Navigating choppy waters…. - Milford Asset

Navigating choppy waters….

Michael Higgins

Portfolio Manager

Michael joined Milford in January 2017 and is Portfolio Manager of the Milford Dynamic Funds. Previously he spent four years at Macquarie Securities as a Senior Analyst in the Emerging Leaders Research team. Prior to that, Michael was an Analyst at the Global Research House Morningstar. Over the past seven years, his coverage has been varied across a broad range of smaller technology and industrial companies. Michael also worked as a Structural Engineer at Sinclair Knight Merz in Sydney before switching into the funds management industry. He holds a Masters of Commerce and a Bachelor of Engineering (Honours), both from the University of Sydney.

Property is an Australian obsession, perhaps more so than anywhere globally. When prices are rising, people crowd the market in the hope of capital gains. However, like any classic property cycle, multiple factors such as an influx of supply, a tightening of credit standards, regulatory uncertainty and so on, can see demand collapse highlighting just how stretched property valuations have become. When prices are falling, buyers flee, awaiting some signs of stability. East coast auction results in Australia are now tracking down 50% with many real estate agents refusing to submit results; new listings are down 20% and price declines in some areas are now challenging -20%.

Source: Core Logic

In less happy economic times, consumers give up what they see as treats and indulgences. They buy what they need, and price shop with even greater gusto. They also exhibit a behaviour called trading down, where they substitute something that still looks and smells like the old, but is less expensive or has better value.

Philip Lowe, the Governor of the Reserve Bank of Australia (RBA) presented some interesting data last week which provides some analytics around vulnerable sectors in household consumption.[1] The chart below highlights the expected short-term impacts from a 1% change in housing wealth. For example, with house prices now down about 10% nationally, the RBA estimates a 6% decline in new Vehicle Sales. This correlates with February data suggesting 11 consecutive monthly falls in new vehicle sales. Other interesting data points suggest that Communications spend (i.e. mobile phones/internet) has one of the lowest elasticities to household price declines…. i.e. it’s considered just as important as food and health and more important than heating!

As investors, we need to identify the winners through every economic cycle. Despite continued weakness in economic data, there will be companies that can grow earnings in the face of this more difficult environment. Just some of the relevant company exposures held across Milford’s Australian funds which we believe stand-out in light of the RBA analysis include infant formula and health company A2 Milk; wine distributor Treasury Wines; English language testing and higher education student placement provider IDP Education; KFC fast food retailer Collins Foods and car part wholesaler Bapcor which will benefit from a higher proportion of older vehicles being on the road requiring more frequent servicing.

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Please note past performance is not a guarantee of future performance.

Disclosure of interest: Milford Funds Ltd holds shares in all the companies mentioned on behalf of clients. 

[1] Governor Philip Lowe Address to the AFR Business Summit 6/3/2019 (https://www.rba.gov.au/speeches/2019/sp-gov-2019-03-06.html)

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