Reset on 'insane' valuations presents exciting opportunities

Wilson Asset Management recently hosted its annual WAM Vault Live panel session, and the firms founder and chairman Geoff Wilson AO, set the scene as most finance presentations do - with a disclaimer (stick with me here). 

In fact, it was a particular quip he made while reading it out that foreshadowed a central theme of WAM Vault 2022, as well as the market we find ourselves in:

 "Our views on the market and specific companies are dynamic and - it's written here 'can change daily'...it can probably change minute-by-minute (at the moment)."

What will happen to the market? That is the trillion-dollar question at the moment. Wilson pointed out that no one truly knows, but we are seeing a reversal of the relative prosperity seen over the past couple of decades. 

"We are now in a different phase, with inflation and interest rates going up. To me, it's going to be a more difficult period."

An investor after a previous presentation summed it up perfectly with the following accusation:

"Geez Geoff, you sounded pretty bearish"

But experience maketh the man, and in this case, Wilson has carried "the scars of '87 and the GFC" with him. Ultimately he is following a long held philosophy where he "plans for the worst and hopes for the best."

Investors also heard from WAM's Lead Portfolio Managers on markets and how that links to their strategies. Catriona Burns sees the current dip in markets as a long-overdue "reset," opening up an exciting 6 months ahead for those that stay invested. Dania Zinurova is similarly confident for the upcoming year, with the prospect of cycling mature capital into exciting new alternative assets on the horizon.

The wire also features an insight from Future Generation. We hear from Jun Bei Liu, a manager involved in this charitable endeavour. She shares how she is approaching markets as well as 2 of her favourite stock picks. 

Speakers covered:

• Geoff Wilson AO - Wilson Asset Management
• Catriona Burns - WAM Global (ASX: WGB)
• Dania Zinurova - WAM Alternatives (ASX: WMA)
• Jun Bei Liu - Tribecca Alpha Plus Fund

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WAM Global sees market crash as a 'reset' opportunity

Catriona Burns is charged with managing WAM's global strategy out of their New York office.  "Messy" is the word she used to describe global equity markets at the moment, and this would be an understatement. With COVID-19 hanging around, there have been continual issues with the fragility of supply chains, the Ukraine conflict and endless 0-COVID policies in China. 

Interest rates have been a hot topic too, with an ongoing period of lowering rates leading to "an enormous divergence in what sectors have worked, and which haven't."

Burns remarks that while this accommodative policy has been positive for markets, this "era of free money" has been the core driver of enormous escalation in asset prices - whether that is equities, house prices, crypto and so on. Accordingly, a market reset could actually be a positive.

"What we are seeing in terms of interest rates going up is actually really healthy for asset prices that are totally inflated on the basis of not very much. I am actually very positive in that we are seeing a reset in some of these insane valuations."

A perfect example of this recent exuberance is Snapchat (NASDAQ: SNAP). The company's share price has fallen approximately 40% this week, yet still trades on "250 times earnings. It could halve again and again, and you still would struggle to justify the valuation." 

This market-wide rerating has shifted the focus of investors back towards reasonable valuations and the durability of a company's earnings. This renewed emphasis is healthy, in the eyes of Burns, and opens a set of new opportunities.

"None of us like seeing markets go down - that is painful for all. But in terms of the opportunities that we are going see over the next 6 months compared to the past 5 years, its going to be very exciting. 

Exciting companies

A common theme of stock-picking at the moment is finding companies that can withstand the seemingly endless headwinds. Whether that be labour inflation, energy price hikes, or supply chain disruptions, Burns is committed to finding companies that can still perform in this operating environment. 

"It's about making sure you are in businesses with pricing power. If costs are going up, they are able to push it on to the end customer. This leads to companies that may demonstrate market leading positions, or who have input cost components are actually really low."

An example of the type of company that exhibits this characteristic is market exchanges. In particular, she singles out Deutsche Boerse (ETR: DB1), owner of the Frankfurt Stock Exchange and Eurex (derivatives exchange).

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4 companies with the pricing power to combat inflation

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The thesis behind this company includes its favourable cost structure and earnings momentum.

