Monday, 03 February 2014 01:23

Emerging Market Risks - How Serious?

Key pointsWorld Peace

- Concerns about emerging countries on the back of various political problems and trade imbalances that leave them vulnerable as the Fed slows down its monetary stimulus appear to have triggered a correction in share markets.

- However, while it makes sense to be cautious about emerging market shares generally, a re-run of the 1997-98 Asian crisis is unlikely and emerging markets are unlikely to pose a major threat to global economic recovery.


The past week has seen renewed concerns about the emerging world reflecting a combination of political problems in several countries including Turkey and the Ukraine, a currency devaluation in Argentina and ongoing concerns about Chinese growth. Such concerns also reflect the impact of the Fed slowing its monetary stimulus at a time when parts of the emerging world are vulnerable.

This has seen falls in emerging market shares and currencies. Moreover, fears about exposure to the emerging world and a possible threat to global growth have seen share markets in advanced countries fall nearly 4% over the last week. Concern has returned that we may see a re-run of the 1997-98 “Asian-emerging markets crisis”.

Our assessment remains that another “Asian-emerging markets crisis” is unlikely. However, it is even clearer that the secular cycle has now turned against emerging market shares (EMs) relative to developed markets (DMs).

The 1997-98 Asian/emerging market crisis

Economic history reminds us repeatedly about the prevalence of cycles – both short term and long term. Asian and emerging countries and shares are not immune having gone in and out of favour several times over the last few decades. In the mid 1990s there was much talk of an “Asian miracle”. Growth was thought to be assured by high savings and investment rates, strong export growth and a shift in labour from rural areas to cities. However, as is often the case during good times, excesses set in including a growing reliance on foreign capital, current account deficits, excessive debt levels and over-valued fixed exchange rates. Eventually foreign investors had doubts. In mid-1997 Thailand experienced capital outflows that became a torrent and triggered a collapse in its fixed currency, which then led investors to search for countries with similar vulnerabilities (so-called “Asian contagion”) which led to the crisis spreading across the emerging world ultimately contributing to Russia’s debt default of 1998 that briefly dragged down developed market shares in August 1998.

In the 2000s, Asian and emerging countries mostly got their act together thanks to a range of productivity enhancing reforms, less reliance on foreign capital, low and floating exchange rates and high foreign exchange reserves and this along with the industrialisation of China and a related surge in commodity prices (which benefited South American countries and Russia) saw their growth rates improve. The enhanced perception of emerging countries and a secular slump in the traditional advanced economies of the US, Europe and Japan at the same time saw them once more come into favour amongst investors.

This reached a crescendo after the global financial crisis with talk of a “new normal” of poor growth in advanced countries and their rounds of quantitative easing encouraging capital flows to the “stronger” emerging markets leading in fact to talk of “currency wars” as EM currencies rose. The surge in the value of Asian currencies versus the $US over the last decade as a result of strong capital inflows can be seen in the next chart. Recent weakness has only reversed a small portion of the rally from Asian crisis lows, but emerging market currencies generally have been a lot weaker, having been in a down trend since 2011 (just like the $A!).


Back to the future?

Has Asia and the emerging world just gone full circle such that it’s now standing on the precipice once more? Several factors are driving current worries:

  • Fed tapering has led to fears of a reversal in the money flow to the emerging world that may have come from quantitative easing. Transitions in Fed monetary policy often have implications beyond the US, eg the Mexican crisis when the Fed moved to tighten in 1994.
  • This has occurred at a time when the flow of news in developed countries – the US, Europe and Japan - has continued to improve.
  • Some emerging countries face political problems – the Ukraine, Turkey, Argentina and Thailand.
  • Several emerging countries, notably Brazil, India and Indonesia, used the capital inflows that occurred as a result of quantitative easing in the US to finance budget and current account deficits.
  • Slower growth in China has taken its toll on the emerging world generally by putting downwards pressure on commodity prices and dragging on the demand for imports from the Asian region.
  • More fundamentally, the boom years of the last decade allowed several emerging countries to go easy on necessary structural reforms. Poor infrastructure, excessive regulation and restrictive labour laws are key problems. The end result has been inflation and trade imbalances and reduced potential growth rates.

