MMC waiting for market to cool

Australia's MMC Asset Management is sitting on a cash pile, waiting for the local stock market to cool off and adjust to an era of lower earnings growth, its chief investment officer said yesterday.

"It is increasingly hard to find value in this market," said Peter Constable, who helps manage about A$500 million ($555 million) in Australian and New Zealand stocks. Reflecting those concerns, Constable has raised cash positions to 65-70 per cent - the highest in a decade.

"It will be interesting to see comments CEOs from Australian companies make about the earnings outlook during the upcoming reporting season," the 35-year-old fund manager said. "The biggest concern facing companies is their lack of pricing power. When costs are going up, profits are going to be pinched at some point."

Despite the challenges, MMC is aiming for double-digit returns.

"Any manager able to generate a net return of 10-15 per cent for their clients over the coming financial year will be doing well," Constable, a 15-year veteran in asset management, said.

MMC's flagship Value Growth Trust fund has delivered 21.2 per cent compounded annual return between inception in 1993 and the end of the last fiscal year, comparing well with the 11.2 per cent posted by the All Ordinaries index.

"Earnings are close to as good as they get, and most people don't realise that P/E (price-to-earnings ratio) of 13-15 is based on peak cycle earnings," he said, adding the market valuation would have been about 20 in a normal business cycle.

His fund has restricted exposure to infrastructure stocks such as Babcock & Brown Infrastructure Group and bread and cereal maker Burns, Philp. He expects strong demand for building materials companies and the oil and gas sector, due to robust global demand.

The benchmark Australian S&P/ASX 200 index returned 21 per cent last fiscal year to June, led by miners such as BHP Billiton and energy stocks such as Woodside Petroleum.

The index rose to a life high of 4321.7 points on June 20, but has retreated some 1 per cent since then.

Last year's return was the best since 1997, but investors are bracing for lower returns as profit growth is seen shrinking.

Constable sees banks facing difficult times ahead as a slowing economy raises the prospect of default. He said banks' provisioning was on a steady decline due to 14 years of economic boom. But that could change now, he believes.

Constable also said abundant market liquidity due to superannuation funds and tax cuts is luring not-so-favourable businesses to the initial public offer market.

MMC sold its entire share allotment in the recently listed gaming company Tattersall's Holdings. "It has to come off substantially before we can find value in it."

- REUTERS