PORTFOLIO POINT: The high-profile investor is positioning to reap rewards from a falling Australia dollar, and says the local sharemarket could see a positive 'pop’ if political uncertainty is resolved.
Peter Morgan must be the best-known fund manager in Australia who does not actually run a fund just now. Indeed, the story as to why Morgan, an outstanding stock-picker, finds himself 'running his own book’ is as extraordinary as any 'call’ the Sydneysider may have made during his career.
Morgan made his name as an exceptionally successful fund manager at Perpetual Investments and later went on to head his own successful boutique fund, 452 Capital. But then in 2009 disaster struck, as Morgan was diagnosed with brain cancer. As it turned out, he was actually 'misdiagnosed’ with the disease (and is now healthy), but not before he packed in the day job.
Today Morgan offers a unique perspective on the markets. He does not labour under the weight of billions of dollars in funds under management, which will restrict the investment options – not to mention the public statements – of any fund manager.
So when we hear Morgan opining on the market, it is always worth listening. In today’s interview, he covers a lot of ground, but there are three outstanding themes:
1) Morgan believes the Australian dollar is going to drop against the US dollar in the near future, opening an array of investment options for Australian investors convinced (as Morgan clearly is) by the renewed strength of the US stockmarket.
2) The building materials sector is for Morgan one of the outstanding areas of undervaluation on the ASX (our interview took place before this week’s surprise 50 basis point cut in interest rates from the RBA, and the Australian dollar’s slide to $US1.02).
3) Morgan suggests that if the intense political uncertainty in Canberra surrounding the Gillard regime can be resolved (i.e. by a clear victory for one party in the next election), then the Australian stockmarket will get a positive 'pop’ effect.
But there is much more to divine from one of the market’s smartest and most independent minds, as you will find in his interview below. – James Kirby, Eureka Report managing editor.
James Kirby: Peter Morgan, you’ve been out of funds management for some time, so you don’t have this weight of funds under management on your shoulders. Until recently, you seemed to be fundamentally bullish on Australian equities. Are you now?
Peter Morgan: Since I made those comments James, the market has lifted. I think what has increased substantially is the nervousness of the business environment. There seems to be a lot of political uncertainty. What I’m saying is, I think the market is reasonably priced at the moment in general; there are still some opportunities, but looking forward, there is still some uncertainty out there.
What about the banks? Where do you think they are just now?
I think they’re priced pretty highly '¦ “pretty” is probably not an aggressive word. I think they’re pricing is right up there now.
Are they a reasonable investment?
Well, I’m a little bit cautious about the dividends going forwards. If you believe what the banks are saying and what they’re doing, they are short capital, in terms of funding, and you’ve seen hybrid issues and the like. What I’m saying there is that the good days of the banks are perhaps gone, and they are entering a period of greater competition, a tougher lending environment, a tougher funding environment, and a property market that is stalling, and all round them business conditions aren’t that great.
Just one other thing on the banks: Do you distinguish between the four?
Realistically, probably NAB is the only one that has a reasonable overseas exposure through the UK and Europe, but they’re very generic. They’re all competing for property loans and business loans. It’s reasonably hard, when you get down to it, they’re $30-40-50 billion capitalisation companies.
Outside of that, and looking at mining, resources and energy, how do you view that sector in terms of where an investor should be active?
Well the big call, as it has been for the last five years with regard to the mining sector, is China, and China is still a communist country, it doesn’t have the same levels of transparency as the US or Australia does. So I am sceptical in terms of China going forward, and China has been the big domain for the pricing of commodities going forward, and I’d be a little bit cautious with regards to that. Supplemental to that, you’ve got acquisitions that have been made by BHP and the like that have to prove themselves yet.
Do you think the mining services stocks are a better place to be, as opposed to the miners themselves?
Yes, but I think that’s a crowded space in terms of investing James, and I think you can’t totally remove the risk of mining from a mining services company. I would again be very cautious in doing that, because those good little plays are no longer cheap and they’ve been pretty well combed over as well.
Despite your concerns, we see lots of the brokers have fairly bullish, long-term forecasts on the ASX. Let’s say it’s about 4400 at the moment, and you see forecasts up to 4800 - 4900 for 12 months ahead. What do you think of those forecasts?
I think if you did any historical analysis, it’s very rare for a broker to be bearish unless they’ve walked into a wall. Added to that, if you’re cautious on banking and you’re cautious on mining, you’re talking about 50-60% of the market, and you take into account the interrelated plays through mining services companies and the like. That’s why I’m saying the market’s had a good run from 3800 to 4400. The swing factor is that you might get a 'pop’ in the market if you were to get political change or greater confidence in the marketplace.
If there are opportunities and they’re not in the areas we’ve mentioned, what areas are they in?
There’s a number of smaller companies and a few companies out there that are trading below asset backing. At some stage, and I think we’re getting to the stage now that the building material sector is getting to a cyclical low point, and that’s one area I’m starting to focus on personally.
Is there anything you like there Peter, that you’d name?
Well, it’s still a touch too high, but I do have a holding in Hills Industries myself. It has exposure to building materials. I’ve been watching CSR, particularly after their downgrade by Boral; we might be a little bit early, but the cyclical low point is coming for building in Australia.
