Lower returns forecast
Investors can expect Australian equities to return 5%-7%pa over the next decade, according to Vanguard’s long-term market outlook. This is in stark contrast to the 9.4%pa return generated over the past 30 years. While sharemarket valuations look reasonable (with a price earnings multiple close to the historical average), unlike expectations for continued improvement for much of the developed world, the potential downside risks are elevated for Australia, says Vanguard.
The risks of a slowdown are elevated given the fading tailwinds of a housing construction boom and higher household debt.
While the labour market looks relatively tight, the demographic shift, including the ageing population, means the labour supply is leaning toward part-time workers.
It is remarkable how quickly sentiment can change. In August 2016, no one wanted a bar of Computershare as stalled earnings and the twin threats of blockchain and Brexit sent the stock below $10. Just 16 months later, it is up 66%.
Our concern with Computershare is that it doesn’t have the quality we admired when we first upgraded the stock in 2011. Our interest was in the core share registry business, which contributed almost 75% of group revenues. The rest came from “business services”.
Since then the core businesses haven’t grown, while business services has almost tripled, now contributing almost half of revenues. Most growth has come from mortgage servicing, which is much more competitive than share registry and has other problems, such as the need to keep winning new mortgages to replace the ones being repaid.
Combine a competitive market and the need to keep winning new work and you have a recipe for overpaying and earning slim margins. The company is already looking at a potential earnings cliff in 2020, as profits start to decline on its mortgage servicing contract with UK Asset Resolution and it will have to fight hard to win new contracts.
At current prices we think the risks are beginning to outweigh the potential rewards. Time to SELL.