Cyclicals looking attractive, says Tyndall

bonds australian investors global financial crisis

20 January 2012
| By Tim Stewart |
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Defensive stocks are at a higher premium to cyclicals than they were during the height of the global financial crisis, reflecting the bearish attitude of Australian investors, according to Tyndall Asset Management.

For Tyndall head of equities Bob Van Munster, that price differential (about 13 times forward earnings for defensives versus 13 times for cyclicals) also represents an opportunity. Tyndall is currently overweight cyclicals because these are very cheap when looking at mid-cycle earnings, he said.

But not all cyclical stocks are created equal, according to Van Munster.

"We're seeing significant structural change in industries like the steel industry, like retail and media. We really have to be discerning as to whether the value is real or illusory," he said.

Tyndall has been able to avoid "a lot of traps" in sectors that are undergoing structural changes, with the retail sector being a prime example, Van Munster said.

"We didn't have a magic insight that consumers would start to move away. [But we thought] Australia was over-retailed and there were significant risks on the downside," Van Munster said.

The cyclical stocks Tyndall is invested in include Henderson, Aristocrat, Qantas and James Hardie.

"We believe the cyclical aspects of those businesses more than outweigh the structural impediments the companies are going through," Van Munster said.

But Tyndall is also invested in high-yielding defensive stocks, namely Duet, Telecom NZ and Telstra.

When it came to the outlook for this year, Van Munster said it would depend on how the "cards played out" globally - although he believed there could be a healthy recovery in markets if a global recession is avoided.

The 'bear' view of the current market also points to global debt deleveraging, earnings downside risk and economic and geopolitical tail risks, said Van Munster.

The bulls, on the other hand, look to the low valuations of equities, the high cash holdings of investors who are 'sitting on the sidelines', and the easy monetary conditions around the world.

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