By David Rogers

 

A $1bn fund overseen by Geoff Wilson has turned cautious on the Australian sharemarket.

WAM Leaders Fund more than doubled its cash reserve by selling shares in the past two weeks. Lead portfolio manager Matthew Haupt said he had increased the cash reserve of the fund to about 12.5 per cent, from 6 per cent, since mid-January in anticipation of a pullback in the sharemarket.

“We definitely increased our cash holding,” Mr Haupt said.

The cautious stance from WAM follows a strong performance from the fund in the past year. In its fiscal 2020 first-half results on Friday, WAM Leaders will report a 185.8 per cent rise in operating profit before tax to $43.3m and announce a fully franked interim dividend of 3.25c a share, representing a 22.6 per cent increase on the prior corresponding period.

The result comes as the outbreak of the coronavirus in China halts an exceptionally strong rise in share prices. Australia’s sharemarket rose 18.4 per cent last year — its best return since 2009 — as central banks slashed interest rates and boosted the liquidity available to investors in response to a sharp slowdown in the global economy.

There was also a related sell-off in global markets as the Federal Reserve planned to keep lifting interest rates and withdraw liquidity, despite an unprecedented US-China trade war.

After rising as much as 6.9 per cent in the first three weeks of 2020, the Australian sharemarket was having its best year-to-date rise since 1983, as investors expected further interest rate cuts.

The 12-month forward price-to-earnings ratio of the S&P/ASX 200 index hit a record high near 18.3 times and its dividend yield sank to a decade-low around 3.9 per cent.

But the index subsequently fell as much as 2.5 per cent as stronger than expected employment data led economists to abandon expectations of a rate cut from the Reserve Bank at its meeting next week and, more significantly, the coronavirus outbreak infected many more people than the Sudden Acute Respiratory Disease (SARS) of 2003-04, dampening the economic growth outlook.

As well as stretched valuations in the sharemarket and the economic implications of the virus (which have led Citi and ANZ to predict that China’s growth will slow to about 5 per cent early this year) Mr Haupt is focusing on the prospect of a reduction in Federal Reserve liquidity.

“The market seemed extended after a good run and then we had the coronavirus,” he said.

“We are also hearing rumours out of the Fed about tapering their repo program, mentioned briefly after its meeting this week.”

In its statement early on Thursday, the Fed said it would keep conducting term and overnight repurchase agreement operations “at least through April”.

“Close to April I think they’ll start tapering and then move to short-dated Treasury purchases at lower levels,” Mr Haupt said.

“They keep saying ‘this is not QE’ (quantitative easing), but risk assets have taken it on board that this is QE and bid up all the risk assets, yet their signalling is that this is not going to go on forever.”

Regarding China’s economic outlook, he remained hopeful of credit expansion providing a “backstop”. But despite early signs of a global economic recovery, he cautioned that equity markets were “susceptible to shocks” amid sub-par global growth and a lack of major drivers.

“Our primary thesis during the stabilisation of the global economy appears to have concluded and we are closely monitoring macroeconomic and market movements for the next key thematic and continuing to invest in solid companies with strong fundamentals and demonstrable tail winds,” he said.

However, he said the increase in cash levels for WAM Leaders was “more of a tactical” decision and he remained “constructive” about the sharemarket outlook over the medium term: “I think it’s a risk-off environment until we see the full extent of this virus.”

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