The big four banks are a reasonable bet for investors over the next 12 months with National Australia Bank the standout pick, while furniture retailer Nick Scali is also shaping up as a strong performer says veteran fund manager Geoff Wilson.
But Mr Wilson, who oversees more than $2 billion in funds under the Wilson Asset Management portfolio of listed investment companies, said it’s likely to be a tough next 12 months for sharemarket investors overall.
He predicts the S&P/ASX 200 Index may be about 5 per cent lower by late 2017 compared with its current level of around 5300 points because “headwinds” from rising bond yields, and sharemarket valuations in many stocks having been pushed beyond sensible price earnings multiples following the flood of cheap money and low interest rates of the past few years.
“I’m nervous about valuations,” Mr Wilson said on Tuesday.
He said the share prices of the big infrastructure stocks including Transurban and Sydney Airport were likely to continue to move lower over the next year because of the shift in bond yields, and he lumps Telstra into that category because it is now a company with similar characteristics as the big infrastructure players.
“Short term it’s over. I think it’s going to be very difficult for the infrastructure stocks to perform over the next six to 12 months,” he said. “Even before Donald Trump won, the shift was under way.”
But the big banks, which were out of favour three or four months ago, are likely to deliver for investors.
Mr Wilson said bad and doubtful debts don’t appear to be getting too much worse for the big banks, except for those exposed to the Western Australian economy. He also believes that while residential property prices are at a peak in Sydney and Melbourne, the likelihood of the big banks being caught in a property market slide is slim, with the Brisbane and Melbourne apartment markets to provide minor irritations.
Big banks look cheap
“The big banks look slightly cheap on a relative [price-earnings] basis,” he said ahead of an investor seminar on Tuesday night for accounting firm Hood Sweeney. “I think they’ll probably perform pretty well”.
Mr Wilson prefers NAB over the other three, ANZ, CBA and Westpac, because of its disciplined lending practices, its cost-cutting and a focus on the small-to medium business lending market.
Another two winners are likely to be furniture retailer Nick Scali and small cap financial services company Armidale Investment Corporation. Mr Wilson said Nick Scali had strong leadership and disciplined management. “Effectively it comes down to the quality of management,” he said. The stock has already risen from $4.15 to $5.60 over the past year, but he predicts it will continue to deliver. This is despite new housing start figures showing that sector which drives substantial demand as buyers furnish their new dwellings, had hit a peak.
He also believes that interest rates in Australia won’t go any lower and future moves will be up.
“I think they’re finished. This is a total brave new world.”
Rate rises are traditionally negative for sharemarkets and he expects the impact of rising bond yields and excessive valuations in many stocks to offset the usual gains that Wall St makes in the first 12 months of the reign of a new United States president, which history shows usually occurs.
“I think we might be 5 per cent lower this time next year,” he said, referring to the likely direction of the ASX200.
Mr Wilson said one of the Wilson Asset Management funds, WAM Capital, was sitting on 44 per cent cash, significantly higher than its long-term average cash holdings of 34 per cent.