The end result has been for investors to start rethinking the outlook for emerging countries with flows heading back to the advanced countries. The problem for emerging countries in raising their interest rates to support their currencies – as has occurred in several including Brazil, India and Indonesia – is that it further serves to slow economic growth making the investment outlook in such countries even less enticing.

Put simply, there is no easy way out for countries with current account deficits when foreign investors start to withdraw their capital. In the short term domestic spending must fall, interest rates must rise and exchange rates fall to bring this about. The only way to sustained stronger long term growth is to reform their economies, but that takes time.

Still not 1997, but the risks have increased

The next table compares the state of current account deficits & inflation today with the situation before the 1997-98 crisis.

Not as vulnerable as in 1997

  Current account, %GDP FX reserves, $USbn Inflation rate, %
  1996 Now 1997 Now 1996 Now
Indonesia -3.2 -3.9 17 99 7.9 8.4
Thailand -7.9 -1.6 27 167 5.9 2.2
India -1.6 -3.1 20 295 9.0 9.9
Korea -4.4 4.6 20 345 5.1 1.1
Taiwan 3.9 10.0 84 421 3.1 0.3
Malaysia -4.4 5.0 15 136 3.5 2.9
Singapore 13.8 18.5 73 272 1.1 2.6
HK 3.9 2.3 93 309 5.9 4.3
China 0.9 1.9 140 3726 8.3 2.5
Brazil -2.7 -3.7 58 376 9.6 5.9
Russia 2.8 2.3 25 524 21.8 6.4

Source: IMF, Bloomberg, AMP Capital

The overall position of emerging countries remains stronger today. Current account balances are generally in better shape, central banks have much higher foreign exchange reserves, exchange rates are floating rather than fixed and not as high as they were before the Asian crisis and inflation is lower. Having mostly floating rather than fixed exchange rates is a big distinction today because, as IMF research has confirmed, floating exchange rates are less prone to crises than fixed: they create less economic distortions and don't need to be defended from speculative attacks.


Source: IMF, AMP Capital

However, several countries are vulnerable, particularly Brazil, India and Indonesia where current accounts have moved heavily into deficit indicating a now heavy reliance on foreign capital inflows. See the previous chart.
Other emerging markets that are vulnerable thanks to current account deficits and hence a reliance on foreign capital inflows are the Ukraine, Turkey, South Africa and Chile.
By contrast China, South Korea, Taiwan and Russia with large current account surpluses are far less vulnerable.

While we don’t see a re-run of the Asian-emerging market crisis or a sharp collapse in emerging market growth the risks have clearly increased particularly for countries that now have large current account deficits. Emerging market growth generally is likely to be softer in the years ahead than what we got used to last decade.

Implications for investors

There are several implications for investors:
First, while emerging market shares are relatively cheap (with forward price to earnings multiples of around 10 times compared to 14 times for global shares) it’s too early to strategically reweight towards them. Notwithstanding likely bounces in relative performance along the way, the secular underperformance by emerging market shares relative to developed market shares could have a fair way to go yet, particularly given the extent of outperformance last decade.


Second, investors in emerging markets should focus on current account surplus countries as these are less vulnerable to foreign capital flows, eg China and Korea. And in any case Chinese shares are amongst the cheapest in the emerging world.
Thirdly, emerging markets are unlikely to pose a severe threat to growth in advanced countries. Yes the emerging market share of world GDP is now just over 50% compared to around 35% in the mid-1990s, but more fundamentally a sharp slump in emerging market growth is unlikely given the stronger position of many emerging countries today compared to that prior to the Asian-Emerging Market crisis.
Fourthly, emerging market worries appear to have provided the trigger for a correction in advanced country share markets that high levels of investor sentiment had left them vulnerable to. But once investor sentiment falls back to more normal levels the rally in shares is likely to resume.

Finally, while a recession in emerging market countries is unlikely, slower growth than seen over the last decade will act as a bit of a constraint on commodity demand, providing another reason why the broad trend in the Australian dollar will likely remain down. Ultimately I still see the $A heading down to $US0.80.

Dr Shane Oliver

Head of Investment Strategy and Chief Economist AMP Capital


DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.


Published in Investment Advice
Thursday, 14 November 2013 02:52

"Nein" to Nine

Channel-Nine-LogoChannel Nine is being floated on the share market shortly, and for many investors the thought of investing in a household name might be appealing.

