$31 billion wiped from Australia Shares

Ross Greenwood speaks to David Paradice from Paradice Investment Management about how the Australia Stock Market reacted to the major sell-off in shares in the US and if the prospect of higher interest rates really are whats driving it.

Introduction: $31 billion wiped from Australia Shares

Ross Greenwood: Let’s start the program and take you to that big fall in Australia’s stock market today which really has had as its catalyst the fall in the United States market the Dow Jones down 650 points on Friday night. What that’s about is about the fear of rising inflation and as a result of that perhaps even the rising wages in the United States making concerns that they could be higher interest rates.

Now, the interesting part about that is that the long term debt in the United States government bonds, went above Australia’s long term interest rates for the first time in 17 years. That’s the key about all of this. Let’s get our man watching the stock market who will have some view about the bigger picture is this real is it a false alarm.

David Paradice from Paradice Investment Management one of Australia’s best investment managers over a very long period of time is on the line. David many thanks for your time. Just explain to people is this a false alarm is it something they should be concerned about?

Interview with: David Paradice, Paradice Investment Management

David Paradice:  No I think the leading indicators in America are suggesting that things are very strong over there. Therefore you’re seeing a move in the 10 year bond rates. What happens is when the cycle moves from being low growth as it has been to growth as it is now, you’ll get a change in interest rates and you’ll get a movement transition from stocks which were what they call cyclical stocks, you’ll get it move up in those stocks.

Then some of the long duration equity stocks, long duration, those particular companies that are growing a lot. Then at the moment given valuations on some of these companies like the bank stocks, like some of the real estate stocks some of the stocks which people are relying on for income. That is saying, “Well hang on if I’ve got some of my money in a real estate stock and I can earn more money at a higher rate in the bank then I’m going to move towards that.” Those particular stocks get affected in this kind of market.

Ross Greenwood: The cyclical stocks you talk about that people will move to are those benefit as the economy takes off. They are often transport stocks, they could be some of the-

David Paradice:  Housing stocks.

Ross Greenwood: -technology stocks these types of companies that will do better. It’s banks, real estate companies, they are the ones dragging the chain. The concern is of course about those bond ratess where the governments actually can afford the higher interest rates given the fact that they’ve already got trillions and trillions of dollars worth of debt post the global financial crisis.

David Paradice:  That’s right. That’s correct. It is interesting that, well, what happens of course is you do in a strong market, you get inflation through wage increases and you’re beginning to see that. That’s leading to these interest rate increases. Of course what happens is that will benefit Australia because you get a strong global economy and that pushes resource stocks up, commodity stocks up and of course Australia is a big beneficiary of commodity prices.

Ross Greenwood: Here in Australia of course we’re not at that phase of the cycle, we’re not seeing the growth in wages, we’re not seeing the pick up in inflation that may come later this year as some people suggest. Even here in the stock market you’re still seeing very strong performances from banks and those real estate companies you’re talking about. The cyclicals haven’t necessarily had their day and as we are about to go into a profit reporting season, companies have got to justify their share prices with the earnings that they’re actually creating for the shareholders.

David Paradice:  That’s correct. What’s happened is that over the last six reporting seasons some of those companies that have been downgraded by say 2.5% have the following month been down by 7% stock price. If their earnings are down below expected forecast by more than 2.5% they do under-perform. Everybody’s investing in the long term. If you believe the global economy is getting stronger and commodity prices get stronger and then those cyclical stocks like in iron ore companies and some of these other ones will move up in price.

Ross Greenwood: Some people I hear are trying to actually get this set of economic circumstances particularly in the United States and they start the ring bell saying the markets at the top this could be the end of it. It’s all about to fall down around our ears. Now clearly the higher it goes the greater the risks become of some significant correction. Do you think this is really–what this is all about right now?

David Paradice:  Well you’ve seen a strong equity market in America largely based around some of those technology stocks. Those stocks like what they call the FAANG stocks. Facebook, Apple, Alphabet, Google, those kind of stocks. Five stocks have pushed the market over there to two significant highs. What’s interesting is a lot of the other stocks have been left behind. Some of these cyclical stocks that we’re talking about some of the building material stocks that we’re talking about, have under-performed those bigger stocks. There’s been a really selective increase in America. There might be rotation out of some of those expensive stocks that are trading at 57, 58 times earnings which is very high, those technology stocks. There may be a rotation out of those stocks into some of the cyclical stocks and as that is happening that that will create some volatility in the equity market.

Ross Greenwood: David, always great to have you on the program from Paradice Investment Management, one of our very best investment managers over long period of time, David Paradice I appreciate your time this evening.

David Paradice:  No problem, Thanks Ross.

 

 

 

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