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Portfolio Talk: David McClatchy

Armstrong Jones chief investment officer David McClatchy says while investors may be experiencing a rough ride at the moment, they can expect a soft-landing.

Sunday, December 13th 1998, 12:00AM

by Philip Macalister

Where do see the New Zealand market being at the moment?
If you were insular in your view, New Zealand is compelling. However, international events and characteristics have a major influence on New Zealand financial asset prices, not only because of the high level of foreign ownership but also because of the effects on our trade based economy. Globally the activity of central banks, and the political platform being more stable, heightens confidence that whilst GDP is slowing, growth will still be positive and a soft landing will occur.
All this adds up to a level of calm we are seeing. That's most evident through the reduced market volatility of the past month. Lower inflation is here to stay and it's not a threat, in fact we are going to see central banks continuing to ease.
This provides us with confidence that the New Zealand market is well placed to perform well. We are at the tail end of a recession, and the Reserve Bank is easing monetary conditions and showing an accommodative stance. We have had a substantial amount of earnings downgrades but we are close to, if not at, the bottom of the earnings downgrade curve and we are seeing some signs of upgrades in earnings. Additionally anecdotal signals we are receiving are showing the economy in a better light than many analysts are forecasting. Heightened confidence and money flows into the Asia/Japan region and Australia proving to be robust throw the crises, and the relative valuation levels of New Zealand makes the New Zealand market much more compelling than international markets.

What stocks do you like?

We are tilted towards domestic cyclical stocks with firms like Telecom (despite having the question mark of regulation overhanging it). Waste Management. You can't have growth without rubbish, and the likes of Sky City, Sky Television, INL, The Warehouse and even Force Corporation. Despite Force having foreign income it has a very high ability to leverage off any pick up in the economy.
The companies we look for all have good management, strong domestic earnings, a strong balance sheet, pricing power and good cash flows.

What sectors do you prefer?
Rather than explicitly picking sectors we are taking a top down perspective and looking for companies exposed to domestic cycles rather than looking at international cyclicals. We have some defensive stocks as well. Defensive stocks are those that have an oligopoly. Typical stocks include Ports of Auckland, TranzRail, Telecom and INL.

What sort of returns do you expect from the New Zealand market in the next 12 months?
I hate to put a number on returns! Considering the market has historically posted returns of about 12 per cent gross per annum I'd like to think high double-digit returns are possible. However, that is contingent on a number of issues.

Such as?
International shocks. If there is a further credit crunch or political crisis internationally, New Zealand won't escape unscathed.

Armstrong Jones has managed to add value to its New Zealand Share Fund for a number of years, even with changes in portfolio managers. How have you achieved that?
Whilst the secret to investment in residential property is "location, location, location". At AJ’s we believe that the equivalent maxim for successfully investing in the sharemarket is "discipline, discipline, discipline". That is discipline of investment process, discipline of analysis and valuation approach, and discipline of qualitative assessments.
We spend a lot of time out in the face of companies. We have a very disciplined process and we spend quite a lot of time looking at Australian companies. For instance you can't invest in Air New Zealand without looking at Qantas or Lion without looking at Fosters. There is a strong interface between New Zealand and Australia.
One of the keys is that we are informed, proactive decision-makers who are constantly thinking outside the square.

What is your investment style?
Our overall style is fundamental and research driven: we place significant importance on value, demonstrated growth, management and emerging growth. Armstrong Jones is not wedded to any one set of simplistic and/or quantitative tools. Equity selection is a dual top-down, bottom-up process with more emphasis placed on the bottom-up component.

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