Here we outline some of the reasons that investors should be wary of this listing:

1. TV advertising spending has gone nowhere over the last 5 years - here is a chart sourced from the Channel 9 prospectus









2. Traditional TV is facing a significant threat from the internet such as YouTube, Apple and Google TV just to name a few.

3. Channel Nine's price to earnings ratio is 14-15 - which doesn't strike us as cheap for a business that is being structurally challenged.

4. Current owners are selling 40% of their shares in this offer, and only have to hold their other shares for 12 months.


Before subscribing to shares in Channel Nine, investors should seek professional advice.


DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.




Published in Investment Advice

The Australian share market has experienced a strong rally over the past 12 months, although it must be said that this rally was off a low base.

So the question that all investors want to know - "Is the share market expensive now?"

One way of determining this is to consider the Equity Risk Premium.  Equity Risk Premium by definition is "The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium."

Below is a chart that shows the history of the Equity Risk Premium in Australia and basically this shows that the higher the risk premium, the better value the market.  Or in other words when the graph is above the "average" line the market can be considered to offer better value compared to when the equity risk premium is below average.



This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Investment Advice
Thursday, 02 May 2013 12:49

Term Deposits - the Great Rotation

There has been much discussion that the rally in the Australian share market has been as a result of a switch from investors with Term Deposits seeking a higher rate of income.  The chart below would seem to dispell that notion as it shows continued growth of term deposits in Australia to record levels.

Speculation continues of further interest rate cuts in Australia which would reduce term deposit rates even further.  Bill Evans (Westpac Chief Economist) is of the view that interest rates will be cut to 2% by 2014.

Term Deposit Growth chart

So it seems that there has not been a rotation out of term deposits into shares just yet.

This is further evidenced by the next chart which shows equity ownership by Australian households at 20 year lows.

Equity holdings at 20 year lows

Share prices have risen dramatically from low levels, but it would seem not as a result of a mass movement of funds from term deposits.

One can only imagine what may happen if the rotation from term deposits back into shares actually takes place.


This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.






Published in Investment Advice

Paul Xiradis (CEO Ausbil Funds Management) talks with Mark Draper (Adviser, GEM Capital Financial Advice) about the outlook for the Australian Banking sector.


Key points:

  1. Bank Balance Sheets are in good shape
  2. Housing downturn concerns overblown
  3. Banks have grown their profits consistently in tough times over past years
  4. Australian mortgage owners are well ahead in their repayment schedules
Published in Investment Advice

It is almost universally accepted that in the Western world we are likely to see a future that features lower economic growth than in previous decades.

Most people automatically draw the conclusion that low GDP growth equals low share market returns.  This article will show you that there is virtually no relationship between GDP growth and share market returns.

The first chart shows the share market returns of developed countries on the vertical axis and at the same time shows GDP growth on the horizontal axis.  You can see that the country with the highest GDP growth is Japan and yet that country had one of the lower share market returns over the period (of 100 years).

Conversely Australia had one of the strong returns from the share market, but was among the lowest GDP growth countries.

We now take a look at developing countries to see if the same holds true for them.

Again we see that the country with the highest share market returns had one of the lowest GDP growth rates.

Ah I hear you say, but none of these charts consider China, which most would highlight as the beacon of economic growth.

The following chart shows Chinese GDP from 2000 to 2012 (measured in $US).  It shows an economy that has grown four fold over that time.

Now lets take a look at the Chinese share market over the same period.

This chart shows that the Chinese share market has barely grown since 2000, and yet the economy (GDP) has grown four fold.

To finish on China we now compare how investors fared in 2012 by investing in Greek shares versus Chinese shares.   The Greek economy is in the middle of a depression while the Chinese economy grew around 7%.  We rest our case.


Bottom line - GDP has virtually no relationship to share market returns.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.





Published in Shares

We recently celebrated the 5th anniversary of the high point for the Australian share market that occurred in November 2007.  The value of the market remains 30-40% below this peak.

History tends to repeat itself so lets compare the last 5 years to other large market downturns in history.

The chart below shows the value of the Australian share market many years after a large drop such as the 2008 drop.  The blue line is the journey investors have witnessed over the last 5 years and plots that journey against other times in history when the market fell heavily.

