Unprofitable firms to be treated harshly in rising rate environment
Companies which are yet to reach profitability could find investors becoming more impatient of results once interest rates start to rise.
Speaking to Money Management, Max Cappetta, chief executive and senior portfolio manager at Redpoint Investment Management, said investors were currently willing to wait for results. However, once rates started to rise, they could likely be more demanding.
Particularly in the IT space, many companies were still unprofitable and giving long-term guidance of being profitable in three to five years.
“Some IT stocks which are priced for massive earnings growth, will they deliver? They won’t have low interest rates anymore to help them maintain their high valuation so we will see how investors react to that news,” Cappetta said.
“If they don’t deliver results in the timeframe that investors expect then they will be harshly dealt with. Until now, investors have been giving them a runway to get to profitability but they will shorten that in a rising rate environment and will want to see what companies are achieving sooner.
“Going forward, I would avoid those stocks which have high valuations and where the profitability is still several years away.”
However, financials and commodities would be likely to benefit in a rising rate environment.
Regarding commodities, Cappetta specified BHP, which sat in the top 10 holdings of the Redpoint Australian Equity Income fund, and said it would benefit from the firm’s decision to sell its petroleum assets to Woodside.
“BHP has a world-class copper business and a petroleum business so if they can offload that fossil fuel business then that would allow them to focus on the copper one which will be most in demand,” he said.
“The decision to get rid of the dual listing and only list on the ASX [Australian Securities Exchange] will also simplify the business and reduce costs, it will likely be one of the top three largest business on the index.”
AUTHOR
Laura Dew
Recommended for you
Record flows into iShares ETFs helped BlackRock’s assets under management reach US$13.5 trillion in the third quarter, but it reported outflows from the APAC region.
Regal Partners has passed $20 billion in funds under management, helped by $723 million in net inflows during the last three months.
Global investment manager Fidante has formed a strategic partnership with a London-based asset manager to secure exclusive distribution rights across the APAC region.
Blackwattle Investment Partners has hired a management trio from First Sentier Investors – who departed amid the closure of four investment teams last year – to run its first equity income offering.
