Smart Investor asks five experts to nominate the companies most likely to underperform.
Roger Montgomery
CIO, Montgomery Investment Management
The idea the banks are a must-own is questionable. On the revenue side, credit growth will be challenged, becoming more apparent as the construction and building boom ends. Net interest margins are coming under pressure because once you are offering zero interest rates on deposits – like most of the big four (ANZ, CBA, NAB, Westpac) are now – the banks can no longer recoup any reduction in mortgage rates that are passed on. And then, thanks to David Murray’s Financial System Inquiry, the capital adequacy requirements have been increased, which means return on equity is likely to decline. I believe there are more compelling opportunities elsewhere in the market than with the big four.
Marcus Padley
Director, MTIS Financial Services
Owning large-cap stocks alone will produce average returns – over the past 18 months these have been roughly flat before dividends. At Marcus Today Investment Strategists, we are not compelled to own any stock just because it is a key component of the index. While many income investors can mount arguments for holding the banks and Telstra, our mission is to add value through capital growth and growing dividend streams. Very few large-cap stocks meet this criterion, with big stocks, particularly banks, dragging the chain over the past 18 months. While we may hold CSL, Amcor, Ramsay Healthcare and Brambles at times, we do not feel pressured to own any stock simply because it is large.
Angus Nicholson
Markets analyst, IG
Now is a poor time to buy yield-focused stocks. Since the August sell-off in 2015, minimum volatility and yield have been two of the best performing return factors over that period, which largely correlate to the utilities, consumer staples and real estate sectors. This has primarily been driven by a collapse in global yields. Brexit produced a renewed surge in these yield-sensitive areas. But global yields are on the rise: there is a very good chance the Fed will raise rates in December, the Bank of Japan has tweaked monetary easing and there are rumours of an ECB taper in the wake of Deutsche Bank concerns. Given this macro environment, I would be cautious around AGL and Telstra over the next 12 months.
Julian Beaumont
Investment director, Bennelong Australian Equity Partners
Business momentum is a key guide for large caps. Financials QBE and AMP have struggled to find it for years, and there is little to suggest change is afoot. QBE still suffers indigestion from past acquisitions, and operates in commoditised and soft general insurance markets. AMP plays right across the financial services value chain, but lacks focus and faces challenging conditions. Both have found earnings momentum evasive. Large-cap REITs also offer below-market yields but face risks from interest rates rises, in terms of asset values and debt costs. For example, Scentre yields just 4.5 per cent unfranked, offers limited growth, and trades on a 40 per cent premium to real-world property valuations.
Brigette Leckie
CIO, Koda Capital
Investors should consider avoiding owning big four banks. While the fully franked yield is appealing, total return is the key. The days of large price gains and high total returns are over. The headwinds are numerous: cracks in the housing markets loom, global interest rates remain low, political meddling is inevitable, and greater globalisation of banking regulation will continue. And technology is changing the market dynamics. A transaction between buyer and seller that involved both parties’ banks can now be completed across a trusted network, without the involvement of any bank. The result: fewer transactions, weaker earnings, reduced return on equity and lower dividends.
