The country's biggest listed investment company says a surge in share prices this month has left valuations feeling "full," and the upcoming corporate earnings season looms as a key test for the market.
As the local bourse hit another record high on Monday, managing director of the $8.8 billion Australian Foundation Investment Company (AFIC), Mark Freeman, said ultra-low interest rates had pushed out valuations of stocks.
AFIC's Mark Freeman says the market felt "full," but low interest rates had complicated this assessment.Credit: Wayne Taylor
Mr Freeman described the 6 per cent rise in share prices this month as "stunning," and said next month's corporate reporting season would be a key test.
“It certainly feels full but in this period of very, very low interest rates it’s hard to work out what’s full and what’s fair anymore,” Mr Freeman said in an interview after AFIC posted lower half-year profits of $146.1 million.
“If interest rates are low you would expect the market to be trading on high levels. Valuations would be higher.
“The test will be in the next few weeks. You’ve had this very strong market, and what are the results that are going to come through?”
With some of the country's biggest companies including Commonwealth Bank and miners BHP and Rio Tinto due to hand down results in February, Mr Freeman said commentary on the outlook would be closely scrutinised by investors.
AFIC said it remained alert to the risk of volatility, and Mr Freeman said valuations of some stocks being pushed above 40 times earnings were "a bit extreme". He would not name individual companies with shares trading at these levels, but pointed to parts of the technology and health care sectors.
It comes after the world's biggest asset manager, BlackRock, last week said climate change could lead to a "fundamental reshaping of finance," and Mr Freeman said this intervention, alongside the summer's bushfire crisis, would ensure climate remained a "talking point" in the investment world.
He said AFIC, a long-term holder of stocks, had been considering climate risks for some time, noting that it did not invest in "pure play" coal miners.
“We’re a long-term investor, we want to hold stocks for very long periods. So, in analysing companies and thinking about the actual business that they’re in, sustainability of the business is one the key factors we think about,” Mr Freeman said.
AFIC reported profit after tax of $146.1 million, down 39 per cent from $239.8 million last year, when its bottom line benefited from share buybacks from BHP and Rio Tinto, and a dividend from the spin-off of Coles from Wesfarmers. Excluding these one-off items, AFIC said underlying profits were down 1.6 per cent.
AFIC will pay a fully-franked interim dividend of 10c a share, the same as last year, but it will not repeat the special dividend it paid 12 months ago.