The question on most investors lips is when will the market recover to new highs?

The chart above shows that it took around 4 years for the market to reach new highs after the 1980 downturn (purple line) and around 5 years after the great 1929 crash (green line). This makes the current downturn one of the most severe in history.

The 1973 and 1987 downturns took 6 - 7 years to recover the previous high.  From the current level the Australian share market would need to rise by around 50% to move back to the previous high.

Bear markets do end and can move quickly when they do.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Investment Advice
Friday, 27 January 2012 08:56

Australian Shares, what next for 2012

With memories of 2008 and talk of a lost decade, many investors have questioned their views on long term investing. But earlier generations of investors faced similar worries – and today’s headlines echo the past with stories about government spending, inflation, oil prices, economic stagnation and high unemployment. And as this information aims to show, those investors who were patient prevailed in difficult times.

While not attempting to predict the future, history has had an interesting habit of repeating itself.

We reflect on the Australian Share market which has just endured two consecutive years of negative performance, and note that it has never experienced three consecutive years of negative returns in the last 100 years. Only 4 times in history has the Australian Share Market had negative returns in two consecutive years.

We now highlight those times, and in particular draw attention to the year following those two consecutive years of negative returns.

1929 -3.6%
1930 -28.1%
1931 +20.0%

1951 -3.3%
1952 -11.8%
1953 +14.8%

1973 -23.3%
1974 -26.9%
1975 +62.9%

1981 -12.9%
1982 -13.9%
1983 +66.8%

Information courtesy of AXA Australia – sourced from the All Ordinaries Accumulation Index




Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at January 2012.

Published in Shares
Monday, 07 November 2011 14:45

Shares And The Long Term

A few weeks ago, after producing a graph showing shares outperform cash and bonds over the long term, I was asked a question along the lines of  “if shares outperform other asset classes over the long term, how come over the last decade equity-dominated balanced funds (which returned  4.5% per annum [pa]) have underperformed cash (which returned 5.4% pa)?”. The same issue was alluded to in a recent Bloomberg observation that in the US, bonds have beaten shares over the last 30 years. While one can quibble over the details, given these observations it is natural to think maybe it’s time to give up on stocks and switch to cash and bonds.

Stocks do outperform over the long term
The first point to note is that over the very long term, shares have provided higher returns than cash or bonds. The next chart is the one referred to earlier and shows the total returns from Australian shares, bonds and cash from 1900. Despite numerous disasters along the way, such as the World Wars, the Great Depression, the stagflation of the 1970s, the 1987 share crash, a major Australian financial crisis in the early 1990s - A$1 invested in Australian shares in 1900 would have risen to A$287,087 by last month with a compound return of 11.9% pa. By contrast, the compound returns of 4.6% pa and 6% pa for cash and bonds would have seen A$1 invested in these assets rise to only a fraction of this.

Shares beat cash and bonds over the long term - Australia

Source: Global Financial Data, Bloomberg, AMP Capital Investors

It’s been a similar story in other comparable countries. Following is the same chart for the US. Not quite as impressive but still the same story.

Shares beat cash and bonds over the long term - US

Source: Global Financial Data, AMP Capital Investors

The long-term outperformance of stocks over bonds and cash is as would be expected – the greater riskiness of shares is rewarded with higher long-term returns.

However, even in the long term there is a cycle

The following chart shows a real accumulation index for US stocks since 1900. The trend line represents a real rate of return of 6.2% pa.
Whenever the index is rising faster than the trend line, stocks are providing above trend returns. Vice versa when it falls relative to the trend line.

Long-term bull and bear phases in US shares

Source: Global Financial Data, AMP Capital Investors

Long-term bull and bear phases are evident, and the bear phase over the last decade is not unusual. This pattern also exists in other countries. The following chart shows the rolling 10-year return difference between shares and bonds. Every so often shares have lengthy phases where they underperform bonds, e.g. in the 1930s, 1970s and more recently.

