Reporting Season Underlines Need For Strong Fundamentals

James Gunn, 3 Sep 2014

Prime Value clients often ask how our ‘view of the world’ is impacting portfolio positioning, and the breadth of investment opportunities we may be identifying at any particular point in time.

This question is tricky at present. While we don’t see the market as cheap per se, we think it’s likely to ‘grind’ higher over the short-term aided by the low interest rate environment and strong levels of liquidity. This contrasts our longer-term view, where we are less certain about the ultimate outcomes of central bank money printing on both the real global economy and financial markets generally. While we know we’re not alone in identifying this disconnect, we think on balance that the longer-term risks are to the downside with potential inflationary pressures to accelerate a normalisation of interest rates.

We recognise that this inflationary scenario is quite a stretch from current economic conditions both domestically and globally. The implication for top-down positioning within our Growth Fund is that while we don’t anticipate making any significant changes in the immediate term (subject to the normal caveats), we remain open-minded between a continuation of subdued top line growth but alternatively the prospect of a better than expected transition for the Australian economy and consumer.

In saying that, we continue to maintain a large underweight exposure to the banking sector, which reflects a general view of valuation in the sector along with a more absolute approach to diversification compared perhaps to some of our peers. We’ve also built a meaningful cash position within our Opportunities Fund, although we expect to deploy some of this capital coming out of reporting season.

While a directional call on the market is challenging at the best of times, pleasingly our core bottom-up research efforts are identifying a number of attractive opportunities from the current results season. As a manager of concentrated portfolios with an active focus on downside risk, all positions must stack-up from a bottom-up perspective, irrespective of how strong we may view the sectoral or thematic tailwind. Pleasingly, the opportunities presenting are broad-based across sector, capitalisation and style.