Elon Musk's SpaceX rocket isn't the only thing that's shot through the stars in recent days. ASX financials are having their own out-of-orbit moment, with the sector up over 15% this past fortnight. But not all companies have shared the spoils equally, with some stocks running too far and others lagging behind.

In this episode, Matt Williams of Airlie Funds Management and Catherine Allfrey from WaveStone Capital join Matthew Kidman to opine on five names and their prospects for further gains. They include one often-overlooked company that cracked through a record high this week, and one of the ‘most-tipped’ big caps from our 2020 annual reader survey. Plus, Cath also brings along a Big Four bank that's a good trading buy, while Matt offers a value laggard that could finally see its "day in the sun".

Notes: Watch, read or listen to the discussion below. This episode was filmed on 3 June 2020.


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Edited Transcript

Matthew Kidman: Welcome to Buy, Hold, Sell brought to you by Livewire Markets. I'm Matthew Kidman. And today we're talking about the great financial rotation. People are actually buying finance companies for the first time in a long time, and to chat about it, Catherine Allfrey from Wavestone, Matt Williams from Airlie. Matt, we'll start with you. The market darling goes up and down with the market. Surely you don't need to know any more than that. Macquarie Bank, buy, hold, or sell?

Macquarie Group (ASX:MQG)

Matt Williams (Hold): Look, I'm a holder and it's a hold. I was a bit worried coming into their result recently, how the crisis might have affected them. But look, remembering that it's nearly half the business is funds management, they're in good shape. They have an ROE that a bank, a major bank would kill for, a reasonable yield, look, the rest of the business after the fund manager is a bit of a black box, but look, it's a good hold at $115.

Matthew Kidman: The old silver doughnut, don't they need the markets to keep rising for you to be comfortable about owning them, Catherine?

Catherine Allfrey (Buy): Well what you should be comfortable about is the management team have elected to take their bonus in stock this year: their short-term bonus and stock. Every Australian corporate company should be doing that this year, and backing themselves. And that's what management has chosen to do. 

So if the management are prepared to back themselves, then I still thinking it's a buy. I also think the actual underlying result prior to all the provisioning that they put in for COVID was really strong. It was better than the market expected, and they were performing exceptionally well. And so I like to back management teams that are performing well.

And I think also there are two structural long-term trends, particularly in the funds management business, but also in their commodities business where that is actually powering the business. One is the fact that it's moving from fossil fuels to renewables. That's exceptionally important. And then the other one, infrastructure. So Macquarie with its infrastructure funds management business, it's the global leader, and that businesses has powered through and it continues to have exceptional funds flow into that business. And it can take advantage of this dislocation in markets, we've seen stress sellers, it can buy more infrastructure assets. So I'm still a buyer of Macquarie.

ASX Ltd. (ASX:ASX)

Matthew Kidman: And what about this one? ASX? I thought because the market was down 38, 40%, the ASX should fall. It's been a powerhouse, hasn't lost any ground. Buy hold, or sell?

Catherine Allfrey (Hold/Sell): I would say I'm a hold to a sell. It's trading now at a record high. It's had a fantastic period through the last few months in terms of the COVID volatility that we've seen, the powerhouse in terms of how much volume has gone through that market with all that day trading. But at the same time, it's also trading on very full valuation. It's got a very low return on equity versus global peers it's expensive and next year it will be impacted by the low-interest rate environment, that will impact its cash business.

Matthew Kidman: Volatility's been great, Matt, but maybe the heartbeat flatlines from here on in. ASX, buy hold or sell?

Matt Williams (Sell): It's a sell. As Catherine pointed out, against its global peers it's starting to get up there, but also the interest rate situation, you looked at the last activity report from the ASX and the futures business really fell off a cliff. We've seen in businesses like the CME in the US where the same thing has sort of started to trend. So there's actually a real earnings risk, I think. And coupled with a very high share price, yeah, I'm going to put it in the sell bucket.

Medibank Private (ASX:MPL)

Matthew Kidman: Okay. We've all been concerned about our health, but we're also trying to save our pennies. Health insurance, Medibank, buy, hold, or sell?

Matt Williams (Buy): It's a buy. It's not a very exciting buy for me. And there's a lot of complexities and regulatory issues.

Matthew Kidman: Does that mean it's not going to go up a lot?

Matt Williams: Well it hopefully goes up enough, Matt. That's all we need, but you're going to get a good dividend. I think we'll get a dividend of 4% or 5%-plus after franking. I'm happy with that, but look, it really is a play on healthcare spending and despite all the complexities and all the nuances around the private healthcare businesses, what we do know is that healthcare spending goes up and it goes up at more than GDP. And if the government wants a private sector, then they're going to have to bring out the carrot and stick at some point when this COVID crisis is over again, to get participation back into private health insurance. So for that reason, I think, and with the dividend, the great net cash balance sheet, it's a pretty solid place to park your money.

Matthew Kidman: Well, none of us can afford it anymore, I don't think, Catherine that's the other thing, participation as Matt said, Medibank, buy, hold, or sell?

Catherine Allfrey (Hold): I'm saying it's a hold. I think in terms of participation it's a real issue, particularly when you've got the unemployment rate increasing and it's not affordable, let's face it, for most families. It's a very expensive choice. And so this stick and carrot approach really does have to occur from terms of the government. I do note this week too, the government's again increased public health, hospitals funding. So, they've got to do something about the whole private sector as well. So for us, the valuation sort of is so-so, so it's not exciting enough.

ANZ Banking Group (ASX:ANZ)

Matthew Kidman: Okay. We can't avoid financials in our market. They're everywhere. They're big. What's one that you like that might carry us forward?

Catherine Allfrey (Buy): Look, just for a trading buy I'm still on ANZ. And that's because in terms of the argument about the fact that it's trading well below its book value, I also think it's quite cheap versus the other banks. I think this COVID event for bad debts is all about the small business sector and the household sector. So vis-a-vis the other banks, they're low weight in those sectors. And I just think that the management is executing well, they've got a reasonable amount of capital. And I think it's a reasonable valuation.

Suncorp (ASX:SUN)

Matthew Kidman: Matt, you got something that might give us an exciting return?

Matt Williams (Buy): The major banks have had a great week and a half, right? The index is up 14%. Suncorp, it's got part of a bank and it's part insurer. I'm waiting for it to have its day in the sun. And it's been a while. Look, there's been a lot of headwinds in the insurance market, as we know. General insurance, coming out of the bushfires, now coming into the COVID crisis and businesses. What does that mean for their commercial books? It's tough and they're having to pay more for reinsurance, but everything has a price and at these levels - and you could interchange this with IAG - I think IAG is probably a bit more of a focused play, but that would be my hoped-for stock to have its turn ... have its day in the sun.

Matthew Kidman: All the boards and all the management, about time you took your pay in stock. I hear it can be very exciting.

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