Kerr Neilson: Risks and opportunities in today’s markets

Patrick Poke

Livewire Markets

In a recent presentation, Kerr Neilson, founder and CEO of Platinum Asset Management, told the audience that the current economic environment is in a “situation that is actually quite rare.” Almost all economic indicators are “extremely positive”; everything from global PMIs, to metal prices, oil prices, and even company earnings, has been on the rise.

I’ve pulled out a few choice quotes from the presentation, a link to the full video is available at the end.

On the broad economy and market:

“If we look at the economic environment, we have a situation which is really quite rare. Most of the economic indicators – and we can find very few contrary ones – are extremely positive.”

Most of the economic indicators are extremely positive.

“Company earnings, almost across the board, are very strong. “

“In markets that are pretty expensive, we are still finding some opportunities.”

“The question we all ask is; where can I get a decent yield? The eurozone is still negative at the short end, in Japan you get nothing for sitting in cash, and in the US, we are seeing tightening.”

“Here’s the problem we face as fund managers. If you go out too early, let’s say by six months, you could leave 14% on the table. If you leave late, you might only be down 10% within six months. So, what do you do?”

“We as fund managers are institutionally bound to play the game until the last second. Keep than in mind when you’re ‘relying on the experts’.”

On oil:

“The official forecasts for oil seem to get it wrong most of the time. They are underestimating the global demand for oil. They’ve been talking about 1%, but it’s actually running at about 1.5%. The world’s using close to 96 million barrels of oil per day. There is plenty of stock around, to me, it’s suggesting the oil price will go higher still, but not out of control.”

The oil price will go higher still, but not out of control.

On Asia:

“We have these reforms continuing in China. This is very important, we go banging on about China because it’s been the principal driver of world growth and we need to get that approximately right.”

“Even Japan is surprising. Company balance sheets are immensely strong; they have about 400 trillion yen (about 4 trillion dollars) sitting in cash. Some of the strongest balance sheets around.”

“The population in the workforce has grown, because the participating rate – notably by women – has grown immensely. Something like 67% participation rate by women in the work force now, which is an interesting change.”

On inflation:

“What’s encouraging the general enthusiasm is that we haven’t had general price inflation in the traditional sense. We’ve had plenty of price inflation in assets.”

“Central banks are missing the picture, because they are focussing on the average, when a large part of the population who are finding life quite difficult. With interest rates creeping up at the short end, this is becoming more apparent.”

“Discretionary spending power remains under pressure.”

The key risks

Neilson identified the following risks:

  1. Weak income growth
  2. Crowding into bonds
  3. A lack of liquidity in some markets, particularly bonds
  4. High valuations across the board.

1) “I mentioned weak income growth, that’s across most countries. The cost of living, as recorded, should be allowing people to have the same expenditures, but across different sectors, they are feeling the pinch.”

2) “[There’s been a] massive crowding into bonds. You have insensitive bond buyers; in governments, but you also have insensitivity by the buyers who are given a mandate to run bond funds. Their job is to try to outperform, they are hugely benchmark aware, as a consequence, they are forced to chase that which has done well. It is momentum investing, which have found may result in some problems down the line.”

3) “When these markets turn, you will have two people missing from the normal game. Traditional brokers and investment banks have removed themselves largely from these markets. The volumes you get traded in ETFs, in some instances, can be huge in relation to the underlying stocks.”

4) “Valuations are high… At 30-times (cyclically adjusted price to earnings – CAPE), Wall Street is pretty much as expensive as it’s ever been, except perhaps in ’29 and 2000.”

Wall Street is pretty much as expensive as it’s ever been, except perhaps in 1929 and 2000.

Watch the full presentation below, where Platinum CIO, Andrew Clifford, explains how major changes in the Chinese economy are being ignored by markets.

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Patrick Poke
Managing Editor
Livewire Markets

Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.


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