Low interest rates sustain ‘valuation distortions’, Argo

Low interest rates sustain ‘valuation distortions’, Argo


Record low interest rates are propping up “valuation distortions” in the Australian equity market despite low earnings growth and a challenging geopolitical outlook, Argo Investments managing director Jason Beddow said on Monday.

via apinews.org

Argo Investments managing director Jason Beddow said the geopolitical outlook was challenging. Photo: Nic Walker

Mr Beddow repeated his assessment that company valuations were “generally stretched” given limited earnings growth outside a few offshore names and energy companies, and added that stocks with high price-to-earnings ratios were susceptible to a correction.

“Despite consistent downgrades to future earnings expectations, the Australian equity market has been resilient, preferring to ignore this and other issues,” Mr Beddow told  the ASX-listed investment company’s annual general meeting.

“While valuations are elevated when compared to history, record low interest rates are helping to support these valuations,” he said.

Mr Beddow also said there were unresolvedgeopolitical and trade-related issues, echoing chairman Russell Higgins’s remarks that US-China trade tensions, civil unrest in Hong Kong, and conflict in the Middle East each had the “potential to deteriorate”.

However, he said the combination of tax cuts and three interest cuts should help the Australian consumer.

“We expect the domestic economy will continue to grow, although therate of growth is slowingand is clearly of concern to the RBA given their rapid interest-rate response.”

$671 million, or 11 per cent, of Argo’s portfolio is comprised of large Australian domestic businesses  — Wesfarmers, Telstra Corporation, Woolworths and Origin Energy. Mr Beddow said these businesses would grow as the Australian population increased at 1.5 per cent each year, which is the fastest rate in the West.

Recent additions to Argo’s portfolio also include Freedom foods, a food and beverage company that distributes dairy and cereal across Australia and South-East Asia, and building developer Downer EDI, which will try to seize on high government spending on infrastructure.

Argo has also increased its stake in Ramsay Health Care, flagging that companies such as CSL and Sonic Healthcare were “exceptionally high-quality” and that it would look to purchase more in the sector at an attractive price.

The biggest share of Argo’s portfolio, at 17 per cent, was tied up with the large retail banks, which face headwinds from low interest rates, slowing credit growth, and increased competition from challenger banks.

Mr Beddow said he acknowledged these risks and that Argo was “cautious” in its outlook, but also said the company was comfortable with its underweight position given “relatively attractive” yields.

Meanwhile, the investment group also saw a“solid” outlook for mining giants BHP Group and Rio Tinto, which account for $520 million, or 9 per cent of its portfolio.

Mr Beddow said Chinese demand for steel to support real estate and infrastructure investment remained robust, but acknowledged that this period of excess dividend returns and capital management would slow with a moderating iron ore price.

Argo reported in August profit of $292.7 million for 2018-19, an increase of 33.7 per cent from the previous year, including $36 million in one-off, non-cash income from the demerger of Coles Group from Wesfarmers.

Shares in Argo Investments remained steady at $8.36 on Monday.

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