“The Federal Reserve looks at an enormous amount of data but a lot of that is backward-looking,” he says. “The market was looking at how much junk bond inventory there was – junk bonds being the riskiest thing that a company can hold.”
Apple ache
One of the most surprising and high-profile victims of the past quarter was US technology giant Apple.
Apple’s shares fell 30 per cent in the fourth quarter on fears of slowing demand in China for the company’s flagship iPhone product.
Those fears proved to be well founded, when Apple issued a revenue warning in January in its first revision to guidance since 2002. The downgrade prompted a 10 per cent drop in the tech giant’s shares over one session.
“People were still drinking the Kool-Aid a bit,” Bundy says. “They didn’t want to believe it. Until they saw the earnings guidance, they didn’t believe it.”
“Apple is probably not a bad buy right now,” he says. “If you were there a couple of months ago it would have been painful.”
As the signs pointed to a much more volatile end to the year for markets, some fund managers significantly increased their cash weightings and short positions – or bets that stocks would fall.
While that strategy works well when markets are falling, it can backfire in a recovering market. The S&P/ASX 200 index is up 4 per cent so far this year and the S&P 500 index is up just over 5 per cent.
Mulling the options
“The question is what do you do if you come back to the market?” Bundy asks. “Do you buy Telstra for the dividend, for example? That would have been painful over the last year.”
Telstra shares fell from a high of $3.67 at the start of the year to a low of $2.62 as the year progressed. The banks were similarly pressured with the ASX 200 banks index dropping 12 per cent over the year.
While Bundy acknowledges the Australian banks were a “great investment over the past decade”, he admits to feeling less certain about the sector’s prospects today.
“There could be an announcement out one day and then overnight things change. All it would take is for one bank to cut its dividend and the rest would follow suit,” Bundy says.
The banks are under the spotlight of a royal commission, with a final report on the sector due out in February, and as the housing market continues to weaken.
“I think that we are going to have a credit crunch here to some degree,” Bundy says.
He’s expecting house prices to fall by about 10 per cent peak-to-trough but for areas with a lot of newly-built apartments, such as Southbank in Melbourne and Chatswood in Sydney, to suffer much greater price falls, potentially up to 30 per cent.
Bundy says he’s on the lookout for apartment settlements to fail as the first sign of real trouble in the housing market
“I think that investors should look at what’s going on in Vancouver,” he sats. “They allowed a lot of foreign investment but then they put in some quite harsh taxes and now the market is in freefall.”
Given his gloomy outlook for housing, he’s also very wary about the housing-exposed Australian retail sector. “I’m very negative on retail,” Bundy says.
Healthcare, tech
Mining stocks are an option, as are companies exposed to offshore markets, the fund manager says. “I like healthcare. There’s high growth there with an ageing population.”
Tech stocks also draw favour from Bundy. “I like Afterpay. Everywhere I go I see a lot of shops with that logo.”
Afterpay Touch shareholders were handsomely rewarded on Friday, when shares of the buy now, pay later provider soared after it said it processed more than $260 million of payments in the US in its fiscal first half.
Tech companies hooked into the online shopping and “service now” ideas are also on his radar. “I just see Millennials especially buying a lot of things online. We like fintech and logistics.”
Tech is an area that Bundy is focusing on in Federation Asset Management, his new venture with Cameron Brownjohn and Neil Brown of Macquarie Capital. The other areas are renewables, education and private equity.
The fund started in September and is aiming to raise $500 million this year. “That will be a combination of industry super funds, high-net worth [investors] and hopefully some retail,” Bundy says.
“We made an investment in Ratesetter, we’re building a $300 million educational REIT. We made a small investment in renewables and a small investment in logistics tech.”
Market veteran
The veteran of global markets was on the floor of the stock exchange for the 1987 Wall Street crash, went through “the pretty scary” Mexican peso crisis and the global financial crisis in 2008. “Nothing really surprises me anymore,” he says.
“The GFC was the most dramatic by far. That was pretty serious. It affected a lot of people,” Bundy says. “If you had asked me if Merrill Lynch would ever collapse, I would have said no. It was a rock of stability.”
Bundy’s mentor at Merrill Lynch was former chief executive David Komansky.
“He was very much like me. My dad was a mailman in a working class area,” says New Jersey-born Bundy, who went to Yale on a basketball scholarship.
“Merrill Lynch was very much the right firm for me. It was blue collar. On Wall Street there were big cultural differences between each firm.”
Brexit, trade
It remains a turbulent world, Bundy says. Britain’s exit from the European Union is set to take place on March 29 and Bundy is worried. “Markets don’t like no plan B,” he says. “I don’t think Brexit is going to happen.”
Still, “rightly or wrongly, Brexit will come to a head” and the US and China will also probably reach some sort of an outcome on trade in the next couple of months, he says.
“I think that we are going to have a lot more clarity by the end of March, It might not be the outcome you want, but there will be more clarity.
“From the pain we endured in the last quarter, I think think that we will move higher. There’s still a lot of money around for investing. Crises usually start with capital. Money dries up and that creates problems. I don’t see that happening.
“If we get a risk-on mentality again healthcare and technology are the two spaces I would look at.”
from Just News Viral http://bit.ly/2CA8fft
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