Four fundamental drivers are pushing investors, but the parity curve-ball is skewing macro-trends, according to a major investor. At present, it is extraordinarily difficult to predict macro-trends, said Fidelity Investment Management’s portfolio manager, Kate Howitt. “Fidelity is focussing on individual companies,” she said, and “we’re nervous of buying because of parity.” That said, Howitt identified four drivers for investors: a buoyant China; QE2 liquidity; small is beautiful; and the re-emergence of M&A. Due to a buoyant China, “miners are back, particularly the small miners,” she said.
The Chinese economy was powering along and it was predominantly an infrastructure-driven story. “At some point, the Chinese economy will shift to consumption and the Government is doing what it can by creating safety nets so that people feel more secure. “If people feel more confident about their children’s education and health, then there’ll be a long-term shift to consumption. In small- to medium-rise cities, people are being shifted out into very tall apartment buildings and that uses a huge amount of steel. We talk about the move from rural to city, but the big move in in cities – and this boosts the iron ore price.” Second, the US QE2 is “at its simplest is a form of printing money … and it’s unconventional fiscal policy – but it has a very direct read-through into asset classes that are priced in US dollars – oil, iron ore, and gold”.
Some parts of the Australian economy “aren’t being invited to the parity party”, Howitt said. “Manufacturers and tourism are suffering, as are healthcare companies – such as CSL, Cochlear, Ramsay Health Care – which have a large part of their earning come from offshore. Mining stocks are now the glamour stocks, similar to 2009.” Third, small is beautiful, said Howitt. “Large-caps are out of favour and small-caps are trading at parity with large caps, which hardly ever happens. Usually there’s a discount for small caps. A lot of small miners are having production growth or commodities-price upgrades, while a lot of the large caps are under pressure: the banks, Telstra, BHP.” Fourth, mergers and acquisitions are re-emerging. Early in 2009, Howitt said, companies such as BHP, QBE, Computershare “were desperate to buy – they’re very competent serial acquirers that buy wisely and well. Nothing happened because there was no price discovery. Now, things have recovered enough that targets are feeling they would not be giving away the farm.”