“November returns were exceptional,” said Jason Teh, chief investment officer at Vertium Asset Management.
“It was a pretty strong month. The blue-chips continue to do very well,” he added, referring to a group of top Australian companies that investors regard as strong dividend payers with solid earnings.
They include supermarket groups Woolworths and Coles, conglomerate Wesfarmers and blood products group CSL.
It’s almost like a hated rally in a way.
— Anthony Doyle, Fidelity International
Underlining the investment case for these companies, Mr Teh calculated that nine out of 10 stocks of the top-100 stocks in the ASX were offering a higher yield than investors could receive by putting their money on deposit at a bank.
Deposit rates have fallen along with official interest rates and market expectations are that interest rates will stay low.
The Reserve Bank will meet on Tuesday to decide on the level of interest rates but it isn’t expected to lift the cash rate off its 0.75 per cent record low and may even cut again in February, according to futures markets.
Interest rates have been lowered this year as central banks have attempted to shore up economic growth, in Australia and overseas, through various policy tools.
“There has been coordinated central bank action on policy,” said Fidelity International investment specialist Anthony Doyle.
“It has really been led by the US Federal Reserve but Mario Draghi’s parting gift was more quantitative easing,” he said.
Rates were cut three times in five months in Australia, he noted. “The broad market gains are reflecting the reduction in interest rates and discount rate calculations,” he added. The domestic economy “has been undenably soft”.
“When investors believe that interest rates are expected to remain at the effective lower bound for a long time, they start to re-rate companies,” he said. “What was expensive starts to be fair value.”
But even though the ASX has rallied more than 20 per cent this year, Mr Doyle says sentiment on the market has been poor. Buy ratings on ASX stocks are at a 16-year low, he notes.
“It’s almost like a hated rally in a way,” he said. Investors may feel that they have no option other than to buy stocks in a low-yield environment.
Still, valuation metrics remained around long-term averages for the broader market and the ASX “isn’t expensive” overall, he said.
Mr Teh noted that December could be a strong month historically but pointed out that this year’s rate-fuelled gains appeared to have made investors complacent, as reflected by the VIX volatility index, which is at extreme lows.
“There’s quite of bit of news flow to come” in December, he said. “We haven’t got a resolution on the trade war between the US and China, and Brexit is still to be resolved.”
He believes blue-chips are now very expensive and vulnerable to an uptick in interest rate expectations, however slight. Rather than chasing blue-chips, the fund manager is looking for companies that are exposed to the beginnings of an economic recovery.
“The housing market tends to lead after a lag to better economic conditions,” he said. “I’m interested in cyclical firms that aren’t priced for perfection.”
He is invested in building construction firm James Hardie and is keeping an eye on Boral and Fletcher Building. Flight Centre and Webjet are other examples of unloved stocks that have caught the fund manager’s eye.
“Qantas is an interesting one,” he added. “They are a cyclical stock that hasn’t had an [earnings] downgrade. That’s not bad.”