positive momentum fall out of equity markets. The worst case scenario would be an interest rate rise sharp enough that it triggered a sharp fall in property prices. This would see bank stock lose value, dragging down the Australian market. We hope the tougher lending rules introduced in 2017 and a responsible RBA avoid this scenario arising.

The rate of change in markets and businesses means that what worked well for investors between 1990-2007, i.e. buying and holding stocks, is far less effective in 2018. We see a mixed year ahead for equities. Businesses not re-investing in their service or products can expect to face tougher operating conditions from the fast-changing business environment. It is not enough to play catch-up either as building a culture of innovation takes time.

The good news for investors is that markets often see significant investment in R&D unfavourably. Where some investors see a large expense dragging on returns, we see reinvestment that future proofs a product or services income stream. We even know of fund managers that won’t consider making an investment in a business if their payout ratio >50%! A payout ratio is the proportion of earnings paid out as profit (as opposed to being retained or reinvested).

Bank shares remain a terrific source of tax effective income (for Australian investors)… However any material exposure to these businesses comes at the risk of fast paced disruption. Businesses like PayPal, Alphabet (Google), Apple, Amazon, Microsoft and even Facebook might not seem like traditional competition to banks, but their expertise in data and ready access to a global network of consumers makes them dangerous adversaries. Being a little late to the game on investing in some of these businesses is better than missing out altogether.

One of the slogans that stuck with me from 2017 was “Go global for growth, stay local for income” – Charlie Aitken (Global fund manager at AIM).

Matt Vickers – Investment Advisor


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