Low interest rates will persist & make wealth creation harder; but not impossible say these investors
In 95 days’ time we will be in the 2020s and record low interest rates and the trade war are likely to remain. These two facts are causing investors to consider their long term strategies.
Some believe the only way to gain is to invest in trends that are unstoppable and immune from low interest rates.
Stockhead heard from Magellan Asset Management’s Emma Kirk and Duxton chairman Ed Peter at the Exchange SA conference yesterday.
Both acknowledged interest rates were low, but argued wealth creation was still possible, albeit harder.
Kirk said the key to wealth creation was understanding mega-trends and taking advantage of them.
“We believe the best way is to look for secular growth trends,” she said, “[that are] not cyclical in nature and are immune from sector shocks.”
She defined this as “a societal or demographic trend that takes place over a long period of time”. Among the trends she named were the ageing population, autonomous vehicles, social media, wellness and convenience of delivery services.
One specific trend she was looking at was the rise of the middle class in China and the affluent upper class.
“They have 150 Adelaides inside China,” she said. “We only have five cities with over a million, only 10 in the US but China has 150 cities with more than a million people.”
“People with $5000 to $30,000 incomes used to make up most of that ground, but $30,000 to $50,000 and $50,000 to $70,000 are set to rise.”
As peoples’ incomes rise, they start to consume more and look towards luxury brands. She named French-listed luxury conglomerate LVMH.
It has more than 70 brands and operates in 70 countries including Krug and Moet, watch maker Zenith and perfume maker Acqua di Parma.
“You will never find one on sale anywhere in the world,” she said. “They keep their price at a premium and get extra margins of their business. We believe it will take advantage of Chinese consumers rising up that band.”
Among other stocks she named were utilities providers Crown Castle and Excel Energy. She also noted Amazon would continue to do well because of its private labels.
“If you’re buying tissues, most people don’t care about private brands they just buy whatever is on sale. If you search for tissues on Amazon it’s all Amazon brands.”
Kirk also mentioned Woolworths (ASX: WOW) had done just this with Woolworths Select branded products.
She concluded by saying: “We’re going to have lower interest rates for longer so you need to search harder for companies to take advantage of it.”
Ed Peter has been around long enough to remember the days when our mortgage interest rates were in the 20s. He believes the only things worth buying are those mis-priced.
“You buy things when they’re cheap,” he said. “From my side I’m a deep value guy and I only invest in things that make true economic sense.
“We created two listed companies because we saw sectors that were mispriced and stories that were mispriced.”
He operates two companies on the ASX. The first Duxton Broadacre Farms (ASX: DBF) owns a portfolio of farms and the second Duxton Water (ASX: D2O) leases water to farmers.
Think of farming and the drought would spring to mind instantly. But Peter argued the drought was a benefit because it made market entry possible. “It is dire out there, but in every cloud there’s a silver lining,” he said.
“Every single drop of the water goes to help farmers somewhere, we have 60 farmers that depend on us – the majority would not be in business today if we had not leased them water.”
He noted Australia’s agricultural land was the cheapest on the planet and that “we have no employees and no depreciation – it’s holding permanent rights and renting them”.