Portfolio managers at Wilson Asset Management have told investors why they’ve fallen back in love with the big banks, what they’re doing to monitor a turnaround in fortunes for Ardent Leisure and what they learnt from Donald Trump on the golf course.
At a gathering of unitholders of several WAM-run funds, portfolio manager Matthew Haupt said his once-bearish view on the banks had changed “quite remarkably” over the past month.
Comments two weeks ago from Australian Prudential Regulation chair Wayne Byres that the banks are likely to require less capital than initially forecast in order to meet new standards, and be given more time to raise it, was a turning point, he said.
“His [Byres’] language was quite soft and people took this as a measure that the capital impost won’t be as large as you think. We think the Australian banking sector has a decent enough chance of generating enough capital organically and through unwritten DRPs [Dividend Reinvestment Programs] to meet the Basel requirements.”
Add that to other factors such as advanced cost-cutting initiatives, a moderation in bad debts and the increased likelihood that interest rates would not fall further, and it all points to improved prospects for big-four bank stocks.
“If you read through the Reserve Bank [meeting] minutes it’s quite clear they don’t want rates lower. The effectiveness of pushing rates down beyond 1.50 per cent is minimal, so I don’t think there is more risk we have interest rate cuts unless we have a shock event.”
Mr Haupt was less upbeat about infrastructure stocks such as Transurban, Sydney Airport and APA. These so-called ‘bond-proxies’ have benefited as investors have turned to shares as an alternative to bonds.
“If you look at the price-to-earnings ratio of the bond market it’s about 60 times, which is incredible. Bonds are so overvalued still and we think there has to be a reversion at a point at time. If they revert to a more stable yield then all these infrastructure stocks are going to come under pressure.”
The fund also said it was holding on to its stake in Ardent Leisure.
Wilson chief investment officer Chris Stott said the fund took a position in Ardent Leisure to get exposure to its Main Event business, which is expected to expand its sites in the United States from 30 to 200.
The company, and its stock price, has been under pressure since the tragic accident at its Dreamworld theme park on the Gold Coast in October. The park is closed but is expected to open before the end of the year.
“We have organised for someone to visit Dreamworld in January to attend the theme park at 1pm and count the cars in the car park and take some photos,” Mr Stott said.
“What we are trying to work out is, are the community and tourists going to come back to visit Dreamworld when it reopens?”
Dreamworld accounts for about 30 per cent of Ardent Leisure’s revenues and January is by far its busiest month of the year. Mr Stott said that, based on the experience of a Six-Flags theme park in the US, visitors would return over time.
“We are trying to build a trend in that sense, but we quite like Ardent from a long-term perspective and think their business has upside and is under-appreciated by the market,” he said.
The analysts also were asked about whether they would consider Qantas, which a member of the audience said was one of the cheapest airline stocks in the world. The questions came as Warren Buffett, who is well known for his historic disdain for the airline sector, bought shares in the large US-listed carriers. While it indeed was cheap, the WAM analysts saw no immediate catalyst to re-rate the Qantas share price in the short term.
The shock election of Donald Trump, and his indication that he will pull out of the Trans Pacific Partnership trade agreement, dominated questions from investors keen to understand the macro-economic impact.
Wilson chair Geoff Wilson joked how the experience of his analyst who played a round of golf with Donald Trump and two other Australians four years ago in Sydney made him question if the president elect could be trusted.
Trump was on the losing team and, while his Australian partner chipped in the $100, the president-elect apparently didn’t.