The days when Australia “rode on the sheep’s back” may be long gone, but agriculture remains a critical component of the economy, generating valuable export income. While overseas investors understand its importance, for most local institutions it’s still a bridge too far.
For several years, investors, from institutional to retail, couldn’t get enough of the tech stocks with all their promises of future growth. But now the market has spoken and it’s saying precisely this – valuations matter again.
… as a value manager takes a dim view of the China market
Notwithstanding a 60 per cent fall from its peak, the Chinese stock market still looks unattractive to a renowned US-based value manager who has been billed as “the new Benjamin Graham”.
Vitaliy Katsenelson, the Russian-born CIO of Investment Management Associates Inc, believes the quality of information about Chinese stocks, the high proportion which are linked to the State, and likelihood of the economy having a hard landing, combine to make Chinese shares unattractive despite their current low valuations.
By association, the Australian share market also concerns him, as does, to a lesser extent, the Canadian market.
“Australia scares me the most (outside of China itself),” he said during a working holiday to New Zealand and Australia last week. “The proximity to China and the mono line exposure are concerns… Canada is a bit like Australia, too, but they have more exposure to oil and gas. Oil scares me less than iron ore.”
Katsenelson is suitably embarrassed about the reference to Benjamin Graham, the “founder” of value investing, which was coined by Forbes magazine after he published , in 2010, his book “The Little Book of Sideways Markets”. He earlier published a book, “Active Value Investing” in 2007, is a contributor for Institutional Investor magazine and an active blogger.
Katsenelson believes there is still value to be found in the US, where 70-80 per cent of his global portfolios is domiciled and is currently very fond of the HMO (health management organisation) market.
HMOs are unloved because they are generally seen as insurance companies specialising in health, but Katsenelson says their ability pass on increased costs makes them different from other insurers.
While admitting there is a political risk due to the nature of that industry, he says HMOs appear to be perfect stocks for today’s market: “They have good balance sheets, terrific free cashflows and recurring, highly economics-insensitive revenues. The global macro stuff doesn’t really affect them… Rising unemployment and underemployment might put a small hole in my rosy thesis, but no worries: with 10,000 baby boomers signing up for Medicare every day and expected to do so for the next decade, that hole will patch easily.”
