A stock to buy in uncertain times

Chairman, Wilson Asset Management
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On a recent trip to Greece, I met a woman who moved from Melbourne to Athens five years ago and found a job similar to the one she had in Australia.

There was one big difference: In Melbourne, she was paid $60,000 a year; in Athens, she makes the equivalent of $10,000.

Things are diabolical in Greece. Unemployment is over 25%, youth unemployment is over 54% and those who have jobs are scared to speak up to their bosses. Many I spoke to are trying to leave the country.

I asked people when they thought things would get better and was amazed at the universal answer – they believed there was no hope.

I also visited London, where the prevailing view was that it could take a decade to sort out the Europe’s economic problems. In the United States, the re-election of President Obama has provided some stability, but the threat of the so-called ‘fiscal cliff’ – when mandated tax hikes and automatic spending cuts will deliver a big shock to the economy unless Congress can strike an agreement – is unsettling, to say the least.

Balancing act

Against this backdrop of great global uncertainty, a number of dynamics are positive for the Australian equity market.

The reduction in official interest rates in the past year has been good for investors in several ways. Since November 2011, the Reserve Bank has lowered the official cash rate from 4.75% to 3.25%.

Lower borrowing costs stimulate a pick-up in economic activity. The cuts are positive for sharemarket valuations because lower interest rates mean higher price-earnings ratios. Lower rates on savings products also force those in bank deposits to look to equities for better returns – six months ago, average term deposits paid around 6% interest; now they pay a little over 4%.

The Reserve Bank left interest rates on hold this month, but the benefits of the cuts already made will continue to be felt.

What to buy?

In times of global upheaval, I look for stocks I believe will perform well regardless of wider trends.

NEXTDC Ltd (ASX code NXT) establishes, develops and operates data centre facilities in Australia, where companies can remotely install their IT and communications equipment. The centres offer reliability, convenience, security and in some cases lower costs than internal storage.

At Wilson Asset Management, we believe the demand for data centres will continue to increase. NXT is well positioned to benefit from this growth. They have centres operating in Brisbane, Melbourne and Canberra and plan to open in Sydney and Perth by the end of next year.

NXT was founded by Bevan Slattery, who set up Pipe Networks, which was eventually taken over by TPG Telecom. It has a strong management team, headed by the recently appointed chief executive, Craig Scroggie.

The company is currently making losses, but as the new data centres open and space is filled, this will become a highly profitable business. Its capital position will be strengthened by the spin-off of the first three data centres into a listed property trust, scheduled to be completed by the end of the year.

This move will release capital to fund the new centres in Sydney and Perth. We believe NXT has sufficient cash to reach break-even in 2014 and grow strongly thereafter. Its growth will not be reliant on global or domestic investment dynamics.

Disclosure: WAM Capital and WAM Research, listed investment companies managed by Wilson Asset Management, are investors in NXTDC Limited.

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 regards to your circumstances.

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