Dean Fergie

If interest rates continue to rise, it would indicate a loosening of monetary policy and a pro-growth, high-spending political and economic environment. Initially, and understandably, the bond-proxy and income stocks have sold-off markedly: property trusts, infrastructure and, in Australia, the major banks and telcos. Liquidated funds would quite rightly be expected to rotate into higher growth economic plays: commodities, building materials, construction firms, consumer discretionary and a smattering of industrials. As well as the implications of interest rates and currency moves, it would be naive to ignore 'secondary' factors following the Election of Trump such as the potential impact on US/China trade relations, and movement in commodity prices, particularly gold, iron ore and coal. In this wire we look at one smallcap industrial that we think is well positioned to benefit.

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 for surprises coming out of the new Trump administration.


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. If we had exposure to businesses that were likely to be directly financially impacted from the recent change in rates, such as any companies that are highly leveraged, such as insurance companies that earn revenue from their investment in bonds, we would take immediate steps to limit our exposure. 


In a pro-growth, rising interest rate environment we think it's of value to have exposure to net-cash businesses with construction leverage. SRG Group (SRG) has over $26m in cash on its balance sheet and is a global player in the infrastructure sector designing bridges, dams, silos and tanks and provides a wide range of post-tensioned concrete products for the building industry.  This business is performing ridiculously well currently (Profit before tax in FY16 was up 50%), and a well-timed and opportunistic diversification in wall-building might be an added bonus for SRG.


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