With Charlie Aitken still on his sabbatical and given the fact you’d all know I think we’re in a correction ahead of a market comeback that should roll into 2019, over the next few weeks I’ve decided to survey fund managers to see what they’re thinking right now and what they’re liking and disliking. I believe the trigger for a market sentiment turnaround will be an eventual Trump-China trade deal but, as I always say, it’s courageous to second-guess this very unusual US President.
Underlining how important this trade war is to US stock market sentiment, the most recent Bank of America Merrill Lynch survey of US fund manages found 35% believed the US-China trade stoush is the key driver of market sentiment right now. Obviously, interest rates, the economy and earnings all were seen as important but the tariff troubles took centre stage for fund managers trying to make money out of stocks.
I’ve cornered Shawn Burns, who manages the Switzer Dividend Growth Fund (or SWTZ) and Contango Income Generator (or CIE) and asked him the questions I suspect many of you would like answers to. So here goes…
Q. Is this a correction phase or a prelude to a crash?
This isn’t a crash at this stage, however global liquidity is reducing and we’ll see much more volatility from now on. I look at credit spreads and they remain OK, and most macroeconomic indicators look OK too. Ultimately, liquidity problems will likely end the cycle but not yet.
Q. Do you expect a Santa Claus rally this year?
As per above, I expect markets to be volatile, so we may see a rally. Historically, markets have strengthened into year end but that doesn’t happen 100% of the time.
Q. Are there some new companies you have added to your two funds?
The two main buying themes we are following are good yielders that hopefully stay out of the regulators gaze, and secular growth stocks that are not at nose bleed valuations. So we have added Reliance Worldwide (RWC), a growth stock into SWTZ and Smartgroup (SIC) into CIE after a sharp sell off in both.
Q. Were you surprised when SWTZ went to $2.32? Did you think it looked like a screaming buy then?
At $2.32, the fund is yielding about a 5.5% net dividend and over 7% grossed up for franking credits. These numbers are quite attractive, as we believe the yield is sustainable. I think the market got caught in a sharp sell off and maybe became oversold, given the fundamentals. However, as I said earlier, more volatility can be expected. That was probably a bit overdone.
Q. What stocks do you hold that look to have a lot of upside?
SWTZ is split between the yield component, which is about 75% of the fund, and a growth component, where we expect share prices to do well. In the past, we’ve had CSL and Resmed that have done well in this segment and now we have Reliance Worldwide, Brambles, Link Administration and Aristocrat that we can see going higher over time.
Q. Have you looked at Labor’s policies and seen any threats or opportunities?
There are plenty of threats but not too many opportunities. We’ll watch carefully as policy takes shape. The difficulty will be assessing what form or whether a lot of their ideas actually get through Parliament. The share market is not reacting well to anything the Government turns its regulatory attention towards, so we have to be careful here.
Q. Are there any stocks you’ve recently sold?
There are two themes on selling we are following. One is taking profits with those stocks we think have done enough, such as CSL and Resmed. And I’m selling those takeover targets, such as Scottish Pacific and Navitas and I’m happy to take the good profits that we’ve generated on them. The other theme is that we want to try and high grade the portfolios even further in quality, focusing on sustainable cash flow and balance sheets, as tough times may be coming closer. Therefore, we sold a couple of positions in CIE that we were not happy with, given the stricter criteria. (Shawn is implying that he’s becoming more defensive.)
Q. Is it easy to sleep when you are a fund manager and markets go mad and crazy?
In times of market volatility or turmoil, it’s very important to have a robust investment process in place. Following a plan and executing it well goes a long way to navigating whatever the market throws at you. Having been through several market challenges, such as the 1987 crash, the 1992 recession and the GFC, helps, and a cool head and a process is critical. (I think Shawn is saying that he has learnt to sleep even through the scariest times because he has confidence in his processes.)
Q. Does history say that dividends defy gravity when markets crash?
Dividends usually do better than the capital values or stock prices, which are much more volatile. The dividends that companies pay are reflective of the operating conditions and balance sheet strength. For most companies, operating conditions are good and balance sheets are very good. In the end, it depends how far operating conditions deteriorate. (I think Shawn’s saying, generally yes, but if a killer recession resulted, then dividends could drop more than we might expect. Also, some companies’ dividends could really remain strong, while others more exposed to a recession could slip substantially.)
Q. Do you expect the market to rebound strongly if Donald Trump cracks a trade deal with China?
A US/China trade deal will be a positive for markets. However, I think volatility — up and down — is here to stay and investors need to adjust their mindsets to this occurrence.
OK, I take it that Shawn is supportive of my view that we’re looking at stocks still trending higher but it will be with a rip-saw pattern, so we just have to get used to it!
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.