The long-term outlook for low interest rates means investors should be giving greater consideration to shares in sectors driving structural change to avoid zero returns in their portfolio, according to a boutique Australian investment manager.
Munro Partners founding partner and chief investment office Nick Griffin said interest rates had been falling for some time and would remain at their current levels due to high levels of debt in markets.
Griffin said this situation was unlikely to change anytime soon, leaving shares as one of the few places to generate income and returns.
“Interest rates have been falling and we saw that prior to the global financial crisis (GFC), post-GFC and now post-COVID and debt is continuing to rise as we solve these problems,” he said.
“What that means is with more debt in the world it is harder for interest rates to go up because if they rise too much, that will tip the economy over, which then sends interest rates back down again.”
He pointed out Munro Partners was confident rates would stay between 1 per cent and 3 per cent despite key market events, which over the past 18 months have done little to change that outlook.
“Low interest rates means shares are probably the only game in town and the reason for that is because every single investor is sitting there with cash in the bank that is getting virtually no return and is highly likely to not have much return into the future,” he noted.
Shares continued to offer good returns where investors engaged with areas involving structural change, he said.
“You can step outside the risk curve and buy shares in a consumer staple and get a 3.5 per cent free cash-flow yield with roughly 5 per cent growth,” he said.
“If you step further up the risk curve to the ‘new staples’, there are companies structurally growing their revenue in excess of 10 per cent per annum with great free cash-flow dynamics, and they are ultimately going to be a better place for your money.”
Investment opportunities that existed prior to COVID are still available, but those that created structural opportunities had been accelerated as a result of the pandemic, Griffin noted.
He highlighted rapid growth in e-commerce, cloud computing, remote working and internet disruption of entertainment services and digital payments as less people used cash, and noted high-performance computing and semiconductors would also offer strong returns.
“This area has been overlooked for decades now and they are not cyclical companies, but they are structural growers and are weapons manufacturers or the shovels in this boom, and the best way to think of them is as the oil service companies or the mining service companies for the 21st century,” he advised.
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