Julian Beaumont of Bennelong: economy ‘chugging along’

Brexit and Trump may be dominating the headlines, but Bennelong’s Julian Beaumont is sticking to his guns.

Brexit and Trump may be dominating the headlines, but Bennelong Australian Equity Partners investment director Julian Beaumont — who’s Concentrated Australian Equities Fund returned an amazing 28 per cent gross of fees last financial year — is sticking to his guns.

“We no doubt have an environment which is low inflation, interest rates are low and the growth is low, but that doesn’t always line up with low returns,” Beaumont says. “You can look back at various times in history and similar scenarios haven’t necessarily meant low returns.”

After falling 2 per cent last year, the benchmark S&P/ASX 200 is up almost 5 per cent for the year to date.

Most of the rise has come in the past month, with the index hitting a 12-month high of 5548.5 points. It has surged almost 10 per cent following a sell-off in the wake of the Brexit vote in Britain.

But while benchmark 10-year Australian Commonwealth Government bond yields have dived from 2.8 per cent to 1.9 per cent in the past 12 months as central banks outside the US have continued cutting interest rates to ward off potential deflation and recession, equities have lagged due to concern about US interest rate increases, a slowdown in China, and political risks including Brexit.

“The interesting thing from our perspective as stock investors is that that isn’t necessarily flowing through into the stockmarket,” Beaumont says.

“For that more than 30 per cent decline in bond yields, you haven’t had a reciprocal jump up in sharemarket returns.

“I suspect people are coming on to the fact that the world is chugging along. We’re having worries about Brexits and Grexits and Chinese problems and Crimea wars or whatever, but the economy globally is tracking along quite steadily irrespective of these things.

“China, the US and Germany are actually putting down really resilient and strong growth ­numbers.”

Beaumont feels investors are still somewhat scarred by the global financial crisis, focusing on events in less significant countries while missing the fact that the US economy — still the main growth engine of the world — is accelerating rather than tipping into ­recession.

So the Australian market, which trades on an above-average 16.5 times forecast earnings per share for the year ahead and a gross dividend yield of 4.5 per cent, isn’t too expensive according to Beaumont, even allowing for some “mean reversion” of bond yields in the longer term.

He is quick to point out that US Treasury yields also tanked during the Great Depression and didn’t bottom until after WW2. Equities surged during the bond bear market of the next 30 years.

Outside of the top 20 stocks — where Bennelong is focused — Australian equities are seeing solid earnings growth in the order of 13 per cent, so it pays to pick and choose, according to Beaumont.

His fund has sold down REITs and utilities due to valuation ­concerns. But he has stuck with tourism plays like Skycity Entertainment and Mantra — increasing his stake in the hotel operator on a share price pullback recently. Beaumont is also a long-time fan of Domino’s Pizza — one of the best performing stocks on the market in recent years.

“Yield is obviously going to continue to be sought after, notwithstanding the fact that it has done very well, and the most important thing for us is the delivery of earnings,” he says. “Earnings disappointments will really get thumped and as we’ve seen over the last six months or so, companies like Aristocrat and Fisher & Paykel Healthcare — a number of names that we own — have really done well.”

While uncertainty about the global economy and the US interest rate outlook has led many fund managers to hoard cash in the past year, Beaumont feels the global economy is plodding along at a “nice steady rate”, there’s reasonable earnings growth outside the top 20, and valuations are not too high.

“Despite what most people would probably expect, returns aren’t necessarily going to be that limited,” he says. “The key is that you need to remain reasonably selective — getting outside troubled sectors whether they be resources or banks, and getting into sectors that should do well, like exporters, tourism, education.”