Successful stock picking in a low rate environment

Published at Sep 2, 2016, in Question and Answer

Stock market commentator Marcus Padley tells The Capital Network’s Lelde Smits how to approach investing in a low rate environment and choose stocks that perform on their own merits.

Read on or watch the video of the interview below.

Lelde Smits: We’ve got a low inflation and [interest] rates environment, what does this mean for equity markets?

Marcus Padley: Well it’s not good news at the end of the day because for 35 years up to 2007 we had the stock market growing at 11.4% per annum which was possible because interest rates were around 7-17%, inflation was around 5%, GDP growth was around 4/5% and that allows companies to grow.

If you’re now talking about a decade, or more, of low or no interest rates, which is what bond markets are predicting, then we have no interest rates and we have no inflation, on which companies can base there growth, so it means we are going into a zero growth assumption for the equity market as well, which completely turns things on its head.

Lelde Smits: Well Marcus nobody wants to hear about bad news and certainly no investors, so how are you navigating this environment and how are you choosing stocks on their own terms?

Marcus Padley: Well that’s exactly what you’ve got to do. The whole industry that is relying on average returns, which is the core of most financial advice – buy an investment that gives you the market return, the market always goes up – that has got to change if the return is going to be zero.

So you have to then go and pick the eyes out of the market, the property market and the stock market in order to get a return at all. And it can be done. Last year the market went down because banks went down and resources went down, but 72% of stocks went up in the S&P/ASX 200.

It is important to be aware that historical share price fluctuations aren’t an indication of future trading patterns and similarly, this data should not be used as the basis for an investment decision.
So it really is about stock selection in order to get a return in a zero return environment, that’s where you’ve got to go, you’ve got to stock pick.

Lelde Smits: Certainly, and when it comes to stock picking, what’s your approach, what kind of trends are we seeing? You certainly noted that blue chip stocks for example, their stock prices have fallen over past last year, we’ve had the emergence of small cap stocks. What kind of trends are you looking for that are attractive to you or may be attractive to other investor looking for opportunities?

Marcus Padley: Trends is the right word because you’ve got to go top down rather than bottom up. You’ve got to look at what areas of the economy people are spending on, which areas are thriving. And, the obvious areas to us is the internet, the internet is going to continue to grow, we’ve got lots of internet stocks already, that will continue to disrupt industries.

The companies that are building that in the telecoms area are all going to thrive as well. There are all sorts of telecoms infrastructure stocks out there beyond Telstra Corporation Limited (ASX:TLS).

Lelde Smits: Can you give us an idea of some that you like?

Marcus Padley: TPG Telecom Limited (ASX:TPM), Vocus Communications Limited (ASX:VOC), Macquarie Telecom Group Limited (ASX:MAQ), there are some below that, there are people like Netcomm Wireless Limited (ASX:NTC) and Senetas Corporation Limited (ASX:SEN), all of whom are involved in building what will become Australia’s next infrastructure stocks.

You think roads are good, wait till you get the internet infrastructure stocks, because that is absolutely essential. I don’t know why it is in the hands of private enterprise, it’s so vital to the economy, and that build will continue. The NBN [National Broadband Network] is coming, but there is going to be something after that and after that. So that’s a theme that will continue, the internet, the internet build telecommunications.

Lelde Smits: And Marcus you’ve mentioned essentials. We’ve often heard for investors they’ve got to look at toilet paper or toothbrush companies. Can you think of other essentials that investors may be neglecting or perhaps stocks they should be paying attention to but they’re not.

Marcus Padley: Well yes stocks that they are not neglecting, but they’ve spotted is anybody that’s got pricing power, which involves anyone who retailers don’t, because they’ve got competitors. But you take a toll road, you can up your prices up and no one even notices.

Airports the same thing, Sydney Airport Holdings Limited (ASX:SYD), Auckland International Airport Limited (ASX:AIA), Transurban Group(ASX:TCL), DUET Group (ASX:DUE), you go down to the utilities, people like AGL Energy Limited (ASX:AGL), we’ve got to keep buying our power, not a lot of competitors, captive audience, anyone with a bit of a monopoly. Telstra probably still retains some pricing power as well.

And then there are all sorts of other themes as well, such as China is not going to go away. We’ve just scratched the surface with companies like Blackmores Limited (ASX:BKL) and Bellamy’s Australia Limited (ASX:BAL) putting vitamins and baby powder in cardboard boxes and sending it, that’s just tiny compared to what happens if say, financial services or health care stocks actually get on the ground in China and develop a brand in China. You’ve got 1.37 billion people to sell to instead of 23 million. They’re going to make a fortune. They haven’t emerged yet, but they will emerge.

Lelde Smits: Well Marcus I feel we have absolutely just scratched the surface but thank you so much for your top tips and all of those stocks. All the best, look forward to our next chat.

Marcus Padley: Thanks Lelde.

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