Fund manager Catherine Allfrey says the Reserve Bank of Australia was “absolutely” right to moderate the pace of interest rate increases this month, in a nod to Australia’s unique sensitivity to the cost of borrowing.
The real toll of this monetary tightening cycle on households is not yet apparent, and the 19 per cent seasonally adjusted growth in retail sales year-on-year is almost a “false signal” if tougher times are indeed ahead.
The WaveStone Capital principal and portfolio manager says the first quarter for most businesses is going to look reasonable.
But a huge cohort of borrowers will experience their fixed rate mortgages rolling off after Christmas; the RBA has estimated two-thirds are scheduled for refinancing before the end of 2023.
“So that’s just going to kill consumption, right? It hasn’t hit yet. But I must say, those quality operators they always find a way to steer through. They’ve had some good times for a couple of years now.”
The annual general meeting season under way will be particularly illuminating on the subject of margins.
“That’s interesting too in terms of what they’re seeing at the coalface dealing with inflation. They’re finding it hard both from a labour perspective, but also from putting prices up. The initial rounds of prices going up were easy. I think going forward, it’s going to get a lot harder.”
Australia’s inflation is lower than the rest of the world. The consumer price index jumped 6.1 per cent in the June quarter, and rose to 7 per cent in July on the new monthly CPI. UK inflation was 9.9 per cent in August and US inflation 8.2 per cent in September.
“A lot of multinationals who want to sell things into Australia are like, ‘Well, hang on, we’re putting prices up 8, 10 per cent in Europe, the US, and if you don’t want to accept that price increase, then we’ll just move it to another market’.
“And then the Australian retailers are saying, ‘Oh, hang on. No, no, we want the products because we know there’s a demand for them. So OK, we’ll have to accept that increase’.”
WaveStone’s Dynamic Australian equity fund is ahead 1.1 per cent over the year to September 30 in gross performance terms, or negative 0.7 per cent net of fees, bettering the S&P/ASX 300 accumulation index’s loss of 8 per cent over the same period. Since inception in 2009, the long-short strategy has earned average annual returns of 12.6 per cent, before fees.
Allfrey is a presenter at this year’s Sohn Hearts & Minds investment leaders conference on November 18, which takes place in Hobart, and aims to raise money for medical research. She was moved to participate for the first time by a close friend who is suffering from terminal brain cancer.
The sharemarket volatility has made it difficult to settle on a Sohn stock selection, but she promises it will be “true to style”.
WaveStone’s long-short strategy has thumped the market with tactical shorts against buy now, pay later technology and consumer discretionary stocks such as Zip, Block and City Chic Collective.
“The retailers are sitting on quite a bit of inventory. It’s always the way, people think it’s going to extend forever and the free government payments and the low rates were never going to continue forever. And so, that’s where we’ve made our money.”
On the long side, WaveStone has succeeded with Treasury Wine Estates, Santos and IGO.
“It’s really old-fashioned bottom-up stock picking,” she says. For example, there were three ASX takeovers that collapsed in the past month, of which WaveStone actively owned none, because it could never make the valuations stand up. In the dissolution of the deals, its outperformance was enhanced by not owning the jilted targets.
Formerly it had a large position in Sydney Airport, which it held through the coronavirus, participated in its recapitalisation, and was validated by the eventual privatisation.
One of the strategy’s worst performers is Nine, publisher of The Australian Financial Review, and a position Allfrey is confident can turn around. “We look for quality, growth at a reasonable price, and to be honest, management have delivered in terms of being in a constant upgrade cycle and then they’ve also come through finally with the buyback.”
The fund manager says media is one of the first parts of the economy to soften. However, this was not yet apparent, and Nine was in an advantageous position as an owner of first-party data through its digital assets. Streaming asset Stan’s progression into sport has held up its subscriber numbers, even though “it’s not making any money”.
“That’s one of the things that clearly the stock’s sold-off on, the valuation of Stan given what’s happened to the Netflix share price.” She speculated that striking a deal with an international content provider could be “quite transformational”.
In a cyclical bear market, Allfrey says history is the best guide.
“When will the market turn? The market always looks six to 12 months out. And we’re already pricing in obviously the contraction of consumption. The market will bottom when we know that rates are going to moderate.”
Wall Street is down about 25 per cent but cyclical bear markets are usually 30 per cent drawdowns, she adds. “The problem is the rate increases have been so fast, what problems does that cause?” This has led to an obsession with corporate debt markets and a hunt for potential structural casualties.
