It is time for investors to think about how a collapse in the cost of capital has masked true delinquency rates in asset markets, according to boutique investment manager Wentworth Williamson.
James Williamson, Wentworth Williamson fund manager, said the credit side of his stable income fund had recently assessed 41 different deals and rejected them all.
“I think there's probably been an inflection in the market and I thought it was last quarter of last year but maybe it's now, and we felt it last three weeks. You can see it, you can sort of sense it,” Williamson said.
Williamson pointed to a collapsing cost of capital as the cause of the inflection in the market.
“When your cost of capital – your cash rates – drops from 7.5% in 1990 to 0.1%, what does that actually mean to a fundamental analyst?” Williamson said.
“I can tell you [we’re] going to have a hell of a big discussion, and it’s going to be a hell of a lot harder than it is today. Because the average guy on the street is probably in trouble, he just doesn’t realise it yet.”
As a credit manager Williamson did not “really care [about] trying to forecast year two and year three of [his] companies”.
“All [my investment team discuss] is what’s normal sales growth for [a particular] company, what is a normal margin, what’s my normal discount rate?”.
Williamson suggested that this could produce a very different assessment to “what the market is saying today”.
“Somebody said to me the other day, ‘yeah but everybody’s doing that’, and I don’t think so – I don’t think that’s happening at all,” he said.
“If you do that properly you probably would consider two thirds of this market [as] un-investable right now.
“If you do that thoroughly, what it has done is it pushes you deeper into the fringes of the indices because you have no choice.
“There’s just so much liquidity around it’s created these extraordinary – I think their bubbles in certain areas.”
He said a problem existed in the banking industry where poor delinquency rates were becoming normalised.
“I go back to what is a normal delinquency. In Australia you’ve got to go back one hell of a long time to see where we really got delinquency impacts,” he said.
“You’ve got to go back about 20 years. And if ever [there’s a time] to start thinking about that, it’s now.”
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