You’d be looking for a turn in building approvals?
Well, you would. Houses have to be built, but again we’re talking about domestic confidence, we’re talking about business confidence, and no-one picks the bottom in a cycle like they don’t pick the top, but houses at some stage will have to be built again. So I’m just saying from the cyclical point of view, that’s one area that perhaps will throw up opportunities on a one, two or maybe three-year basis, but you’re not going to be able to pick the bottom.
As I said, I think the Australian market has recovered a lot; it still has issues domestically and the big swing factors are the commodities cycle and China. But when I look around the world, the US seems pretty resilient, they seem to have regained their confidence and they are getting a very good pull-through on their own currency being so weak, and they don’t seem to have the political roadblocks that Australia has had thrown up at it, and Europe has had thrown at it, with regard to austerity and the like.
But doesn’t the US have a roadblock when it comes to sorting out their debt ceiling?
Yes, they do conceptually, but so does the rest of the world. It’s like we’re almost in a situation where all the currencies are going to be devalued and back to the same sort of level, because of debt around the world. Australia may be the exception, although our economic characteristics are very cyclically based, as we’ve discussed. I think that debt situation in the US is well known. I think what is often underestimated is the resilience of the American people, the resilience of the American economy; it’s very entrepreneurial, it’s pro-business, it’s a bastion of capitalism.
How does that map onto the Dow then?
Well, the Dow has obviously had a good run, and what I’m trying to articulate is that perhaps, if Australia has risk and it’s reasonably priced, perhaps an alternative play is investments in the US. It has had a good run. Apple is obviously not in the Dow, but it’s the biggest company in the world, and it’s share price has gone up astronomically over the last 18 months for all the right reasons.
Do you see Apple as an exception, or is it actually typifying something more representative of the nature of the best US stocks?
I think it’s partly more the exception, but it’s also a reflection of the US getting on the right track. Sure, Apple has done a lot of things right itself; it’s led the marketplace and it’s had a pristine balance sheet in doing that, but also I think the American economy and Apple’s move into China has also helped as well. All I’m trying to articulate James is, when you compare the US to Australia, you’ve got a number of factors that give the US the advantage, whether it’s the currency, the business environment or the government staying out of the situation. The US has a lot of debt, but a lot of the companies themselves are carrying a lot of cash on balance sheet, and a number of companies still have very healthy balance sheets.
Tell me, if you were looking at it from an Australian dollar user’s perspective, which our readers will be doing, where do you think the dollar will be a year out from here if it’s at US$1.03 today?
Well everyone says the Aussie’s been strong; the thing that they keep missing, making that comment, is the US dollar has been very weak. I think the Aussie dollar at US$1.03; again you’re playing supply and demand factors in that, when you make that comment. I think the Aussie has more chance of going back to US$0.80-90 in the next 18 months to two years, than it has going to US$1.15, where it’s as high as it’s been.
When you are looking at the US, do you look at it unhedged?
At the end of the day, I’m an Australian resident investor, and I’m looking at it as an investment alternative.
When you’re looking at the US, are you unhedged?
I’m not hedging; I’m not hedging the position. As an individual investor, I would never do that.
But you are actually assuming a kick, if you like, from the currency.
Well, as I said, I think there’s a greater chance of the Aussie going to US$0.80-85 than there is of it going to US$1.15, all things being equal.
I want to ask one other question, which is about this issue you raised about political uncertainty. Do you have any evidence that political uncertainty is damaging the market, because the ASX 300 is up 8% this quarter so far? What are your concerns there?
You’re saying the market is up 8% this quarter, and you’re right in saying that, but we’ve also got global markets that have also been very resilient, and let’s not forget that in 2007 and 2008, we weren’t far away from 7000 with regard to the index itself, and we’re at 4400 today. Now, the Dow’s a lot closer to an all-time high than we are, and supposedly we’ve had the best economy in the world throughout the Global Financial Crisis. I extrapolate that comment out a little bit further; I’d say political uncertainty here domestically has played a very big part in holding the non-resource base back, here in Australia. It played a big part; I’m not saying it hasn’t been the only factor. The currency has had a part in it, but the uncertainty with regards to politics here is just terrible, and if it was to clear itself, you would get a 'pop’ in the market.
You wouldn’t be prepared to quantify what the “pop” would be, would you?
I just think confidence is, again, something you can’t price into an equity market, or a sharemarket, but it’s there! I mean, why do you see markets fall 3% in a day and go up 3% in a day? This swing factor is confidence ... investing confidence.
Do you think an election would actually resolve that?
I don’t think it could be any worse, and short-term I think it would resolve the uncertainty because if there was a mandate given, and the threat of taxation wasn’t there, and the threat of uncertainty wasn’t there, the markets, whether they be property, equity or just the business environment, would take some confidence from that.
Peter Morgan will be a key speaker at Eureka Congress, our inaugural event for Eureka Report members and DIY investors. The Congress, to be held in Melbourne on June 21 and Sydney on June 23, will include panel discussions and small group master classes run by investment experts. For more information, or to book a ticket, click here.