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Short-term pain in Aussie for long-term gain?

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Short-term pain in Aussie for long-term gain?.

Larry Williams:
Manuel, let's talk about the Aussie markets today. Another tough day in Australian markets; what do you see there? Is there an end in sight?

Manuel Greenland:
Yes, it has been a tough day mainly on the back of weak global markets. Overnight night we saw a London investment bank downgrade Glencore and say that its equity was worth nothing at current commodity prices which on the back of what happened last week with Volkswagen and more weak Chinese data put the skids under global markets generally and Australia specifically.

As you point out it's been a tough ride since reporting season which was tough. Investors were not impressed with weaker than expected earnings guidance for next year from Aussie companies. So overall, we've seen it's increasingly difficult for the average Aussie company to grow profits when the rate of growth in the economy broadly is slowing.

Larry Williams:
Well that makes your job hard as a manager of a portfolio of Australian shares?

Manuel Greenland:
Well interestingly we think it throws up opportunity. What we have seen are instances of very good companies, with very good reasons for reducing their short-term profit guidance, having their shares heavily sold off. So that gives us an opportunity to buy quality companies at discounted prices.

Larry Williams:
Yes, the Australian credit bureau company Veda was one that was sold off on results and then had a foreign company bid for it didn't it?

Manuel Greenland:
Yes and that is a very good example. Veda is Australia's leading credit bureau with four decades of credit data which it uses to help lenders make decisions. A change in regulation in Australia will see credit bureaus access more credit data than they could historically, which in turn will allow them to provide lenders with much more comprehensive credit reports. So Veda expects significant growth ahead, and has to make investments now to support this growth in the future. The market sold the share on the expectation of weaker short-term profits. A global leader in the space promptly stepped in and said, "Thank you very much Mr. Australian market, I'll have that and happily pay you a 30% premium to what you think this is worth".  

Larry Williams:
So essentially the Australian market chucked the baby out of the window with the dirty bath water on Veda — are you seeing more of this?

Manuel Greenland:
Yes we are. Another good example is online job ad business Seek which was heavily sold off after its result on a very similar story. The company is evolving from a pure advertising business and developing a database of candidate profiles which employers can search when they have a vacancy. This makes a lot of sense because employers can search everyone who may fill the needs of a vacancy, rather than just those people looking at job adverts.

LinkedIn has already done this and makes a lot of money from it. Again though when Seek told the market that it would need to invest to make this happen, the share sold off as investors reacted to the short-term earnings impact rather than the long-term growth possibilities.  So there are several of these kinds of instances we're seeing.

Larry Williams:
I guess most of the focus in Australia at the moment is about commodity prices and mining companies?

Manuel Greenland:
Absolutely. The most common question I get about Australia is "what should I do with my mining shares?" I think for now capturing great investment returns in Australia will depend more on careful stock selection than it did when the commodity prices were rising and the economy was growing rapidly. It is a broad market with lots of investment alternatives — you just want to make sure you've thought properly about your choices.

 

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