With the financial year drawing to a close, markets continue to recover. Joining us once again for an update is Paul Xiradis, CEO and Head of Equities at Ausbil Dexia. Paul welcome back. The S&P/ASX200 is sitting around 3,800 points up from 3,500 in April and a low of 3,150 in March. What’s your view on the market at these levels? Too far to fast? Or fair value?
Paul Xiradis: Look I think we’ve had a very nice recovery from its low point as you correctly pointed out, from the 3,150 level. The view that we have at Ausbil is that we think that the market is still inexpensive and likely to recover progressively over the next 12 months. We do like the upward bias that the market is showing at this point. We have certainly seen a short term correction from its recent high of 4,000 but we do believe the market will trade higher over the next six and 12 months.
Clive Tompkins: You seem reasonably positive about the outlook for Aussie shares, how have you been positioning your large cap portfolio? And which sectors do you like?
Paul Xiradis: Sure, look I think that one of the areas that we have been focusing on is very much towards the cyclical end of the market, we believe that the underlying domestic economy is likely to recover in the second half of this year. We also see more and more signs that internationally things are past the worst and is likely to improve. So we are tilting our portfolio more towards cyclical type stocks. The reason for that is that the valuations have been crunched quite dramatically over recent months and they’re at or near, we believe, their cycle low as far as earnings are concerned. So if we are going to get a recovery which we think we will, if we do get the underlying economy recover as well, we’re likely to see a very strong bounce back in earnings and also a PE re-rating over the next 12 months, so we’re quite well exposed towards a number of cyclical sectors. Specifically we are overweight retail, we have been building up our positions in steel stocks as an example, we also have been increasing our exposure towards building materials as well and also pure metal players as well has been something we haven’t had in the portfolio for quite some time. So it really is moving towards the cyclical end of the market and selectively media as well, but that’s very difficult to find good value there, but we have been increasing our exposure towards media so they are very much more associated with, or those types of stocks, are very much associated with an improving underlying economy.
Clive Tompkins: Does the fact that many companies in the last quarter have raised funds relatively easy, albeit at discount prices, inspire confidence?Paul Xiradis: Look it does, I think that what we have seen over recent months is the risk appetite of the market improve, certainly if it was some nine months ago or 12 months ago it would have been quite problematic for a number of capital raisings that we have seen. But certainly what we have seen over recent months is a marked improvement. The capitalisations that we have seen or the re-capitalisations we’ve seen are very much towards those companies which required to correct their balance sheets and once they do, do that the market will then re-focus on the underlying earnings and then also the quality of the company. And what we have seen in just about all instances, is that these stocks have traded well above those capital re-rating or capital raising prices. So that’s a good sign, and again interestingly enough the stocks which have been quite keenly sought have been those stocks which are commonly referred to as cyclical stocks and we have participated in quite a few of those capital raisings.
Clive Tompkins: For a market to maintain momentum it needs to be broad based. How have the mid and small caps performed over the last period?
Paul Xiradis: From the low point we have seen a marked recovery from the mid-caps and also the small caps in particular. The reason for that in part is that during the market downturn these smaller stocks were quite illiquid and hence if there was any selling that occurred, the valuations were crunched quite dramatically. There was also a fair bit of fear that a lot of these groups that were smaller in nature were unlikely to survive the crisis. But what we have seen is that now the crisis has passed valuations got to too extreme levels so we have seen quite a strong bounce back. The question is, is that sustainable? In our view it is likely that we’ll see smaller stocks still perform reasonably well, because what we do see in an improving underlying economy, is that those broader based stocks which are very much exposed to that environment tend to also perform reasonably well. So we are likely to see the recovery be fairly broad based right across the market, in our view.
Clive Tompkins: And are you at all concerned about the rise in bond yields and the size of government borrowing?
Paul Xiradis: That’s the only concern that we really do have, we do believe that bond yields will increase because there’s obviously more supply, so that’s going to be an issue as far as that’s concerned. But it also indicates that the underlying economy will recover as well. It’s sending a two pronged message, one is that there is going to be additional supply, and two is that there’s going to be a reasonably good recovery. Provided that the bond rates don’t move up to aggressively I think that will be taken as quite positive.
Clive Tompkins: Last question. Ausbil Dexia runs a number of funds designed to meet the needs of a range of investors. Risk aside, where amongst your funds would you choose to invest for the next 12 months?
Paul Xiradis: Well certainly we like equities, and if you like equities and you’re not too concerned about your level of risk you can actually increase your exposure to equities by investing in a geared product. Ausbil certainly has a geared product which is on offer. And certainly that’s where I have put some money recently because I do believe the market is likely to recover and recover quite strongly, and if that is the case you can get an even greater increase in return should the direction be right. But you have to be careful of that if it goes against you, you can also lose money. But if you are a little bit more risk conscious, certainly the broader based equity portfolio certainly offers value and certainly the Emerging Leaders which is more of a smaller cap product, because we do believe the market recovery will be fairly broad based and it will be from both the leaders and also from some of the smaller caps. So between the two there’s not much differential but certainly if you want a bit of extra zing the geared fund would be the way to go.
