May 12

Perpetual Portfolio Manager’s Interesting View

I just had a meeting with Charlie Lanchester, who manages half of Perpetual’s massive Industrial Share Fund, and his views on the Australian economy were far more dire than many commentators are saying. Like many, he believes that commodity prices are very high and showing signs of faultering (doesn’t mean they going to crash just beware) and also like many, the Australian residential housing prices are in some trouble (once again not that they’ll crash but that there’s cause for concern). Now whilst, many commentators (including me) agree with these views, Charlie (like me) is of the belief that the Reserve bank is not likely to (or should not) increase interest rates in the short term and that there is a reasonable probability that interest rates could be lower in 12 months time, such is the weakness in the underlying Australian economy. If the Reserve Bank increases rates Charlie believes this could be potentially disastrous for the Australian housing market and we can all extrapolate on the potential effects of that.

It is amazing that economists of the bigger banks are suggesting rate hikes, particularly given they are more likely to suffer the consequences of a housing market decline. Either way, Charlie believes that the real sufferers of a housing market decline are likely to be companies in the consumer discretionary sector and as we’ve seen in recent days, some of the bigger players in property securities, like Westfield, Mirvac and Co.

As mentioned in earlier posts, Australian investors are facing some big risks…

  • very very high commodity prices (for when they crash they really crash)
  • record high residential property prices (that have effectively propped up this ecoomy through the GFC)
  • China needing to slow and contain inflation
  • a Euro Sovereign crisis that could always overflow into global financial markets
  • record high AUD that is contributing to our two speed economy and preventing foreign investment

Our markets are mostly financial services and commodities (plus a fair share of property) so when investing ensure these risks are considered in full.

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