Hear the latest from our Chief Investment Officer, Jamie Nicol, as he provides his insights into the current state of play for equity markets.

 

Well, the market’s responded very favourably to the Trump election. We’re sort of calling it a Trump-i-locks scenario where the market’s focusing on the positives. That’s the tax cuts in the US and the fact that he’s looking to cut regulation. These sorts of things have the potential to boost demand and boost confidence in the US. The other factor that the market needs to think about of course, is inflation. If he’s lifting tariffs, cutting immigration, that’s quite inflationary. And then the other thing we’re just thinking about is what happens to the deficit? Potentially the deficit could blow out on the back of those tax cuts, but if they can manage costs down enough to offset it, then that would be the most bullish sort of scenario. So we think it’s been very difficult to call the macro scenario. The outlook for the economy and for interest rates has been bouncing around all the year and continues to do so.

And I think for us, the focus has been and continues to be trying to find those good quality businesses which have some valuation support. And in the current environment, you’ve seen a lot of momentum drive some stocks to record highs. And I think you’ve got to be a little bit cautious about some of those stocks, which are trading at very expensive levels. We try to find those good quality companies when they’re a little bit out of favour. And there’s a number of those in the market that we think we’ve managed to find. And one of those being James Hardie.

So James Hardie’s is market leading business selling building materials both here in Australia and the US and a little bit in Europe. In the US, they’ve been winning market share for the past 40 years and continue to win market share largely off of vinyl, brick, wood, other commodities. Over the past six months, the economic environment for Hardee’s has been a little soft. Higher interest rates means there’s been a softening in demand for new homes and also renovations. When we look in the longer term, we think the environment’s very favourable. We think they’ll continue to win market share. You’ve got a consumer that’s very strong in the US. A lot of them are locked into their homes in very low interest rates, so we’ll need to undertake renovations. And the US has been under building, so like Australia, there’s a lot of pent up demand for housing over there.

So we think there’s a big long-term tail in the US And right now, the fact that there’s a bit of softness in the environment gives you opportunity to buy the stock when it’s a little bit cheaper. But the outlook over the next five years means the earnings growth will be very strong double digit earnings growth for the next five years. And so I think it’s just one of those businesses which is really well run, good balance sheet, strong product, market leading business, and you’re getting it when it’s out of favour. So it’s very much in our wheelhouse of the types of businesses we like to own. So to summarise, I think Hardie’s demonstrates the type of businesses we like to buy, and it’s those stocks with those quality characteristics. There’s a number of these types of companies that are out there in the market, and I think the volatility that’s likely to present itself, given the uncertainty around the macro environment that presents opportunities, we are thinking through the short term, thinking about the longer term, thinking about those companies which can deliver strong earnings growth over that medium term, and try to find those companies with a really strong structural position, structurally strong, good competitive advantages that can deliver those good returns over the longer term.

And those opportunities exist in the market, but I think you have to be a bit selective because there’s some market leaders trading at very high prices and you want to be a little bit cautious about those names that have got very strong momentum.

 

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