Shares periodically go through a decade or so where they underperform bonds

Source: Global Financial Data, AMP Capital Investors

This suggests that at any point in time, the experience of the past 10 to 20 years is no guide to the long term. An investor in US stocks at the end of the 1960s would have been wrong to project the above average returns of the 1960s into the 1970s (when actual real returns averaged -0.7% pa). Likewise the bad 1970s were no guide to the 1980s (when real returns averaged +11% pa). In other words 10 to 20 years is not the long term when it comes to shares. So the fact that US shares have underperformed bonds over the last decade doesn’t mean they will over the next.
In fact, what’s evident is mean reversion. 10 to 20-year periods with above-trend returns and above-average returns relative to bonds and cash tend to be followed by weak 10 to 20-year periods where returns are below trend. The table below shows the top performing asset classes (out of equities, bonds, cash and property) for each decade over the past century in the case of the US, the world and Australia.

Top performing asset classes by decade

Source: Global Financial Data, Dimson et al, AMP Capital Investors

The 1982-2007 bull market in Australian shares arguably spoilt investors and we have simply forgotten that the superior longterm performance of shares comes with a cost, which is that there are sometimes lengthy periods during which shares can perform poorly.

The 10 to 20-year return cycle in shares reflects fundamentals.

It’s no guide to the ‘long term’. The 10 to 20-year secular cycle in shares appears to reflect a combination of factors including:

  • Starting point valuations – US share prices were high relative to trend earnings (i.e. the price-to-earnings ratio) in 1929, the late 1960s and in early 2000 (after which followed the secular bear markets of the 1930s, 1970s and 2000s) and low in 1949 and 1982 (after which followed two decades of strong returns);
  • Underlying economic developments – depression in the 1930s and inflation in the 1970s were bad for shares, whereas solid economic growth, disinflation, economic rationalism, globalisation etc. in the 1980s and 1990s were great for shares. Right now it’s deleveraging in the private and public sectors in the US and Europe which is proving to be bad for stocks.
  • Technological innovation – rapid technological innovation helped push stock returns above trend in the 1920s (electricity, mass production), 1950s (petrochemicals, electronics) and 1990s (IT).

Perhaps the most important point is that the starting point matters. Ten years ago US stocks were offering a dividend yield of just 1.5%, but the 10-year bond yield was 4.6%. This made it much easier for bonds to outperform shares as indeed they have over the last decade. But it’s now going to be harder for bonds to outperform over the decade ahead as their yield has fallen to less than 2% whereas the dividend yield has increased to 2.2%. This is still low, but even if share prices do nothing over the decade ahead, shares will outperform bonds. Likewise in Australia, 10-years ago bond yields were 5.6% and dividend yields were just 4.3% so it was comparatively easy for bonds to do well. Today though, bond yields are 4.2% and the grossed up dividend yield is 6.8%. In other words, it’s currently easier for shares to outperform bonds over the decade ahead as bond yields are quite low relative to dividend yields. This is also highlighted in Australia with the dividend yield grossed up for franking credits now running well above bank term deposit rates which are now falling. In fact, on this basis the grossed up dividend yield of 6.8% compared to term deposit rates of around 5.5% imply shares are paying out 1.3% more cash per annum than term deposits.

The Australian dividend yield is up, deposit rates are down

Source: RBA, Bloomberg, AMP Capital Investors

Concluding comments
The historical record suggests:

  • Over the very long term stocks do outperform most other asset classes;
  • However, there are 10 to 20-year periods over which this is not necessarily the case. In this context the recent experience in share markets is not unusual; and
  • The outlook at any point in time in part depends on the starting point. After a decade or so of above-average returns a period of slower returns is likely, and vice versa.

The long-term cycle in equity markets should clearly be allowed for when setting investment strategy for individual investors. While 10 years might not seem long for me, it is very long for my mother. So, as discussed in a recent note, an outcome or absolute return investment approach may be appropriate for those with a short-term investment horizon or specific investment needs. However, for those with a longer-term investment horizon it’s worth bearing in mind that in an historical context, the turbulence in share markets in recent years is not unusual and doesn’t tell us shares won’t provide superior long-term returns going forward. This is particularly so with dividend yields on shares rising at a time when yields on bonds, cash and term deposits are falling.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital Investors

Published in Shares

What should you expect from a Value Manager?

