No repeat of 2008: Kerr Neilson

Billionaire investor says market volatility, not crash, set to be theme of year ahead.

08/02/2007 BUSINESS: Kerr Neilson, MD of Platinum Asset Management, in Sydney.

Slowing global growth and concerns about central bank impotence have seen sharemarkets smashed in recent weeks, but billionaire investor Kerr Neilson doesn’t believe we’re headed for another 2008.

“I think we’re experiencing very much like what the Japanese had after their bust. You have these rolling markets where you have big upkicks and then big downkicks, so you move along sideways but there are big opportunities on both sides. It is really quite awkward to play,” he said.

His comments come amid a rocky start to the year, with Australian shares down more than 7 per cent while Wall Street barometer, the Dow Jones is off more than 8 per cent.

Mr Neilson, the chief executive of Platinum Asset Management, says China is the big risk right now, and although investors are cognisant of the dangers posed by its slowing growth, many may be underestimating the extent of the defaults facing its banks.

“Chinese banks are going to lose a lot of money on their loans. Everyone knows that, but the magnitude may be more than you’d think. I’m looking for the Chinese banks to lose almost certainly 10 per cent of their loans, and it’s highly probable that will go as high as 15 per cent.”

Amid the volatility, investors are desperately looking for places to hide.

“Last week we had really what I’d call a capitulation,” Mr Neilson says. “You had massive selling of any asset that was at all risky. It was a huge event in markets, where gold went up quite a lot and anything of a cyclical or credit nature got thrashed.”

“It’s a bit like when we had the euro crisis and everyone was saying well, ‘where do we hide?’ Back then everyone was charging into the US dollar.”

With governments doing their best to debase currencies worldwide, there are no ‘perfect’ choices, he says.

While a recovery in risk assets is likely, with highly cyclical stocks getting a strong rally for a short time, ultimately “the markets will be winnowed out and it will be the more predictable companies that will lead what is going to be a shuffling around of stockmarkets around the world”.

“You’ve got to shuffle through companies that have got really quite strong inherent positions, where they are providing a service that is difficult to dislodge.”

“People will say ‘well they’re not growing much but at least I’m going to get my money back because they don’t have a lot of debt, they don’t have much growth at all but at least I know that people have to eat, have to have medical supplies and so on’.”

Amid the sharemarket ructions, Mr Neilson has taken the opportunity to top up positions in global companies such as Alphabet, the parent company of Google, and China-based tech giant Tencent.

“Google is still growing and even if it slows down, which it will do, it will probably grow for a couple of years at 10-15 per cent and by that time, when it’s down to growing at a slow rate it will be at 12-13 times earnings, which is not uninteresting for a company that throws off a lot of cash.”

“We like Tencent, which is the Facebook lookalike in China. Because of the government’s intervention there it’s got a market to itself to some extent. Strangely enough it’s quite as innovative as Facebook but it doesn’t have the foreign competition to the same extent.”

Meanwhile, weakness in European bank stocks has also provided a buying opportunity.

“We haven’t been too scared by the banks in Europe and have been adding selectively to those,” he says.

As investors hop between risky and safe haven assets, Mr Neilson sees risks in sitting in cash but believes gold may fare better.

“The trouble is the banks can be quite unprincipled and make you pay a lot of money for being in cash. In that event you’ll see gold, platinum and other metals doing a little better.

“We don’t mind people owning some gold and platinum exposure because ultimately you’re just laying off some of your bets in a more uncertain world.”