• While there are high initial fixed costs (for technology infrastructure), once that is covered every incremental trade realises very high margins.
• Continued volatility in markets leads to more trading volume, a positive for the company as they take a clip on every trade.
• They benefit from the structural shift of more fixed income and derivatives trading moving from off-market to on-exchange transactions.  
• Ability to take ownership over their prices, as opposed to being a price-taker. 

In terms of broader thematics, WAM Global has a focus on a number of globally imperative trends including the following two:

• Health & wellness: Focused on the 'picks and shovels' of this sector as opposed to taking bets on biotech trials and approvals. Favourite companies include Avantor (NYSE: AVTR) and Thermo Fisher Scientific (NYSE: TMO).
• Automation: Labour risk is a massive global issue at the moment, and businesses are trying to remove the pressure of such costs involved. Favourite companies include Zebra Technologies (NASDAQ: ZBRA) and Concentrix (Nasdaq: CNXC).

The unique opportunities of WAM Alternative Assets 

The Dania Zinurova-managed LIC came under the spotlight, given its unique investment approach and current discount to NTA. Trading at 87 cents on the dollar, Wilson believes it is one of the most interesting "value" opportunities on the market.  

WMA is currently the only LIC that provides retail investors with access to alternative assets on the market. This has led to Zinurova labelling it as the fund that "democratises alternative investing."

Its mandate is quite broad, giving it an extensive investible universe to uncover value. It has current holdings across:

• Real estate
• Private equity
• Infrastructure
• Real assets (such as water rights, agriculture) 

The portfolio currently holds 26 investments, with contrasting risk-return characteristics that cover risk mitigation and income as well as capital appreciation.  

In terms of the future outlook, the portfolio is focused on understanding the macroeconomic environment, with an emphasis towards 4 themes:

• Ageing population
• Digitisation
• Increasing demand for food
• Climate 

Over the coming 12 months, around 60% of the portfolio is set to mature. All exits to date have happened at "over carrying value of the investments", and Zinurova is expecting this to continue over the next 12 months. As for what comes next:

"Thinking about reinvesting this (realised) capital, the current time is a really good period for alternative assets. The key is quality, and following our thematic trends."

Helping Future Generations with future market winners 

The webinar concluded with a discussion on Future Generation (ASX: FGG & ASX: FGX), the Geoff Wilson founded LICs that combine the investment power of the industry's finest. This vehicle collects no management fees, instead donating 1% of NAV to charity each year. Les Nadine Lutherborrow, CEO of Youth Off The Streets, shared the impact of Future Generation's donations.

Also featured on the panel was Jun Bei Liu, Portfolio Manager at Tribeca's Alpha Plus Fund. She shared her view on the market and 2 favourite stock picks. 

"A lot of investors in the market are short-term focused at the moment...Things do look a little bit tough, but we have gone through a tremendous amount of growth in the last couple of years because of stimulus.

Despite all of the concerns around (you guessed it), inflation, supply chains and reopenings, Liu believes we are almost at the bottom

"A lot of the bad news in markets has been priced in. As an investor focused on the long term, this is an amazing opportunity to buy sold off companies. Our market outlook is very positive - we think the australian share market looks very good. 

As for what her favourite stock picks are at the moment? Amongst all of them, two local icons stand out:

CSL (ASX: CSL): As one of Australia's biggest success stories, CSL continues to be a market leader in pharmaceuticals. It has sustained double-digit growth for decades, and this is showing no sign of slowing. In the current environment, there has been a lot of market nervousness and the resultant "tunnel vision" triggered a sell-off of 20-25% in January. 

But if you are looking for a company that will continue to grow earnings at double-digit percentages, regardless of the macroeconomic environment, then CSL could be a compelling opportunity at an incredibly cheap price.

Xero (ASX: XRO): Another market leader, Xero's accounting software provides a wonderful platform with proven execution. They have managed to replicate their NZ success in Australia and Britain, becoming a dominant player in both these markets. They have recently expanded into the United States, and Liu is confident in its ability to continue its run of success. 

It is a business that will undoubtedly be larger in the next 5 years - you aren't buying today's earnings, Liu emphasies. 

"They have shown you they can replicate their business model in NZ, in Australia in the US - it could be global dominance!" 

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For additional webinar coverage check out Glenn Freeman's wire:

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Why Geoff Wilson is optimistic despite scars of past downturns

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