The Eley Griffiths fund manager says all the conditions for an extended rally have been met, except for one. He’s confident that’s about to change.
Ben Griffiths has been in the stock-picking game long enough to know that when you’re in a bull market, holding cash, trimming winners or showing the slightest hesitation can be costly.
But calling on all of his 35 years of experience in the Australian sharemarket, he’s convinced that we’re well and truly in a market that’s just building up steam.
Griffiths says the time for investors to go all in was October 23 last year when markets switched from fretting that interest rates were going up, to salivating at the prospect they were heading back down.
“We made sure that we were pretty well invested from that point onwards,” he tells a Future Generation webinar in which Eley Griffiths, the firm that Griffiths co-founded, is a manager for its ASX-listed Australian fund.
“It’s about having faith in stocks in the darkest hours when rates were being hiked and people were losing faith. We went quite counter to that trend.”
Griffiths later caught up with The Australian Financial Review at the Eley Griffiths office in Sydney to outline why the missing piece for a full-blown bull market may be just around the corner.
“All the elements are falling into place,” he says. “What is good about a very low ebb in initial public offerings tells me that there’s no hysteria in our market.”
Far from it. In August, the S&P/ASX Index hit 9000 for the first time – a milestone that was only noticeable for its lack of fanfare.
“No one’s even thinking about it, which just tells me just how much more juice is left in [the bull market],” he adds.
So why is Griffiths so upbeat? For a start, his firm’s strategies have had a good 12 months. The small-cap fund is up 28 per cent, the mid-cap fund has returned 25 per cent and the emerging companies strategy 26 per cent.
He’s a big believer that, as crude as it may sound, interest rate cycles power small-cap stocks. That’s playing out across the world as smaller companies from Canada to Europe finally catch a bid, outpacing their large-cap rivals.
“Small caps are a very easy bet on the interest rate cycle and investors, whether they’re sitting in Pitt Street or whether they’re sitting in the City in London. But it’s all about the trajectory of interest rates.”
“I think we’ll see the continual rerating of small caps in line with the action of central banks.”
Griffiths has naturally joined a chorus of fund managers touting the value in smaller companies relative to large caps which by various measures are trading at extreme prices.
Underlying trends tend to go much longer and further than the average investor thinks, and there’s nothing more enticing than a new high.
The ASX’s top 100 stocks trade at a multiple of 20 times earnings compared with 18.2 times for the Small Ordinaries. That’s a 10 per cent cheaper entry point, Griffiths points out. The top 100 are also not growing their profits while earnings for small companies are forecast to increase by double digits.
But the story which most small-cap funds have played on repeat is finally ringing true. The past reporting season was one in which some of the biggest companies stumbled.
In fact, on the Future Generation call, Griffiths was inundated with questions from retail investors asking for his views on blood plasma giant CSL, which plunged on the day of its results and has fallen 25 per cent so far this year.
But the August reporting season was also one in which small caps surprised to the upside as the prospect of lower rates lifted consumer sensitive stocks.
Australian retailers such as Nick Scali, Harvey Norman and JB Hi-Fi all delivered upbeat outlooks and reported that the consumer was resilient and growing in confidence.
“It’s good to see confirmation that’s happening with tax cuts, lower interest rates and some easing up of cost-of-living pressure that certainly manifests itself in some pretty good consumer-facing company results,” Griffiths says.
One bright spot among the large caps during the reporting season was the resilience of the big banks which revealed better margins and lower losses than some feared. That also bodes well for the smaller end of the market.
Griffiths’ main message is to embrace the bull market.
“A professional manager doesn’t sell stocks when they’re at all-time highs,” he says. “The underlying trends tend to go much longer and further than the average investor thinks, and there’s nothing more enticing than a new high.”
The missing piece
He adds that the conditions for Australian stocks to run have been falling into place throughout the year. May’s federal election in which the Albanese government swept in with a majority provided an “element of predictability” that helped.
Next came the turn in the outlook for earnings. While Macquarie’s investment conference in late May was dubbed the “downgrade conference” as companies confessed they would miss their forecasts, the tone was upbeat and that continued through to August.
But the stocks veteran says there is one final and crucial element of a bull market that has yet to appear in full force: initial public offerings.
“A depressed IPO market is a great lead indicator of a good market coming,” he says.
But what makes for a good IPO?
Eley Griffiths head of quantitative strategies Pieter Stoltz crunched the numbers last year and examined all the public offerings with market capitalisation over $100 million over the past decade.
The message was simple: the average IPO doesn’t outperform over 12 months and the sector it is in matters. New listings in the technology and healthcare sectors do well, for example, while materials and energy floats always struggle.
The final insight does not necessarily require the skills of a highly trained quant but was nevertheless confirmed by the study: private equity floats should be avoided.
“The vendors that tender, promote or are responsible for successful IPOs are more the family-run business or the genuine vendor selling, rather than a private equity sell-down,” says Griffiths.
That’s been the experience for the past 10 years, but that too can change as more IPOs adopt a US model in which listings are initially smaller, before more shares are released to the market as the company proves itself.
And a few winning IPOs will encourage more retail investors to call up their brokers in the hope of getting a healthy allocation to the next big winner.
“The investor sentiment for the average household investor at the moment is ‘measured but aroused’,” the veteran says.
Griffiths is optimistic. But according to John Templeton’s four market stages of sentiment, there’s still one more to go – pessimism, scepticism, optimism, and finally euphoria.
“We’re in late stages of optimism and marching into the euphoria, but we’re not quite there. That can’t happen until we’ve had a proper IPO [boom].”
Licensed by Copyright Agency. You must not copy this work without permission.