'Magellan CEO Hamish Douglass dismisses talk of stockmarket bubble' David Rogers, The Australian
Magellan CEO Hamish Douglass doesn’t believe the stockmarket is in a bubble.
But if there is a correction, the $53 billion managed by his fund will be well protected.
“We run much lower risk strategies with much higher quality portfolios than the market as a whole,” he told the Australian British Chamber of Commerce lunch on The Future of Investment in Sydney yesterday.
“We aim to get people a minimum return before fees of 10 per cent per annum and if you look back from when we launched these strategies, we’ve delivered returns of over 12 per cent per annum net of all of our fees, and the markets have done about 4 or 5 per cent.”
Asked whether the internationally focused listed investment company launched by Magellan this week was the right move considering the elevated state of the US market, Douglass dismisses the idea of a bubble, based on his view that interest rates will stay relatively low.
“Interest rates are going to go up from where they are today, but there’s a lot of evidence that long-term interest rates, inflation and wages growth have structurally changed,” he says. “If you adjust history for a 1 per cent lower long-term interest rate than prevailed in the past, the multiple points (the price-to-earnings ratio of the S&P 500 index) probably would have been two multiple points up, and we are about three multiple points up in the US, over its long-term average.”
He backs Warren Buffett’s comment that if the 10-year US Treasury bond yield were 100 basis points higher three years from now, stocks would still be “cheap at current prices”, whereas if the global benchmark yield is 300 or 400 basis points higher, “they won’t look cheap”. In any case, he argues that Magellan’s global fund isn’t heavily exposed to the US economy, despite the fact that most of the companies in the portfolio are US domiciled.
“Where we have put money directly betting on the US, we’re at PE multiples way below where the markets are trading, and where we are invested in multinationals, obviously we have selected the ones where, adjusted for the appropriate interest rate environment we see going into the future, we think we’re going to earn decent returns on capital.”
Douglass says absent a major shock, the Australian economy will meander along at its current rate of growth, and while “housing is the biggest risk”, it could stay firm for another 10 years.
“For more than 20 years we’ve had house prices go up at twice wages growth and for the last few years, house prices on average have been risen by about three times wages growth.
“At the moment we are living in a very low interest rate environment. In Sydney the average house price is about $1.1m so if you’re financing that with an 80 per cent mortgage you’re up for $880,000, so a 4 per cent interest rate you’re paying $35,000 after tax in interest and the median income in Sydney is a bit over $100,000 per household. People are spending 40 per cent of their after-tax incomes on interest, at record low interest rates.
“We are kind of on a knife-edge. If we got a burst of inflation or something and the RBA had to put a couple of percentage points on interest rate hikes, that could take us off course”. Thankfully he doesn’t expect much inflation.
But he’s also concerned by the fact that the east coast has seen “a super cycle of construction, particularly in inner-city apartments, with huge amounts bought by Chinese investors”.
“The problem is if that investor base ever wants their money out of here, they can only ever sell those apartments to Australian residents. If for some reason they got nervous ... you could have one mighty crash in apartment prices.”
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