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Opportunities raining down

It takes courage to buy when others are fleeing the sharemarket's fury. But some fund managers have been doing just that, writes John Collett.

It takes courage to buy when others are fleeing the sharemarket's fury. But some fund managers have been doing just that, writes John Collett.

Shelter from the carnage on sharemarkets is not easy to find. While no listed company is bulletproof, there are some whose share prices are likely to hold up better during the turbulence and outperform the market in the long term.

Good businesses, including the big banks and the big miners, have been caught in the investor fear emanating from overseas. Although the share prices of these companies have recovered somewhat, many are still trading at knock-down prices.

Sharemarkets around the world have fallen heavily in the past three weeks as concerns over sovereign debt in the US and Europe were deepened by the historic downgrading of America's credit rating by Standard & Poor's from the highest AAA rating to AA with a negative outlook. Now there are fresh concerns that the world may be entering GFC Mark II and perhaps even a global recession. Australian shares are down almost 20 per cent since the post-GFC highs of April 2010. With the S&P/ASX 200 dipping to just below 4000 points last week, the market was back to where it was two years ago, though it has recovered somewhat to about 4200.

"What we are seeing is a combination of a huge vote of no-confidence collectively in governments around the world," the head of equity strategies at BT Investment Management, Crispin Murray, says. "The issues that need to be addressed are being addressed in a piecemeal way, rather than quickly and decisively, and the result is that confidence continues to be eroded.

"Ultimately, confidence is critical in terms of global growth."


"There is no question the market is offering quite good value and quite a good earnings outlook but unfortunately the world economic outlook is looking much more shaky than it was," the head of research and senior portfolio manager at Investors Mutual, Hugh Giddy, says. "The economy is going to be fairly sluggish for a while. And in a sluggish economy you want to be focused on the high-quality stocks that can deliver without relying on economic growth."

But Giddy, like other leading fund managers, is still managing to see a silver lining. Unlike the amateur investors who take flight whenever markets turn ugly, fund managers see opportunities to pick up shares in good companies at bargain prices.

One of those bargains is CSL, whose share price has fallen to about $30 prices not seen since 2009 and the GFC. The blood-products maker has "great growth prospects" but has been caught up in the overall sell-off and the worries about healthcare spending in the US, he says.

Woolworths is another good defensive stock whose shares are trading at about $26 on a decent yield. Metcash, the distributor to independently-owned grocery and liquor stores, is another good business that pays a good yield, Giddy says. He also likes Telstra, which has a good balance sheet. The telco's earning are not going to be growing fast but the earnings are defensive and these are the types of stocks that investors need to be in, he says.


"While macroeconomic concerns continue to overshadow the market and impact sentiment ... some companies are being impacted much less than others," the head of Australian equities at Fidelity, Paul Taylor, says.

Taylor's top picks include Rio Tinto, which he prefers over the smaller miners. "Rio Tinto owns long-life, low-cost mines, has a very strong balance sheet and has just upgraded its share buyback program," Taylor says.

"At a share price around $70, we believe that Rio is very attractively valued and represents a great long-term investment due to its strong balance sheet, with plenty of growth options."

Taylor also likes Wesfarmers. The turnaround at Coles, owned by Wesfarmers, is continuing and all the signs point to an improving return on invested capital, Taylor says. "Coles is a quality asset that has maybe not been managed to its highest potential through the years but with the new management team, the improvements in returns could be substantial," he says.

Wesfarmers, at about $27 a share, is very attractively valued with a strong, fully franked dividend yield, Taylor says. He says Domino's Pizza represents an excellent long-term investment.

"Domino's Pizza has a strong management team, a strong balance sheet, has proven itself in a tougher economy, has excellent long-term growth prospects in Europe and, at around $6.00 a share, is also attractively valued," he says.

BT's Murray sees opportunities to pick up more shares in home entertainment retailer JB Hi-Fi. It is a stock that many investors would probably not want to go anywhere near given the weak consumer confidence and challenge from internet retailers. But the company has still been able to generate a decent rise in profitability despite the challenges, Murray says.

JB Hi-Fi has a relatively small chain of stores and more earnings growth could come from opening more stores.

"JB Hi-Fi has the best operating model in that market segment," Murray says. And, as the shares are on a cash yield of about 6 per cent, fully franked, investors get some some protection from weaknesses in the share price, he says.