“Let’s hope it’s just a rate-driven correction.”
The historic unification of BHP Group in January wins Allfrey’s approval. “The stock’s continued to perform despite not owning any energy assets," she says. BHP’s petroleum business was merged with Woodside to create the enlarged Woodside Energy. “That’s fascinating in itself.”
The main reason she attributes to Woodside Energy’s outperformance of the ASX energy sector is the fact its gas is not fully contracted. Over one year, Woodside’s 32 per cent return has trailed only coal producers Whitehaven and New Hope.
“It’s got the exposure to the spot gas price in Asia. That’s been clearly the right way; I don’t think it was by design, to be honest,” inferring that BHP entered the merger with less contracted gas. “Who do you want to be exposed to? You want to be exposed to those gas players that aren’t contracted at $4, they’ve got exposure to that $34 LNG price in Asia.”
Allfrey is an advocate for more lithium processing to be done in Australia.
“We’re not processing the raw material,” she observes regretfully, although IGO and Wesfarmers “have both stepped up”. It should be something the federal government is encouraging, she argued. “Let’s see more of the raw material processed in Australia. If you think lithium’s going to be around for generations, let’s invest as a country and let’s focus on this industry.
“Because it’s embryonic.”
The central question about spodumene, from which lithium is derived, is what happens to the price as more supply arrives.
“No one has worked out exactly what it should be except that the cash costs are so low. You look at Greenbushes, which is IGO’s mine, the cash cost is [around] $300 a tonne versus the price today [around $US7000]. Usually it moves down to the marginal cost.”
Electric vehicle sales from China are behind much of the demand. The fund manager personally drives a hybrid. “It does 35 kilometres which is perfect. Do the school drop-off, come back, put the battery back on.”
The Australian Financial Review is a media partner of sohnheartsandminds.com.au.
This article was originally posted by AFR here.
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Two hundred of Australia’s best and brightest money managers, bankers and entrepreneurs toasted the seventh Sohn Hearts and Minds conference at David Walsh’s Museum of Old and New Art, better known as MONA, in Hobart on Thursday night.
Fund manager turned anti-corruption campaigner Bill Browder is advising investors to hang on to their cash until central banks stop raising interest rates and the cost of living starts to come down, before investing it strategically.
The Sohn Hearts & Minds Investment Leaders Conference, held annually, had before Friday’s event made more than $40m in collective donations to medical research. It applies the stock picks made by fund managers in an investment portfolio.
Professional gambler and arts impresario David Walsh had a brutal message for successful top money managers – you may just be lucky.
Technology behind the tech; healthier lifestyles; the green transition and regulatory tailwinds. These are the mega-themes the smartest minds in the market are now firmly getting behind which they believe can help them deliver outsized profits.
A room filled with 700 of the country’s financial luminaries and billionaires is a difficult place to pitch an investment idea but it’s a great place to raise money for charity.
Top global money managers are telling investors to steer clear of companies that don’t make money and invest instead in unloved but profitable businesses, as continuing central bank interest rate rises threaten to keep markets falling.
Perpetual’s star stock picker Anthony Aboud says companies with strong balance sheets will finally be rewarded for their discipline in an environment of rising interest rates and global market upheaval.
Perpetual’s top stock picker Anthony Aboud makes his money running against the crowd and this is why property trusts like Charter Hall are sitting right the top his list right now.
Some of the top fund managers in the country will on Friday pitch their best investment ideas to the Sohn Hearts & Minds conference.
Twenty students from Kingston High School have been given the opportunity to attend the prestigious Sohn Hearts & Minds conference this week.
Gerry Cardinale, the owner of AC Milan and a host of other soccer, cricket, baseball and ice hockey assets is trying to double his money in the ‘resilient’ asset class.
Carleton’s conviction will be on full display on Friday, when he makes his third appearance at the annual Sohn Hearts & Minds Investment Leaders Conference, where stock-pickers share their best ideas in the name of medical research.
James Miller, a portfolio manager at Firetrail Investments, believes investors need to stop seeing the global decarbonisation push as a risk – and start seeing it as an opportunity.
Maggie O'Neill, Head of Marketing and Operations at HM1 joined Nick Griffin, CIO of Munro Partners to discuss the history of Hearts & Minds, Munro Partners' involvement and Nick's upcoming stock pitch.
Bob Desmond is Head of Claremont Global and Co-Portfolio Manager. He will present at the Sohn Hearts & Minds Investment Leaders Conference in Tasmania on November 18.
