Macquarie Group’s incoming chief executive has declared confidence in the outlook for real assets in an environment of rising bond yields, rejecting the conventional view that such conditions are negative for the asset class.
Shemara Wikramanayake, who is readying to take over from Nicholas Moore this month, is being elevated to the top job from her role as head of the $500 billion Macquarie Asset Management business. That has made her a global authority on the booming infrastructure and real assets sector, one of the areas of investing where Macquarie has been credited with a pioneering role.
The counterargument to Macquarie’s view is that higher yields mean real assets are ascribed lower valuations, as the discount rate applied to future cashflows is revised.
“We’ve actually done research that shows infrastructure as an asset class tends to perform particularly strongly in an environment of rising interest rates,” she said, provided economic growth is going up and such assets benefit from increased activity. “It does actually when you think it through intuitively make sense,” she said. “Even though the discount rates may be going up, the earnings are going up at a faster rate.”
The yield on the US 10-year Treasury is at 3.14 per cent compared to 2.33 per cent this time last year as the Federal Reserve commits to raising interest rates and the US economy heats up.
Macquarie is on track for another record full-year profit after upgrading guidance on Friday, foreshadowing a 10 per cent increase for its 2018-19 result.
Net profit came in at $1.3 billion for the six months ended September 30. It will pay an interim dividend of $2.15 a share, up from $2.05, on December 18. The stock rose more than 3 per cent to $122.42 and is up 23 per cent this year.
A strong performance from the commodities and markets business lifted Macquarie during the half, adding $700 million of net profit alone, an increase of 85 per cent. In part, this was fuelled by a return of volatility in the energy market, but management also said it showed the fruits of a strategic investment in energy at a time when investment in the sector in America is booming. This has lifted demand for transportation and storage assets.
Ms Wikramanayake succeeds Mr Moore on November 30 after Mr Moore’s retirement was formalised in July concluding 10 years in the role.
Diverse business mix
“We remain confident that we’re well positioned to deliver superior performance,” Ms Wikramanayake said. “You can see that coming through in this half,” as she described how the “annuities” side of the business performed reliably, but it was the capital markets-facing side that had a “strong half” displaying the benefits of a diverse business mix.
“What’s underpinned our results for nearly half a century is our strong risk management culture and framework.”
She credited Mr Moore for this, saying: “I know you’ll be hating all of this acknowledgement of your contribution, but he really exemplifies the Macquarie culture.” Ms Wikramanayake recalled how in the late 1980s, Mr Moore “really hit the ground running” at the bank. “As we went into the ’90s, it was really Nicholas who pioneered infrastructure, which is a huge asset class.”
By 2008, the businesses that sat under the investment bank were generating more than 60 per cent of Macquarie’s income and Mr Moore was recognised as the architect of that. He positioned Macquarie to be opportunistic after the financial crisis with the funding and capital enabling it to seal the purchase of US fund manager Delaware.
“I’m sure she’s going to take Macquarie to great places in the future,” Mr Moore told investors on Friday of his successor.
“You’re handing me an enviable legacy,” Ms Wikramanayake said later.
Former Reserve Bank board member Jillian Broadbent will become a Macquarie director, the company said, joining a board that includes the former Reserve Bank governor, Glenn Stevens.
Ms Wikramanayake‘s own successor was named as Martin Stanley. And Ben Brazil, currently head of CAF principal finance, will instead become chairman of that division, making way for Florian Herold. “His decision is very much driven by his own personal needs and wants,” Mr Moore said of Mr Brazil’s intentions. “CAF will still be an engine for the group.”
Seeing opportunities in renewables
Taking a longer view, Ms Wikramanayake was optimistic about opportunities presented by renewables, urbanisation and food and water scarcity.
“I don’t actually think we are in a capital-lite world despite technology. A lot of capital is needed, for example in the US, the public sector is heavily indebted at the moment, there’s a huge amount of capital needed to upgrade their infrastructure. That’s just one tiny example of where we need capital.”
For 2018-19, Macquarie had previously guided that results are expected to be “broadly in line” with 2017-18, when the group reported a record $2.56 billion net profit. Plans for a share buy-back floated last year were scrapped in favour of more than $2 billion of investment already undertaken.
UBS banking analyst Jonathan Mott said the revised forecast was equivalent to a 6 per cent upgrade to consensus, including the impact of Quadrant Energy that adds an estimated $100 million to the bottom line, and represents about a 14 per cent rise in profit year-on-year.
Santos in August agreed to pay $US2.15 billion to buy gas supplier Quadrant from Brookfield and an investor group led by Macquarie Capital.
Ms Wikramanayake indicated a preference for growing the asset management business from within, in response to a question about deal appetite as market multiples ascribed to asset managers decline.
“Asset management is a very people dependent business so we’re very cautious of doing acquisitions there,” she replied. “We’ve very guarded in terms of inorganic growth in asset management,” but agreed it was a viable plan B in a “very disciplined” way.
Mr Moore refused to comment on speculation reported this week that linked Macquarie to AMP, to which Ms Wikramanayake added: “Growth will continue to include both organic and inorganic, with the inorganic being something less frequent.”