Giselle Roux: Bitcoin mania ‘just a joke’

The Australian 19 January 2018

Cliona O'Dowd


Bitcoin mania has taken hold across the world, but Giselle Roux is more than happy to watch from the sidelines.

“It’s just a joke … It’s silly. It’s symptomatic that there’s a bit of ‘fear of missing out’ money running around — and it’s not particularly well-informed money,” the chief investment officer of ­Escala Partners says.

“It’s always a concern in markets when people start to chase performance rather than rational valuation and fundamentals.

“The logic in the way the pricing moves is something I can’t fathom. So I’m quite happy to miss out (on bitcoin). We shouldn’t throw away the fact that distributed ledger technology is going to do something valuable at some point but pricing of whatever bitcoin is, I’m not sure that applies.”

Roux, one of Australia’s most highly regarded investment strategists, has headed the investment team at the boutique wealth firm since 2013. Before that she spent six years as chief investment officer at wealth manager JB Were.

She expects the Australian sharemarket to follow its global peers higher this year but says the low-growth financial sector will hold it back. There are still pockets of interest, she says, including the resources sector, which she views as most promising in the short term.

“The cost-out thesis is most inherently promising from a company’s perspective, but some firms just don’t have the capacity because of inherited legacy or the willingness to make significant changes to their cost structure, probably because of the degree of initial disruption before the pay-off,” she says. “I think the banks have problems reducing costs because of their legacy-embedded structures.”

With the low-growth banking sector set to plod along, Roux says dividend payouts aren’t at risk.

“The banks have restructured their capital base considerably so it feels for the foreseeable future that dividends are safe. But they’re unlikely to grow much at all.”

Muted expectations for the local banking sector are in stark contrast to the outlook for the ­financial sector in the US, due in part to Donald Trump’s tax reforms. “It’s a really interesting time in equity markets right now,” Roux says. “We’ve seen clear signs of a rotation from growth-type stocks, such as the big internet companies — which have been very dominant over the last five years — toward cyclicals.

“We’re seeing people rotate to financials, companies where the leverage to the current global economic activity levels is better. And we’ve seen funds rotate from those iconic big names to stocks that are perhaps smaller, that have more potential upside from this point.”

The next leg of growth for the Googles and Amazons in the US is going to be more difficult, since they already dominate their industry sectors. As they move into new areas it’s harder for them to create that same level of dominance, Roux warns.

“So investors are picking up stocks in the retail sector, companies that have already adapted to deal with some of the disruptive factors. Then it comes down to brand names that can create their own destiny through social media rather than big marketing budgets. So there’s a generic set of names that you find fund managers are starting to look at as alternatives to hanging out in the big names.”

Locally, Roux cautions that the high-flying small and mid-cap sector is looking overheated and is one area of vulnerability for the market. “They might be decent companies but the valuation has lost its way a little. We’ve seen valuations of 25 or 30 times for good companies, but nothing that warrants that level of valuation.”

A2 Milk and Costa are two such companies that are looking toppy, she says. “This is not being in any way judgmental about them as companies, it is simply a question of how much do you pay for a company of that kind?” Roux says.

“What you typically see is when those valuations unwind it drags the small-cap sector with it. The small-cap sector is much more prone to these heaves and waves of valuation cycles. And at the most extreme you’re seeing hot money going into anything that has the name ‘lithium’ or ‘bitcoin’ in it. It’s money going into these things without having any idea what the businesses are, and a lot of them haven’t even got any money.”

Meanwhile, investors banking on bond proxies for yield could also be in for a shock. Bond proxies are shares that generally offer predictable, reliable dividend streams.

“In the second half of the year, some of the bond proxies are going to be affected by rising global interest rates,” Roux says.

“It will have an impact on them even if our own interest rates don’t rise. Shares like infrastructure stocks and property trusts, companies where the first port of call is the yield.”

The big question for the economy now, she says, is what’s next after the mining and housing boom? “We’re always dependent on one or two industry sectors. At the moment we’re quite dependent on the export sector and state-based infrastructure spending. If we see China tightening in the early part of the year, as anticipated, we could see softer-than-expected commodity prices and commodity demand. So that’s a risk, which is why the resource sector, while it looks fine now, may be riskier further into the year.”