EQUITIES have had a great quarter in Australia and the US, but the sidelines were more crowded than ever before - as evidenced by the news that legendary investment management group Fidelity now has more of its $US1.6 trillion in managed assets sitting in bond and money markets than in equities.
Australian households held only 17 per cent of their assets in equities in the June quarter, down from 19 per cent a year earlier and a peak of 30 per cent back in late 2006, based on ABS data.
The last time households had an equities exposure this low was in 1998, although in 1992 the weighting got as low as 10 per cent.
While money was sitting on the sidelines, the heavyweights of the S&P/ASX 100 Index charged up 7.2 per cent in the September quarter and the Small Ordinaries gained 5.8 per cent.
And despite the ructions in commodity prices, resource stocks were a better place to be than industrials - the Small Industrials only advanced 3.1 per cent while Small Resources stacked on 11.9 per cent (see the bottom of this column).
Perhaps we have bottomed out and Australian investors are regaining their appetite for risk.
According to CoreData's latest quarterly investor sentiment index, sentiment is now at its highest level in 15 months. CoreData suggests that Australian investors are becoming more optimistic about the economy, business conditions and the sharemarket.
This follows an improved reading from the Global Proxy-Melbourne Institute shareholder confidence index for August, which rose 2.7 points to 106.7 and was up 13.1 points from August 2011.
So the weight of money may provide some support for equities, but this analyst continues to take the view that we face a low-growth macro environment and will for some time (and while the CoreData index has improved, it is still in negative territory - for the 10th consecutive quarter).
Under that scenario oligopolistic large cap industrials must face limited growth opportunities.
Smaller companies have greater scope to benefit from growing market share, developing new markets or simply presenting as a synergistic growth opportunity for a larger company.
For example, at the weekend $3 billion Danish mining equipment and services group FLSmidth continued to buy Australian businesses, acquiring two private service firms in the wake of its takeover earlier this year of formerly-ASX-listed mining equipment maker Ludowici.
The consensus annual growth expectation for the S&P/ASX 100 Industrials is for 7.6 per cent a year over the next five years, while 9 per cent growth is projected for the Small Industrials.
Investorfirst's research coverage is quite focused on specific small and emerging industrials and, at the moment, out of about 30 stocks, 11 are priced on single-digit PEs.
Those smaller companies that are generating reasonable growth but have been forgotten in the risk-averse environment should be targets for larger companies looking to boost their returns.
In fact, the September quarter generated a significant increase in the number of mergers and takeovers of Australian businesses. There were 217 "M&A" transactions in the quarter, excluding the materials, energy and financial sectors, ramping up from 190 in the June quarter and 170 in the March quarter, based on S&P Capital IQ data.
The last time this number of deals was exceeded was in the December quarter of 2007, although there were 216 in June 2010.
Strategic investment has included the $130 million purchase of a 16.4 per cent stake in leading car dealer Automotive Holdings by rival AP Eagers.
Private equity has been active: there was the approach from TPG to Billabong, while CHAMP Private Equity agreed to buy lighting manufacturer Gerard Lighting Group for $287 million.
Gerard Lighting received a 52 per cent premium to its "weighted average" share price of the month prior to the offer. Its independent expert noted that "notwithstanding the group's minor outperformance of its prospectus forecasts, the Gerard Lighting share price has generally moved sideways since listing, reflecting the difficult trading environment for stock exchange-listed companies".
The company "bit the bullet" and it's likely that more will do so in the current environment.
Those companies that are getting rewarded with higher investor interest (and higher valuations) on the sharemarket may still become attractive.
Martin Pretty is head of research at Investorfirst Securities.
Frequently Asked Questions about this Article…
Why did Australian equities have a strong September quarter?
The article notes solid gains across major indexes in the September quarter — the S&P/ASX 100 rose about 7.2% and the Small Ordinaries gained 5.8% — with resource stocks (Small Resources +11.9%) outperforming small industrials (+3.1%), helping drive a generally strong quarter for Australian equities.
What does it mean that Australian households have low equities exposure?
According to ABS data cited in the article, Australian households held just 17% of their assets in equities in the June quarter (down from 19% a year earlier and far below the 30% peak in late 2006), which means many investors remain on the sidelines with a relatively small share of their wealth in shares compared with past cycles.
How is investor sentiment affecting the sharemarket right now?
Investor sentiment has improved — CoreData’s quarterly investor sentiment index is at its highest level in 15 months (though still in negative territory for the 10th consecutive quarter) and the Global Proxy–Melbourne Institute shareholder confidence index rose to 106.7 — suggesting growing optimism about the economy, business conditions and the sharemarket.
Why might everyday investors be told to look at small companies?
The article argues smaller companies can have greater scope to grow market share, develop new markets or become takeover targets for larger firms; consensus growth forecasts also show Small Industrials are expected to grow about 9% a year over the next five years versus 7.6% for S&P/ASX 100 Industrials.
Is merger and takeover activity increasing in Australia?
Yes — S&P Capital IQ data in the article show 217 M&A transactions in the September quarter (excluding materials, energy and financials), up from 190 in June and 170 in March, with activity including strategic stakes and private equity approaches such as AP Eagers’ $130 million stake in Automotive Holdings and CHAMP’s agreed purchase of Gerard Lighting.
Which sectors outperformed in the September quarter and what does that mean for sector allocation?
Resource stocks outperformed small industrials in the quarter (Small Resources +11.9% vs Small Industrials +3.1%), while large-cap heavyweights also rose (S&P/ASX 100 +7.2%), indicating that performance varied by sector and that resources were a stronger place to be during that period.
What does Fidelity holding more assets in bonds and money markets suggest for investors?
The article highlights that Fidelity had more of its roughly US$1.6 trillion in managed assets sitting in bonds and money-market instruments than in equities, which signals there were unusually large sidelines and cash allocations — a factor that can influence equity market dynamics if some of that money moves into shares.
How are valuations and private equity activity affecting listed companies?
Investorfirst research found many small and emerging industrials trading on low (single-digit) PEs, making them potential targets; private equity and strategic buyers have been active (examples include TPG's approach to Billabong and Gerard Lighting’s $287m deal that paid a 52% premium), meaning takeover interest and re-rating can change valuations for listed firms.
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