Wilson Asset Management chief investment officer Chris Stott says the Reserve Bank of Australia will need to cut interest rates again if it wants to reignite economic growth over the medium term.
Speaking after the RBA cut rates last week by 25 basis points to a record low of 1.5 per cent, Mr Stott said
that monetary policy was likely to need to remain loose for another 12 months at least.
“We think the RBA will continue to keep cutting over the coming months,” Mr Stott said.
While he believes it is “line ball” whether the central bank takes the official cash rate as low as 1 cent, Mr
Stott said he “can easily see another 25 basis points between now and Christmas”.
Mr Stott said Wilson Asset Management was pleased with the performance of its listed investment company
WAM Research, which on Monday will announce it has delivered a 25.5 per cent investment return for the
12 months to June 30, compared to a 2 per cent increase in the S&P/ASX All Ordinaries accumulation index.
The company also delivered record earnings for the period, with operating profit after tax up 34.4 per cent to
WAM Research will pay a final fully franked dividend of 4.25c a share, bringing the full year dividend to 8.5c,
up 6.3 per cent on 2015.
Mr Stott expects the low rates will help spark an increase in merger and acquisition activity in the coming
year, as companies seek to take advantage of cheap debt and relatively strong balance sheets.
In the past 12 months WAM Research holdings including Smartgroup and RCG both enjoyed positive
reactions to takeovers, while Mayne Pharma’s recent acquisition of a suite of generic drugs from a US firm
has also been roundly cheered by investors.
“Given the anaemic outlook for growth, investors are hungry for companies that are growing,” Mr Stott said.
“The appetite for accretive deals is as high as I’ve seen it in over a decade.”
One sector where WAM expects particularly M&A action is the car leasing space.
It holds companies including Smartgroup, Eclpix and SG Fleet and Mr Stott describes it as being similar to
the telecommunications sector five years ago, when the likes of M2 Communications, Vocus, iiNet and
Amcom were all still independent players. Today they have all been through mergers and takeovers, making
the second tier of the telco sector much thinner.
“We believe that consolidation needs to happen in the car leasing space,” Mr Stott said.
He also expects the retail sector to fare well heading into the key Christmas period following the rate cut,
nominating WAM’s holdings The Reject Shop and Baby Bunting as potential beneficiaries.