The election of Donald Trump has driven a surge in bond yields and moves across all asset classes on the expectation of inflationary fiscal policies. Locally, we have seen a rotation away from ‘bond proxies’ and a number of high PE stocks. To provide you with some insight as to whether we are witnessing a kneejerk market reaction, or a meaningful shift, we recently asked a panel of Contributors a series of questions starting with: ‘Against the current backdrop, what steps do you take to review and assess your portfolio?’ Responses from Chris Prunty of Ausbil, Hugh Dive of Aurora and Dean Fergie from Cyan.
Sticking to our core business of finding quality smallcaps
Chris Prunty, Fund Manager, Ausbil Micro Cap Fund
Our portfolio is like a kite dancing in a hurricane. Or at least it has felt that way in 2016. Not since the dark days of 2008 has the specter of macro-economic trends and global events had so much impact on small cap portfolios. I’m reminded of a quote attributed to Warren Buffett’s mentor Benjamin Graham who is reported to have said: the market is like your mistress, you can’t afford to ignore her completely but... With this in mind we’re not ignoring our mistress, and we’re well aware that bond proxies and growth stocks will struggle short-term and cyclicals, banks and non-gold resources are going to run, but nor are we straying too far from our core business of finding undervalued, growing smaller companies.
Aussie market to weather slowly rising rates
Hugh Dive, Aurora Funds Management
Since the election on the 9th of November the ASX has rallied +4%, but at a sector level there has been a high degree of dispersion, with strong gains in financials, energy and materials being offset by losses in the “bond proxy” sectors of listed property, utilities and telecoms. The biggest question facing equity investors isn’t so much rising bond yields per se, but rather the trajectory of this rise. We do not see a 1994-style bond yield spike, such as what occurred after the US Federal Reserve raised rates from 3% to 6% in a 12 month period starting February 1994. This caused Australian 10-year bond yields to rise from 6.4% to 10.7% and the ASX to fall -8%. We see that Australian equities will weather a slow grind up in bond yields without significant falls, in the face of improved corporate earnings in 2017. Consequently no major surgery has been undertaken on the portfolio.
Sentiment the key driver in the short term
Dean Fergie, Cyan Investment Management
The Cyan C3G Fund comprises predominately higher growth, domestically focused businesses with meaningful revenue and earnings growth forecast in the coming years. Given the lack of direct international exposure, the US election result does not impact our fund as immediately or as directly as it would a larger cap portfolio with direct US asset exposure such as a CSL, Westfield, QBE or James Hardie). However it would be naive to ignore 'secondary' factors such as the potential impact on US/China trade relations, movement in commodity prices (particularly gold, iron ore and coal) and, of course, global factors such as currency and interest rates. We are very close to the companies in which we have invested and use financial modelling to assess the impact of significant changes in financial factors. Importantly we recognise in the short-term that the most meaningful share price driver is market sentiment and at this point in time it's fair to say we are positioned defensively as we believe there is likely to be significant uncertainly and potential surprises coming out of the new Trump administration.