By David Rogers


Geoff Wilson is cautious on the outlook for shares as central banks boost rates amid surging inflation, albeit stressing the need for investors to take a long-term view.

Speaking at the Future Generation Investor Q&A webinar on Wednesday, the founder of ­Future Generation and head of Wilson Asset Management said it was important to stay “flexible”.

“I was around in the ’87 crash, so I’ve got those scars on my back … I do get nervous,” Mr Wilson said.

“We have had a period of falling interest rates and now we have rising interest rates.

“That has a negative impact on valuations and potentially company earnings if there’s a slowing in the economy, particularly for any companies that have debt.

“But what you’ve really got to be aware of is that, over time, you get significant performance.”

He noted that the S&P 500 had generated an average annual return of about 7 per cent before dividends over the past 20 years, “but if you missed the 20 best days over that 20-year period, you virtually got no performance.”

Of course while there have been ups and downs, US inflation and interest rates have basically trended down since 1980. US inflation has been much “stickier” than expected in the past year or so. The question is how high interest rates must go to tame inflation and the economic impact of that.

“You always want to be buying when you feel scared and selling the other way,” Mr Wilson said.

“I’m probably a little bit more on the conservative side at the moment. It’s always worth having a bit of cash to find opportunities when they present themselves.

“It’s just the fact that we have had a very long period of falling interest rates and now we’ve got a period of higher inflation and rising interest rates.

He said the key question was how high interest rates went relative to market expectations.

His comments came as Australia’s headline CPI for the June quarter rose by 6.1 per cent.

While the CPI rose at the fastest pace since 1990 – apart from the early 2000s spike caused by the start of the GST – it was slightly below Bloomberg’s consensus estimate of 6.3 per cent.

The dollar dropped as much as 0.5 per cent to US69.13c as market interest rates fell. The government bond yield curve “bull steepened”, the three-year yield falling 12 basis points to 3.25 per cent and the 10-year yield dropping 12 basis points to 2.92 per cent.

Market expectations on the size of near-term rate rises by the Reserve Bank were dialled back.

The futures market was expecting only 44 basis points of tightening by the Reserve Bank at Tuesday’s board meeting, down from 53 basis points pre-CPI, and Goldman Sachs and Deutsche Bank economists scrapped their forecasts of a 75-basis-point lift.

The sharemarket consequently rallied, the S&P/ASX 200 rising from an intraday low of 6678.9 points pre-CPI to a six-week high of 6833.4, before closing up 0.2 per cent at 6823.2.

Investors were awaiting “forward guidance” on US interest rates from the Federal Reserve, with a 75-basis-point increase in the Fed funds rate already priced in for this month.

Mr Wilson pointed to the US reporting season, where the market had focused more on the outlook than the latest results, as a guide to the key themes for the Australian market next month.

“There’s probably a bit of growth in revenue, but it’s (also) costs everywhere,” he said.

“Whether it’s funding costs, employment costs – just trying to see to what extent a company’s margins are being squeezed, or which companies can actually pass on those costs, maintain their margins, and actually benefit from this environment. This reporting season will be the start of telling that tale.”

As for the best stocks to own, Cooper Investors chief investment officer and portfolio manager Peter Cooper offered Brickworks for Australian port­folios and China Mobile for global portfolios.

“[Brickworks] has been around for over a 100 years and has increased its dividend since 1976 every year … very diversified … fantastic balance sheet … net cash 30 times interest cover,” he said.

“The good news is that you get to buy it at a 25-30 per cent discount to its net asset value.

“You can stick your money in here and go on holidays … come back in 30 years to see it grow.”

For his part, Mr Wilson nominated Telstra and AMP. Telstra was “finally getting a bit of growth” after a decade of none and, while it was already trading on a forward price-to-earnings ratio of 20 times, the signs of growth deserved a “rerating”.

AMP had “continually disappointed” but was now an “asset play”.

“We think the assets could be worth between $1.50 and $1.80 (a share), more likely the higher end,” Mr Wilson said. “They’ve got some great assets and the new CEO has been doing a fantastic job cleaning it up.”

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