‘Not out of the woods’: Why this fund manager is bearish on markets
As a tumultuous year on sharemarkets draws to a close, investors appear to have taken heart from signs that global inflation may have peaked, while company earnings have remained solid. Fund manager Will Curtayne, however, says it’s a situation that can’t last.
Indeed, the portfolio manager at Milford Asset Management has put an unusually high 40 per cent of the portfolio he runs into cash, and says that after the bounce in the ASX since October, the next big moves are more likely to be down than up.
“We’re at the moment in this pocket of reprieve where inflation’s gone down but the economy’s not so weak to worry people about earnings,” he says.
“But we don’t think that kind of goldilocks window lasts. We think it’s a temporary window that’s good for markets, but come the first quarter of next year, we think the markets will be focusing on earnings weakness in companies.”
Milford Asset Management’s Will Curtayne.Credit:Louise Kennerley
The comments reflect New Zealand-based Milford’s view that the investment landscape in 2023 will be quite different to 2022.
This year has been dominated by inflation, leading to sharply rising interest rates, which have in turn contributed to heavy falls in technology stocks in particular. Curtayne, who runs a $1 billion Australian-focused fund, believes investors will next year turn their attention to the deteriorating outlook for the economy, and the risk of global recession.
“Global equities have been in a bear market. We don’t think we’re out of the woods yet. We think the first stage of this [global] bear market was very much an inflation interest rate story, and… 2023 is going to be driven more by a recession story,” he says in an interview.
That sort of global backdrop, Curtayne argues, is not helpful for some of the biggest sectors on the local bourse – including mining giants and banks – which are highly exposed to changes in economic conditions.
“The ASX 200 has been one of the best places to be in the world because the 2022 story was of course interest rates going up, which was good for our banks, people wanted inflation hedges, so they went to resources. But you may see a little bit of a reversal of that in 2023,” he says.
Despite our near-term views, we do think the next decade’s a pretty good one for Australia
Curtayne says the fund has been “more on the bearish side” this year, and he still feels that way.
In a sign of this caution, he says it is choosing to hold 40 per cent of its assets in cash. “We’re sitting on quite high cash levels and are happy to just be patient and say that the market’s had a good run and we’ll be a little cautious here.”
Curtayne has worked as a fund manager for 13 years at Milford, a privately owned NZ firm with about $NZ17 billion in funds under management. The company has been pushing into Australia, and Curtayne relocated to Sydney in 2014 to help set up its local office, before crossing the ditch to live back in NZ last year.
The fund he manages, the Australian Absolute Growth Fund, has the flexibility to hold more cash than many equity managers. He describes its approach as somewhere between relative funds, which tend to measure themselves against the market index, and more aggressive hedge funds, that make bigger changes to their asset allocation.
Its published after-fee returns are 8.49 per cent a year over the last three years, compared with 5.92 per cent for the ASX 200 accumulation index. In the year to November it made 2.78 per cent, less than the 5 per cent of the index, and over five years it has returned 9.34 per cent, compared with 8.2 per cent for the index.
As part of its cautious view, the fund is also heavily underweight on banks, which are highly exposed to swings in the economy. Curtayne says only 1 per cent of the fund is in banks, and he argues the sector will face more challenging conditions next year, after it benefited from rising rates in 2022.
First, he believes stiff competition for loans will erode of the margin gains that have boosted profits. Second, he thinks the market will grow more fearful of bad debts as house prices continue to fall and unemployment starts to rise – even though he is not overly worried about the banks’ actual bad loans.
“We see a strong likelihood that there’ll be a ‘fear of bad debts’ moment,” he says.
It is not all pessimism and caution. He says Australia has a better chance of avoiding a recession than the US, and he’s on positive on “defensive earner” stocks such as Telstra, ResMed, Computershare and CSL, and he thinks the energy sector will be a winner over the next five years, including refiners Ampol and Viva.
Over the longer-term, he is more upbeat about Australia’s economic prospects, saying the ASX is positioned to benefit from deep-seated forces including strong demand for metals and the energy transition. “Despite our near-term views, we do think the next decade’s a pretty good one for Australia,” Curtayne says.
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