The rally across equities is driven by two factors: expectations of slowing rate rises in the US and extreme bearish positioning by investors. But it’s premature to think that rate rises by the US Federal Reserve will stall soon.
Inflation in the US remains stubbornly high with wages continuing to rise to uncomfortable levels. Despite some relief from lower commodity prices, the tight rental market continues to put upward pressure on the CPI. We are expecting another 75 basis point rise in November, followed by a 50 basis point rise in December. We are unlikely to see a peak in interest rates in the US until early next year, by which time we should begin to see real economic weakness.
We think many investors have been far too cautious and are sitting on large cash balances. As a long-short manager, this market is presenting us with some of the best buying opportunities in many years for many quality businesses. Our view is that some of those excess cash balances will be redeployed into the market over the next six months which, together with a pick up in M&A activity early next year, should underpin the Australian market.
Since the sell-off in June, we have added REA Group, Johns Lyng Group and NextDC to the portfolio. We are looking for quality companies with an established franchise and track record that has been unfairly sold off by the market as investors hide in safe havens. A lack of confidence by market participants are presenting unprecedented opportunities.
We are net neutral the Australian banking sector. Our view is that trading conditions for banks are probably as good as it gets, with rising interest rates, steady mortgage growth and a benign credit environment. As a long-short manager, we look at this sector in a relative order. We prefer some of the cheaper banks, such as ANZ, which will report its earnings with a good tailwind and we pair it with one of the more expensive banks such as CBA.
With an expected slowing of economic activity, banks – like many parts of the economy such as building materials and consumer discretionary – will be under more pressure. Meanwhile, the CBA share price continues to trade close to an all-time high versus building materials, for instance, which are down 30 per cent.
To us, this means a falling share price in the not so distant future.
We do think lithium stocks are frothy. While the medium- to long-term prospect of demand for lithium-ion batteries remains strong, in the shorter term they have run up too fast, too high. We have been early investors in many of those lithium names and we have generated enormous return. We are now taking profits in the space and recycling capital into some of the underperforming names and other sectors.
Ramsay is probably one of very few deep value stocks currently trading on the ASX. With recovery on the way, its earnings will compound 25 per cent over the next three years and medium term growth will be supported by capital deployment into field projects, and increased waiting lists support winning public sector work. Private hospitals are a highly sought after infrastructure-like asset.
Ramsay is now trading at a 40 per cent discount to the KKR bid, and it has substantial premium property on the balance sheet that can be split into a separate structure to create value.
With two young children, I am all about pop culture. Stranger Things is one we have followed closely. Netflix has now become our daily go-to in addition to many other streaming services.
One of my favourite restaurants in Sydney would have to be Chin Chin at Surry Hills. Its yummy fusion food with vibrant decor is a great place for catching up with friends. Another favourite in the nearby streets is the wine bar WyNo X Bodega. It is a tiny wine bar with sharing tables, and they have some of the best wines around the world for tasting, and also serve some of the best food to go with those wines.
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Catherine Allfrey, Principal and Portfolio Manager of WaveStone Capital will be speaking at this year's Sohn Hearts & Minds Conference in Hobart which raises funds for Australian medical research.
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