An increasing intransigence from authorities in Beijing toward private enterprise - and harsh pandemic restrictions - might be keeping some investors away, but the same factors are creating good opportunities in Chinese stocks.
Joyce Meng is a presenter at this year’s Sohn Hearts & Minds Investment Leaders Conference on November 18, which takes place in Hobart and aims to raise money for medical research.
Founder, CIO and CEO of Eminence Capital Ricky Sandler talks about his journey launching the $5.7 billion dollar asset manager, how the market has changed over the past decade and his motivations for participating in this year's Sohn Hearts & Minds conference.
Munro’s Nick Griffin on why he prefers Alphabet and Amazon over Meta, shorting industrials and Chinese equities, and his top picks for the energy transition.
When Auscap Asset Management founder Tim Carleton tips a stock at this month’s Sohn Hearts & Minds conference in Hobart, he doubts it will be a name that shocks investors.
The veteran fund manager says the most uncertain period of his career will deliver huge opportunities – providing his firm can stick to its system.
One of the nation’s most influential fund managers has warned that investment markets have entered a “new phase”, with hidden risks in the form of debt sitting in super funds, private equity and big investors that is set to test the financial system.
Speaking to The Australian Financial Review before the Sohn Hearts & Minds conference, Sandler named global on-demand ride-sharing and food delivery service Uber Technologies among his top picks, alongside real estate marketplace Zillow.
When former Amcor chief executive Ken MacKenzie was named the new chairman of BHP five years ago, that was a sign for top-rated fund manager Peter Cooper to move back into the mining giant.
Jun Bei Liu is the lead portfolio manager at Tribeca Alpha Plus Fund. Ms Liu is set to present an investment idea at the Sohn Hearts & Minds conference in Tasmania on November 18.
Regal’s hedge fund focused on the resources space has thumped the market and its top stock picker, Tim Elliott, says resources stocks are still cheap.
Desmond, who worked in London before moving to Australia in 2008, is making his first appearance at the annual Sohn Hearts & Minds Investment Leaders Conference, where fund managers give their favourite stock tips to raise money for medical research charities.
The WaveStone principal says retail will drop away but quality operators will find a way through.
Catherine Allfrey, Principal and Portfolio Manager of WaveStone Capital will be speaking at this year's Sohn Hearts & Minds Conference in Hobart which raises funds for Australian medical research.
Bill Browder, the fund manager who has become one of Vladimir Putin’s fiercest critics, says the Russian leader is increasingly desperate, but no less dangerous.
Bill Browder, once the largest foreign investor in Russia and the man behind the global Magnitsky justice campaign, says the US is the weakest link in the war in Ukraine.
There are many descriptors for Browder, including Russia’s anti-corruption crusader, and its most dogged oligarch hunter. But it’s his title as Putin’s No.1 foreign enemy that bestows on him another label - consummate survivor.
On November 18, Griffin – with $4.7bn under management at Munro Partners – heads to Hobart for this year’s face-to-face pitch to investors on his 2023 pick.
Tim Carleton, founder of Auscap Asset Management and 2022 Conference Fund Manager sat down with Equity Mates to discuss his investment philosophy and what makes a great Australian company.
When investor Kara Nortman and actor Natalie Portman decided to start a soccer team, they created a brand that has grabbed the sporting world’s attention.
Sporting teams and leagues are becoming serious investments for global firms managing billions of dollars, as private equity funds eye off the sector’s growth potential and resilience to economic slumps.
Australia’s sports leagues are being held back by a culture of conservatism and need to be more open to private equity investment or risk falling behind, investors say, with Netball Australia’s rejection of a $6.5m bailout cited as just one example of administrators’ aversion to private capital. Conservative Australian sports leagues are ‘letting investment opportunities pass them'.
A financier and political activist who is viewed as a key enemy of Russia’s government will address Australian investors on the war in Ukraine at this year’s Sohn Hearts and Minds conference, as the conflict continues to have a major influence on global markets.
Keynote speaker will be Bill Browder, the former Hermitage Capital hedge fund manager that has become an arch nemesis of Russian President Vladimir Putin, as he has lobbied governments to black-list senior Russian officials attempting to shift their assets offshore.
Bill Browder, one of Russian President Vladimir Putin’s fiercest critics, the founder of Hermitage Capital and the man behind the Magnitsky Law on human rights, will headline this year’s Sohn Hearts & Minds investor conference.