‘We buy the best companies – and many of them happen to be Australian’

‘We buy the best companies – and many of them happen to be Australian’

Fund manager Jason Pidcock of Newton explains why he is optimistic about prospects down under

By Jason Pidcock

12:47PM GMT 29 Oct 2013

We maintain a constructive view on the Australian economy, market and currency. While we are more positive than most of our peers, who have been swayed by some excessive pessimism; it is worth pointing out that we do not have an aggressively large holding of Australian shares in our funds. As always, our aim is to look for the best companies, wherever they may be listed, and Australia happens to provide us with a lot of candidates, especially for the Income fund. The weighting of the portfolio to Australia is purely a function of that.We have been optimistic on Australia’s outlook for some time and we feel that the case has only strengthened recently with the election out of the way. The electorate no longer faces the uncertainty of a minority government, as it has over the past three years.

Furthermore, from our meetings with company managements across industries, we think Tony Abbott’s coalition will provide more pro-business sentiment to the Australian economy, or at least be less of a burden to the corporate sector. Indeed, key components of Mr Abbott’s campaign included scrapping the mining and carbon taxes which, if he can overcome likely opposition from Labor and the Greens, will be a big positive to the miners.

It is fair to say that Australia now has one of the best governments within the G20. We think it is unlikely to come out with negative policy surprises, contrasting with possible incoming governments in other developed countries.

Recent data has been quite encouraging. There is evidence that house prices are on the rise, consumer sentiment is now at levels above the 10-year average, GDP grew 2.6pc on an annualised basis in the second quarter, and unemployment is at 5.8pc, a healthy level by developed world standards.

We are well aware of the bearish arguments on the Australian dollar. While we do not disagree with some of these, we think that the market is overreacting. An example is the argument of reliance on mining exports to China. Chinese demand growth for commodities is slowing, and that commodity prices have fallen too.

However, we would argue that Australian exports are relatively flexible in terms of both destination and commodity – it is not just iron ore being exported to Chinese steel mills. In particular, we think the likely impact of LNG (liquefied natural gas) exports in the coming years is underestimated.

From 2012 to 2020, LNG exports are projected to grow from 1pc of GDP to 3.6pc, supporting 180,000 jobs, according to McKinsey. Some estimates put the contribution to GDP closer to 6pc, depending upon which potential projects are included. If the construction relating to these projects is included, it boosts the GDP estimate further.

Of the 22 stocks in Australia that we hold across our two Asia Pacific ex-Japan strategies, only two are outright mining companies. To take a negative view on the Australian market because of a negative view on China is a mistake – there are plenty of well-positioned companies that have little direct link to China. Indeed, we manifest our negative view on China via a significantly reduced exposure to China, not to Australia.

The housing market is another area where we would say the consensus is too bearish. We are aware of the potential problems, but feel that foreign investors are overly concerned. If the housing market crashes in the US, it does not mean the same has to happen in Australia.

Immigration provides support, and the rate-cutting cycle that began again in 2011/12 should have a similar positive effect, as it did in 2008/9. It is worth pointing out that most home owners have substantial equity in their homes. During the rate-cutting cycle in 2008, a lot of people kept paying the same amount despite falling mortgage rates, and so were paying down more of their mortgage.

The finance director of Australia & New Zealand Bank told us that 59pc of its borrowers were ahead of their repayment schedule. There is another key difference to the US in that borrowers cannot walk away from their mortgage when they are failing to meet the payments. Mortgage insurance is compulsory for anything less than a 20pc deposit (in most cases excluding certain incentives), and such insurance is very costly, which acts as a deterrent against excess leverage.

Given the points above, we are happy to maintain a bullish stance on a country where we find accomplished management teams leading companies which provide a source of both yield and growth.

Jason Pidcock manages Newton’s Asian Income, Emerging Income and Oriental funds