Like Giddy, Murray also regards Telstra as a good defensive play. In coming to an agreement with the government on the National Broadband Network (NBN), where the telco will hand over its copper network, some certainty for the telco has been created, Murray says.

The way the NBN contract is structured means that even if there is a change in government, the NBN is unlikely to be unwound, he says. The telco's cash yield of almost 10 per cent, fully franked, is sustainable, he says.

Murray also likes Asciano, which owns and operates a range of infrastructure assets including ports and rail across Australia. "It will benefit from the growth in coal volumes," he says. "Its ports business is now starting to win back market share after it lost some contracts more than a year ago," Murray says.

The head of Australian equities at Schroder Investment Management Australia, Martin Conlon, says now is the time investors want to own good companies with competitive advantages. "As prices fall, as they have recently, we will become more optimistic, not less," he says. "The price which we pay for the cash flows of a company is likely to remain a very significant determinant of future returns." Conlon says the Australian sharemarket is on a price to earnings ratio (P/E) of between 10 times and 11 times compared with the long-term P/E of between 14 times and 15 times. He says the Australian sharemarket could even return between 10 per cent and 15 per cent in the next 12 months from dividends and rising share prices. Conlon looks for good-quality companies with strong balance sheets and management teams, excellent growth opportunities and attractive valuations.

His three top picks are Rio Tinto, Wesfarmers and the Commonwealth Bank, which share these characteristics.


The head of Perennial Growth, Lee Mickelburough, says it has been a tough environment for a couple of years now but that is reflected in the prices of stocks. "The market is cheap from a long-term perspective," he says.

AMP is a good example of a quality business that has been unfairly sold off by investors. At about $4 a share, it is back to levels not seen since the darkest days of the global financial crisis, he says.

AMP management has worked hard to reduce costs in recent years. Mickelburough says the acquisition by AMP of Axa was a good one and he rates AMP's management team highly. "When [revenue] flows come through you will have a business that is [already] in great shape," he says. Once markets normalise, AMP could be trading at $5 or $6, Mickelburough says. He says ANZ, which has embarked on an Asian growth strategy, is particularly attractive. He also likes NAB, which has been growing its loan book a bit faster than the market.


A portfolio manager of the EQT Flagship Australian shares fund, Shaun Manuell, says: "There has been an awful lot of bad macro[economic] news thrown at us." He would be very surprised if Australian shares revisited their lows of the GFC but the market is finding it difficult to move out of the range of between 4000 points and 5000 points. Manuell continues to like BHP Billiton and Rio Tinto.

"We like them because of their size and their low costs [of production] and the long lives of their mines," he says.

If commodities prices fall because of their higher costs of production, smaller miners may struggle again as some did during the markets turmoil of 2008 and 2009, he says.

Manuell also likes ANZ, which has been a favourite of the fund for eight years. He likes the management and the "Asian story" which, if successful, will "deliver a lot of upside."

Golden future at silly prices

In the midst of the doom and gloom, BT Fund Management's Crispin Murray thinks that we may even be at the low point for domestic stocks. After the ASX/S&P 200 index fell to just below 4000 points last week, it has recovered somewhat.

The Australian dollar has dipped a little, which will help exporters, oil prices are down, which will help keep inflation down, and the next change in interest rates will probably be down, which will spur consumer confidence, Murray says.

However, he expects the Australian economy to remain sluggish.

Murray says the big issue is that we have an economy where policy has been set for a two-speed economy the mining sector and the rest of the economy.

"The benefits of the mining boom are not coming through [to the rest of the economy] as significantly as people had been anticipating," he says.

Lee Mickelburough of Perennial Growth, says that while consumers are cautious and retail sales remain weak, there is still much about the Australian economy that is the envy of the developed world.

Unemployment is just above 5 per cent, the sharemarket offers good value and companies with defensive earnings and competitive advantages will do well.

Martin Conlon

Schroder Australia

Rio Tinto


Commonwealth Bank

Hugh Giddy

Investors Mutual




Paul Taylor


Rio Tinto


Dominos Pizza

Lee Mickelburough

Perennial Growth




Crispin Murray

BT Investment


JB Hi-Fi



Shaun Manuell

Equity Trustees

Rio Tinto



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