There is no point owning a single bank stock until the next round of capital raisings is out of the way, says the fund manager behind Wilson Asset Management's newly listed WAM Leaders fund.
Matthew Haupt sees dividend and earnings risk for the banking sector at the next set of results. Margins are suffering as low interest rates persist, he says, and capital raisings could return in early 2017, once the Basel IV capital and liquidity rules are finalised.
"I don't think at the moment you need to own any Australian bank if you're not pegged to the index," he says. "All the retail guys are looking at the yields [saying] 'oh, they're really attractive', but there's risks to those yields I don't think they're factoring in yet. There will be a time to buy them and generally you buy a bank at the last capital raise of the cycle. Then they're probably a good buy."
Haupt, who is from Adelaide, got interested in investing by managing his mother's superannuation portfolio as a 13-year-old. He would print off price-earnings charts and pick the cheap stocks, a strategy which was enough to beat the market every year back then. "But we were in a raging bull market," he concedes.
The interest in equities goes even further back. Haupt's father was a neurosurgeon, but his grandfather worked at News Corp on the printing side of the business. In those days, Rupert Murdoch would gives shares away to staff every year. "He actually made quite a lot of money from that," Haupt recalls. "The share price was so low and he would give all his staff really generous share plans."
After starting out working for a trustee company, Haupt moved to Sydney when he got a job advertised by Geoff Wilson in 2011.
"It's really an intellectual challenge to try and work out what information's in the price and what's going to drive it higher. That's the challenge. You get it right and you get it wrong and you're always evolving and learning. It's a great industry," he says.
Early into 2016-17, he doesn't see stocks snapping out of the yield-first thinking that has distorted valuations.
"We haven't got off the life support since the GFC which is easy money, and easy money creates artificial markets. That's the market we're still in, where asset prices have been bid up off essentially free money, loose money.
"It doesn't look like changing any time soon."
Relative to other asset classes shares look ok, but on any absolute measure stocks are expensive right now. Sydney Airport and Transurban "are just so over-valued", he says. International investors can set up a carry trade, borrowing at half a per cent to invest in Australian yield stocks, "that's just the world we live in at the moment". "That's why when it unwinds it's going to be quite painful because it's all these artificial pockets of extreme valuations which in a normal set of circumstances wouldn't exist.
"But that unwind, when does it come? And it looks like the last week or so has pushed it out another few years."
Haupt foreshadows a tough earnings season next month with little detail in the way of outlook statements. After Brexit and the electoral stalemate, he agrees many companies will be using the political and economic instability to paper over weak numbers.
"Especially with the foreign exchange translations, there's a lot of risks there for people with UK earnings. There's quite a list of Australian companies with big UK earnings. It's going to be really interesting to see their guidance, they're really going to have to have great hedging programs in place or they're going to get hit pretty hard.
"You've got Brexit, the election, you can clean out some of the rubbish with those excuses."
WAM Leaders looks for stocks that can grow their earnings at least at their price-earnings ratio, and with a catalyst for the share price to rise. "No matter what the market's doing, you can still find those companies, but they're harder to find because valuations are extreme."
Some stocks the fund holds are Credit Corp and Orora, the packaging company which has United States dollar exposure. "It's cheaper [than Amcor], with more potential." The fund doesn't tend to look at resources companies and maintains high levels of cash. The WAM stable of funds is running at higher-than-average cash levels right now.
A big position in Mayne Pharma paid off when the Australian drug maker revealed its highly earnings accretive acquisition of a generics portfolio.
And Reliance Worldwide, the behind-the-wall plumbing fixtures company which listed to acclaim this year, still looks interesting as it expands beyond retro-fit products. "They're launching a new product in the US later this year for new home builds. It's a whole new market, which will double the size of the company. That's quite positive and it's got US dollar exposure."
To find a stock with the opportunity to double the business in three-to-five years is "really attractive".
In financial services, Haupt will be watching AMP for any signs of capital management, but as for the Brexit-hit stocks such as Henderson and BT Investment Management, there is no comfort around earnings certainty. "For us it is a gamble. It's just rolling a dice," he said.
