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Direct Domestic Shares, Investments

Red flags raised around bank and mining sectors

Slowdowns in the housing and mining sectors are potential red flags for Australian equities investors, according to investment manager Janus Henderson.

In an overview of what may lie ahead in 2019, Janus Henderson head of Australian equities Lee Mickelburough said the slowdown in the Australian housing market, and the tightening of credit standards, was a key area of interest given the dominance of banks in the benchmark.

Mickelburough added that while the banking sector had low levels of bad debt, which was a positive, “from such a low base, means we are likely to see an increase in bad debts in 2019”.

The caution expressed with regard to the mining sector was due to the slowdown in China, but at the same time, iron ore prices have remained strong, creating good cash flows from businesses such as BHP and Rio Tinto, according to Mickelburough.

He said Janus Henderson had been looking outside the bank and mining sectors for other investment opportunities, including the areas of consumer staples and advertising.

With regard to consumer staples, he identified Woolworths as a well-managed business that held a dominant place in its market, as well as having a strong balance sheet.

“This company hit a little bit of an air pocket the middle of the [last] year with a slowdown in sales; it is now re-accelerating. We also anticipate some capital return at some point in the early new year, so strong cash flows and capital returns are very positive in the context of a cautious backdrop,” he said.

He pointed to changes in outdoor advertising as a reason for Janus Henderson’s positive view in that area.

Outdoor advertising was being used more as part of an advertiser’s marketing mix because of the way it complements other forms of media, he said.

“This is especially the case with the digitalisation of the sector, which is reducing the production costs associated with printing and installing advertisements, as well as enabling advertising to be more dynamic and varied by geography and time of day,” he said.

“The outdoor advertising sector has also consolidated from a five-player market down to a three-player market, so we think returns and growth will be strong.”

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