  • Resilience in falling markets
  • Reasonable capital growth in rising markets
  • Consistent dividend income
  • Low volatility
  • Tax effective

Master of the market shares his success secrets
Anton Tagliaferro has risen to the top by sticking to the basics
The Australian: Business - 22 June 2011
IML Investment Director, Anton Tagliaferro was featured in The Australian, the article has been re-published below:

It was 1998 and the Australian investment community was in the grip of the tech boom. An emerging fund manager named Anton Tagliaferro, who was ready to make his mark on Australia’s funds management industry, had just established his own firm, Investors Mutual. But unlike most fund managers, a young Tagliaferro was unconvinced about the tech-boom hype and instead stuck with traditional companies that had a performance history. The decision would be costly because his performance took a hit and the period until 2000 became one of the darkest of his professional career. He describes that tumultuous period, which is documented in the book Masters of the Market, as “one of the worst things I’ve had to live through in my professional career”. Tagliaferro even doubted if his business would survive. “I just didn’t know what to do,” he says in the book. “I had just set up a business. We only had $300 million under management and our clients were really unhappy. I had people pulling money out because our returns were bad.” It was during this period that Tagliaferro bought an annual pass to the Sydney Aquarium. “I used to go down there at lunchtime and stare at the fish in the big tanks and think maybe my time was up,” he says But the tide turned. The tech sector collapsed in 2000 and Tagliaferro was among the few fund managers to emerge unscathed. Two years later, IML was awarded the fund manager of the year for Australian equities by MoneyManagement, and today, Tagliaferro is considered one of the greatest in Australia’s funds management industry.

But it’s a description that does not sit easily with him. “There are lots of good people in the industry,” he says. “I think that I’ve been fortunate that I’ve always had a very conservative investment policy at a time when there have been speculative bubbles in place. Wilson Asset Management founder Geoff Wilson, who co-wrote Masters of the Market, says Tagliaferro has been a “phenomenal success story”. “He’s grown a business from nothing to $3.5 billion (in funds under management) in 13 years.” Tagliaferro is equally known for this straight-shooting style and is not afraid to tell company directors or politicians like it is.
Paradice Investment Management founder David Paradice says Tagliaferro has been influential in the funds management industry and his “strong views” have changed the outcomes for a lot of companies. “He doesn’t suffer fools lightly; I think that’s a very good quality,” Paradice says.

Tagliaferro takes the view that shareholders are the owners of the company and management is there to work for shareholders. “I know a lot of fund managers take the view that if they don’t like what’s going on, they just quit the register and sell,” he says. “We take the view that we are the owners of the company, so if the company is fundamentally a good company and it’s just a matter of changing or influencing the direction of management, we’ll do what we can to achieve that.”

As the topic turns to the shape of corporate Australia, there is no mincing of words. “I think the environment is fairly tough at the moment,” Tagliaferro says. “There’re all sorts of pressures on companies apart from the currency being where it is, interest rates going up (and) clearly a government . . . whose policies are not often that economically transparent but seem to be more politically driven like the carbon tax. There are no free kicks anymore for companies; they have to really earn their living now.”
He is equally blunt about the carbon tax. “For Australia to go it alone on a carbon tax is a little bit naive,” he says. “It is . . . making it very disadvantageous for many of our companies to operate when you are putting things on like carbon taxes which don’t exist overseas.
“When you consider Australia only consumes something like around 80 million tonnes of coal a year and China consumes over 3 billion tonnes of coal, it seems a little bit ludicrous to be worried about changing the world’s temperature or whatever we are trying to do when we are such a small part of the global environmental problem.”

Tagliaferro also sees “major risks” to the Australian economy. “The currency, where it is, is making it very tough for many industries,” he says. “Interest rates: you could argue that the RBA has already pushed them up too far. “Politically we have all these different decisions being made, which sometimes seem to be more politically motivated than economically rational.”
He says unless we are careful, “we could be going into a downturn in Australia”.

Tagliaferro says in the past two years, IML has positioned its portfolio away from cyclical stocks. “We haven’t got any discretionary retailers like JB Hi-Fi or Harvey Norman,” he says.

“We don’t own any very cyclical manufacturing stocks like Bluescope Steel; we’ve stayed away more or less from media companies like Fairfax and Ten Network. We have really tried to focus on companies that we think can continue to grow and deliver and do reasonably well in what is a fairly . . . difficult environment for corporates.”

Published in Shares