by Eli Greenblat.
Veteran funds manager Geoff Wilson, whose listed investment companies will start parading their latest financial results from today, says he is “incredibly worried” that Australian investors are throwing money into the equities market because of historically low interest rates, and in the process pushing up share prices well beyond fair valuations.
This could eventually see share prices pull back sharply as a rerating of price-to-earnings valuations to better reflect the low-growth economy provides investors with a painful reminder that equities are a more risky proposition than cash in the bank.
“We are in an equities market being driven by these record low interest rates and it seems to be the hurdle rate for returns with interest rates at just a little above zero, or even negative in some instances, there virtually is no hurdle rate, so a significant amount of money is flowing into equity markets and that is pushing up valuations,’’ Mr Wilson told The Australian. “I’m incredibly worried about that.
“In the US we have the longest bull run ever, and we all know bull runs don’t last and eventually finish. And one of the things that worries me is a situation where we have about 80,000 shareholders now across our six listed investment companies and a lot of them I have been talking to are saying they can’t survive on these record low interest rates, so they are saying they need to put their money in the equity market. And that is the wrong reason to put your money in the equity market.’’
Mr Wilson’s WAM Leaders fund will report its fiscal 2019 result today and its WAM Global fund later in the week.
The investment environment has made it harder to score better returns. Mr Wilson’s flagship $1.6 billion WAM Capital fund failed to beat its benchmark for 2019, although he argued it was only the third time in 20 years it hadn’t eclipsed the benchmark.
But Mr Wilson said that for the six months to June 2019, WAM Global’s portfolio increased by 17.8 per cent and WAM Leaders by 19.4 per cent.
He said global markets were being driven by low interest rates.
“The fact is low interest rates have been the driver for equity markets, and low interest rates are effectively in place because of lower economic growth. And so, therefore, do we end up eventually in a situation similar to Japan three decades ago, which was low interest rates, low growth and then therefore you get contracting price-to-earnings ratios as share prices come down to properly reflect that low growth environment?’’
“And it is bizarre to me that at a time of these record low interest rates, we have monetary authorities … talking of pumping even more liquidity into the system.”