Risks and opportunities of a leadership change

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With a potential change in Federal government on the horizon, in this thematic discussion, we sat down with Matt Williams from Airlie Funds Management and Rhett Kessler from Pengana Capital to ask what it means for investors. Will new leadership bring big changes, or will it ultimately be ‘more bark than bite’? Access the video with transcript below.  

Edited transcript:

Jeremy Hook: Welcome to Buy, Hold, Sell. I'm Jeremy Hook from TMS Capital. Today on the panel we've got Rhett Kessler from Pengana Capitol and Matt Williams from Airlie Funds. Now there is a growing expectation that there may be a change in federal government in 2019 and certainly, this is worrying some investors. We want to look into this and see what investors might need to do and I guess starting with you Matt going back over history have these been things that people should be aware of? And maybe some examples for our viewers. 

Matt Williams: I think over history change in government has been more bark than bite. There's always a lot of talk about what's going to happen but generally the market takes it in its stride. This time I think in my experience we'll probably see I think much more bite. I think there's much more thinking around regulation, the sort of populist sort of policies that governments are now sort of focusing on, we've seen the introduction of the bank levy. So I think this potential change in government, if indeed we do get one, there's going to be a lot more noise and a lot more substance to changes that can affect companies and investments. 

Jeremy Hook: Okay thanks. Rhett I remember being in '96 very pleased about the opportunities in the market with the Howard government coming in. Didn't really sort of fire up the market in the way I thought. But you agree with Matt this time might be a bit different? 

Rhett Kessler: You know I think he's right and I think there's probably two phases. The first one is the lead up where you're going to get a lot of political footballs, and the timing with the release of the banking royal commission outcome is going to be I think very, very interesting. We've already seen some political footballing on health insurance and what the increases should be there. I don't understand how those are going to work we've tried to work those out but we'll wait and see. And the Franking is obviously the big one that's got a lot of investors really, really worried. Particularly the mums and dads who've worked pretty hard, built up a nest egg, have defined what their take out is that's going feed them and keep them housed and retrospective legislation always hurts. 

Jeremy Hook: So you've spoken to a lot of companies, CEO's and management. What are they saying? Are they concerned? 

Rhett Kessler: Again it's the people in different camps so there's the political footballing that concerns a lot of people absolutely. So your bank officials, particularly your health insurance CEO's would be concerned about the uncertainty and then everybody down the supply chain. The Hospital CEO's would be even more concerned. But then, of course, there's always the opportunity because quite a few of the companies we hold have made interest free loans to the government which are these Franking credit balances that have built up. And I think those could see some very positive outcomes from them releasing a lazy balance sheet early. 

Jeremy Hook: Matt have you run into any CEO's who are particularly starting to focus on this as an issue? 

Matt Williams: Yeah look I think in terms of Franking even in the last reporting season we saw increasing payout levels I think and as companies sort of had a view that this potentially is something that they should do is start getting the franking in the hands of investors. But as Rhett says I think in the next reporting season for the half year we might even see some really accelerated franking sort of releases. 

Jeremy Hook: So buybacks, off-market buybacks and the like? 

Matt Williams: Yeah more of that and more maybe higher payout ratios where companies can afford it, one-off sort of bigger dividends. So I think you'll see a bit of that, but I guess then it depends what sector the company's in that we're talking to management. Obviously, in the financial sector the royal commission has impacted and other inquiries and then I guess then, I mentioned the bank levy, what happens there. I just guess even in any sector really the threat of regulation has just become much more present and what I think we'll see more inquiries and of industries as the political football as Rhett quite succinctly puts it. These footballs start to really start to get kicked around as we move into the election cycle. 

Jeremy Hook: Matt we know a lot of the viewers on Livewire will be affected potentially by the franking credit changes, but at the economy level this is redistribution isn't it? So it can actually potentially have a neutral or even positive impact on parts of the economy? 

Matt Williams: Look, maybe. I think that there's a chance of that. I think if we do get a change in government I think potentially we'll see some industries where wage growth, there'll be some demands for wage growth. I think unions will certainly be on the front foot under a new change in government. So we could see demands there, but look, at the moment it can be easy to get a bit bogged down in this and bearish and things I mean at the moment the economy's pretty good. And people do have money in their pockets, interest rates are low so that's good for now. It's what, I guess the confidence-sapping nature of a lot of changes and regulations can have an impact on consumers and we know going into an election that we see people do stop spending to some degree. 

Jeremy Hook: Excellent. Rhett in terms of what would you be doing and what advice could you give an investor with respect to these changes? Is it going looking for some of these heavy franking credit heavy balance sheets for example? 

Rhett Kessler: That's a possibility. But what I would strongly suggest is to keep calm and carry on because at the end of the day in spite of, some would say the media's best efforts and the politicians best efforts, the economy is actually doing pretty well. Anybody who thinks that a strong government is necessarily going to do good things might also be overly optimistic and so I think a bit of disarray on both sides probably allows the free hand of capitalism to carry on and do what they need to do. So I think companies are in pretty good shape. I do agree with Matt's view on confidence sapping due to what's happening behind the scene and the uncertainty. But the economy's in pretty good shape. I'd just hold my nerve and stick to what we call toilet paper and toothpaste type businesses that everybody needs and loves. 

Jeremy Hook: We'll laugh during the election as well. Matt any last comments for investors to consider about this kind of change? 

Matt Williams: Yeah look I'd be careful of the toilet paper companies Rhett with the Asaleo, what's happened to them in the last 12-18 months. But Rhett's point is right I think to look to make big portfolio shifts based on what could happen is a bit dangerous. I think what we've done is sort of look through the portfolio and just seeing the susceptibility of a lot of the stocks to a left-field regulation kind of view and that's really all you can do. But the other thing is to keep an eye out for, the market is well known to overreact to policy announcements sometimes and they can provide opportunities. I think the health insurance industry's a good case in point that the listed players are very solid-looking companies with great sort of balance sheets. And so if any really bad news was to come to them I'd be looking at them for a long-term sort of chance to pick up a company, a good company, for a long-term hold. 

Jeremy Hook: Excellent. Well the election will come, things might change but there'll be opportunities as well as some things to consider and possibly change. 

Enjoyed that? 

In the most recent episode of Buy Hold Sell our panelists also discussing their investment view on NAB, AMP and Janus Henderson, with each of them nominating one stock that they believe offers compelling value: (VIEW LINK)

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