Transcription of Finance News Network interview with Gerard Minack from Minack Advisers Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Minack Advisers is Gerard Minack. Gerard, welcome back to FNN.
Gerard Minack: Thank you.
Lelde Smits: When we spoke in March last year [2013] you said a global correction is coming on equity markets, but this year has seen solid gains. Have you adjusted your forecast?
Gerard Minack: Not really. I think the game changer will be when the market, particularly in the US, starts to price in the prospect of tighter Fed [US Federal Reserve] policy. I think the Fed will tighten next year. I think through the second half of this year the market will start to anticipate that. In other words, what we are likely to see is curve flattening. And, when you see curve flattening you almost always see some corrections.
I think there is a great chance that we get a correction in the second half of the year. That may not necessarily end the rally, every bull market has corrections. I think ending the rally is a story more for 12-18 months away. But a correction I think is a story for the second half of this year.
Lelde Smits: As we are in the second half of this year when the correction hits what kind of falls are you expecting?
Gerard Minack: I think we’re talking 5-10 per cent. So, if you’re very nimble it’s tradable. If you’re taking a strategic view it will be difficult to play.
Lelde Smits: Looking at the interest rate environment in Australia, how long do you believe can we afford to have the lowest interest rates on record?
Gerard Minack: I can’t see that the RBA [Reserve Bank of Australia] is going to need to tighten anytime soon. I can’t see that it’s going to be happy to ease anytime soon. Put a gun to my head, probably next move is down, 12 to 18 months away. But for corporates, it’s a new lower environment for top line growth that’s going to make it more difficult.
Lelde Smits: Many are piling into cash with the view that stocks are looking expensive at the moment. How have you adjusted your portfolio?
Gerard Minack: I like several themes, but I have to say I like each one of them less that I did 12 months ago, simply because they’ve run.
Firstly, this is a low rate environment. Even if we get some tightening, through the cycle rates are going to be lower. So, anything that offers a safe yield looks attractive. The banks fall into that category. I can’t like the banks as much today as it was right to like them a year or two ago. They’ve had a cracking rally, but there’s still some yield there.
Secondly, if you can find companies that offer genuine organic growth, there aren’t many of them, but if you can, I think the premium that you pay for them is worth more. When growth is scarce the price of something that does have genuine growth goes up. But, if you are a mum and dad investor I’m happy to hold some cash, I think you’ll get better levels to buy at in a range of assets, including property over the next two to three years. Don’t be greedy now. This is late in the cycle.
Lelde Smits: Finally Gerard in which sector of the Australian share market are you seeing the biggest risks and where are there the best opportunities?
Gerard Minack: I think that as we head into next year the miners are a highly cyclical stock and there earnings I think have further declines cyclically. I think domestically the middle part of the market, the retail sector, is struggling. And, that’s partly because the consumer is soft, partly because of structural change. The banks are the best of a bad lot. The least bad house on a bad neighborhood. So, you hold them for 12 or 18 months, but as I said it’s last innings for the banks.
So look, there’s a lot of risk out there. The one offset which would come to some companies rescue is if the Aussie dollar fell. I think ultimately on a three or four year view, yes it will be lower. But, it’s been slower coming down than I was expecting. And, that means that I want to see it decline before I start pushing some of the stocks that would benefit from a lower Aussie.
Lelde Smits: Gerard Minack, thank you so much for the outlook.
Gerard Minack: You’re welcome.
Ends
