Recession unlikely – DNR Capital

Despite a weakening economy, Australian equities investment firm DNR Capital expects Australia will be able to avoid a recession.

Scott Kelly, portfolio manager at DNR Capital, said a recession was not its ‘base case’ here in Australia.

“The combination of the [Reserve Bank of Australia] RBA cuts, the tax refunds and cuts, stabilisation in property prices, potential loosening of credit, and infrastructure stimulus particularly in NSW and Victoria, should mean we avoid a recession in the next 12 months,” Kelly said.

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“In terms of Australian markets, in terms of where interest rates are, the equity yield on markets is still attractive.”

The Brisbane-based, boutique Australian equities fund manager offered four strategies: the High Conviction portfolio, Income Portfolio, a Socially Responsible (SRI) portfolio, and Emerging Companies portfolio.

The High Conviction and Income portfolios complimented each other as the former was for investors in the accumulation phase, while the latter was for retirees or investors in pension phase looking to replace lost income.

The High Conviction portfolio had seen a return 32.6% over three years to 31 August, 2019, while the Income portfolio saw a 28.3% return over the same time period, according to FE Analytics.

“Quality means to us buying companies operating in a good industry structure with a sound balance sheet with strong management teams, good earnings and growing return profiles and low environmental, social and governance (ESG) risks,” Kelly said.

The benchmark for the high conviction portfolio was the S&P ASX 200 Accumulation Index, while the income portfolio’s benchmark was the S&P/ASX 200 Industrials Accumulation Index.

“The industrials index has delivered higher levels of income than the [ASX] 200, and it excludes resource and energy companies so it has a more stable dividend profile,” Kelly said.

However, that doesn’t mean they cannot own those stocks and they do have holdings in BHP and Rio, with BHP making up the second-largest holding in the High Conviction portfolio at 7.37%.

“We prefer to buy the diversified miners so we avoid exposures to single commodity risks, BHP and Rio Tinto provide that diversification across geographies and commodities,” Kelly said.

“They have very strong balance sheets so they have the ability to ride out a cycle should commodity prices fall.”

DNR Capital High Conviction portfolio and Income portfolio performance over three years to 31 August, 2019 versus ASX 200 and ASX 200 Industrials indices.


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