Blue chip-focused listed investment company WAM Leaders believes Australia’s resources giants have got the message about remaining prudent in the face of global commodity price volatility, and remain well placed despite their strong runs.
Resources companies BHP Billiton, Rio Tinto, Origin and Santos were key to WAM Leaders easily beating its benchmark in the six months to December 31, according to the company’s results, to be released to the market on Monday morning.
The S&P/ASX 200 index returned 8.4 per cent during the December half, compared to WAM Leader’s investment portfolio return of 11.9 per cent. Over 12 months, WAM Leaders has returned 16.5 per cent, compared to an 11.8 per cent return from the benchmark.
WAM Leaders, part of the Wilson Asset Management stable, added to its holdings of BHP and Rio during the period, as strong data on global growth was matched by resilience in China’s economy.
With Rio Tinto set to reports its full-year results on Wednesday, and BHP later this month, senior equity analyst John Ayoub is looking for more of the same.
“They are doing a great job,” he told The Australian Financial Review. He said the large amounts of free cash flow the pair are generating is being put to good use. BHP is likely to make faster debt repayments than the market expects, while Rio has showered shareholders with big returns.
“They will start investing at the asset level rather than the company level in the back half of the year,” Mr Ayoub said, adding this has been well flagged and would be prudently approached.
While oil prices fell from recent peaks at the weekend, Mr Ayoub remains positive on the outlook for the likes of Santos and Origin, which continue to bring down costs to insulate themselves from price movements.
The lack of investment in oil exploration across the world means reserves are slowly dwindling, which should also support the Australian groups long term.
“We’ve seen an under-investment from a capital expenditure point of view from all participants. So the future and the cost curve seems very stable, although we will get volatility,” Mr Ayoub said.
Qantas, BlueScope Steel, G8 Education and National Australia weighed on returns during the period, and WAM Leaders is cautious on the banks.
Mr Ayoub said the big four banks looked “fair value to slightly cheap” given their strong dividend yield, and WAM Leaders’ weighting towards the sector has risen slowly since the middle of 2017.
“We think the dividends won’t come under question at all, all those issues around capital are behind us now,” he said.
But the growth outlook for the sector remains a query, particularly given a slowing housing market.
Overall, Mr Ayoub is upbeat on the outlook for equities – and for active investors.
“If you look globally, synchronised growth is better than we’ve seen in decades,” he said. “The thematic days are done for now and it will come back to stock picking.”