Geoff Wilson is leery about stocks.
He typically has a high cash allocation of around 34% but it has blown out to almost 43%. Like many other funds Wilson and his team are having an increasingly difficult time finding stocks they think will deliver decent returns so the money stays in cash which is earning a pittance at the moment.
Wilson spoke on a panel in Sydney last week hosted by Livewire and offered some perspective on why this has been happening:
We’ve just done our roadshow for our public companies. We’ve probably seen over a thousand of shareholders over the last three weeks. What are they all saying? People are going oh, there’s this money in cash, I’m only getting two and a bit percent, what do I do with it? My view is, keep it in cash at the moment, because there will be blood, and we’re getting closer and closer to the blood.
With the number one question in the financial world right now being when global interest rates will start to rise, Wilson touched on the basic inverse correlation between share prices in terms of PEs, or price-to-earnings ratios, and interest rates with this amusing story:
I remember I started, it was my first job in broking from a fund manager at Potter partners. I was young analyst. I just rolled my mortgage at 17% interest rate for three years – I thought it was pretty good so I locked it in. Rates at the time were heading in one direction – and the average market P/E I think was seven.
So it comes back to the inverse relationship between interest rates and PEs. So now we’ve got interest rates – if I locked in for three years, mortgage now, you’re probably doing it at five, and the average market PE is about 17.
As rates rise, Wilson’s baseline view on the current state of the market is based on this fundamental inverse correlation, and he makes special mention of the spectacular length of the current bull run for stocks.
But what worries me is really the length of the bull market that we’ve had. We’re in the 75th month, so we’ve gone for six and a quarter years, and so since I think 1937 this is the fourth-longest bull market. If we last until August, it’ll be the third-longest bull market. Unfortunately we’ve got human beings … making the decisions in the market, and we are caught up with the hope and the fear on the other side. This doesn’t go on for an extended period of time. Companies get overvalued.
But it’s not just fundamentals that have Wilson worried. His bubble radar has recently flashed red after he got asked to return a call to a broker canvassing interest in an upcoming market debut.
“In terms of the floats, the quality of the floats – and it may be a great business – but they’re looking at floating a franchise for Chinese massage shops.”
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