Why Platinum is short US tech stocks and long China
According to Andrew Clifford, CEO and Co-Chief Investment Officer of Platinum Asset Management, there's one variable that matters more than any other in stock markets. That variable is interest rates.
Interest rates can't get much lower than current levels, and, until recently, central banks have been pushing rate hike expectations years out into the future. But that narrative has changed abruptly, and market participants are scrambling to dial up the speed and quantum of rate hikes in their forecasts.
In a note sent to Platinum's investors, Clifford said he sensed a 'regime change' was on the cards and that January could be a sneak preview for what lies ahead in 2022.
Platinum's International Fund delivered a positive return of 3.6% (C Class after fees and costs) in January, compared to the MSCI AC World Net Index that fell - 1.9%.
If a regime change means more outperformance, it would be welcome news for Platinum Asset Management and their investors who have weathered a long testing time for Value investors.
Short US tech stocks and long China
The significance of this regime change has been well articulated. Low-interest rates have been a powerful tailwind for a long time, especially for the valuations of defensive and growth companies.
Every bull market has two things in common, according to Clifford. Firstly, it has a great story, which is a true story. In the case of the current market, we've seen some unique companies emerge in the US tech sector. The second ingredient is easy monetary conditions.
He says that bull markets die with higher interest rates, and then the underlying fundamentals of companies get questioned.
From a positioning standpoint, Platinum's International Fund has a near net-zero exposure to US equities, where the manager also has its largest short position. On the long side, China represents the fund's single largest country exposure at nearly 20% (Source: Platinum report).
I recently had the opportunity to sit down with Andrew Clifford to explore his views on the investment backdrop, why he is short US equities and long China and two high-conviction ideas in the Platinum International Fund's portfolio.
You can watch or listen to the interview by clicking on the relevant player below.
Topics and time stamps
- 1:12 - Asymmetric risks in markets at the start of 2022
- 2:49 – Why is a tightening interest rate cycle on the cards?
- 4:54 – What does a regime change for markets mean?
- 8:07 – What happens when perfection gets questioned?
- 12:56 – Could this be a bump in the road rather than a turning point for US tech stocks
- 16:02 – Why Platinum still believes China is a compelling long-term opportunity
- 19:30 – How Andrew Clifford challenges his long held own views on China?
- 21:58 – The investment themes that Platinum Asset Management is backing in 2022
- 27:48 – Two high-conviction global stock ideas from the Platinum Asset Management portfolio
*Interview recorded on 16/02/2022
James Marlay: Hi, there Livewire readers and viewers. It's James Marley here, co-founder of Livewire Markets, and I'm really excited about the interview that I'm about to let you in on today. I'm joined by Andrew Clifford, who's the CEO and CIO at Platinum Asset Management. Now, it's been nearly three and a half years since I last spoke with Andrew. A lot's changed in that time. One thing that hasn't changed is my suit, which is a bit embarrassing, but it didn't get much use during lockdown. But we're going to be talking with Andrew today about the bigger market backdrop, what's been happening in US tech stocks, and particularly why Platinum has got a short exposure in that part of the market. We're also going to test his thesis on a long-held view that China represents one of the opportunities of a lifetime. So, Andrew, great to see you again, welcome back.
Andrew Clifford: Good to be here, James.
James Marlay: Drawing on some comments from a report you’ve put out to your investors, you talked about the idea that risks in markets were asymmetric as we entered 2022. What are some quantifiable examples that have led you to that conclusion?
Andrew Clifford: Interest rates matters more than any other variable in stock markets. It's pretty hard for rates to go down. The central banks have been telling us for the last year that rate rises are far in the distance, 2024, 2025, and then it's 2023, and now we're faced with the reality that rates are going to go up this year. And starting soon in the US, we're talking about as many as seven or eight rate hikes this year. So, potentially 2% type rates. This is a fundamental change to the environment we've been in.
We saw at the end of 2018, that particularly the more highly valued end of the market doesn't react well with rate hikes. So, that's the most obvious thing. In terms of really trying to quantify it, I think there are a lot of things out there, in terms of whether it's valuations, retail activity in the market, that are all classic indicators that we've had a pretty good bull market here. Combined with those rate hikes, I think we are on the verge of a very different environment, for at least the foreseeable future.
James Marlay: In 2018, there was a backflip on the tightening cycle. Do you think that there's a case where central banks get the wobbles again?
Andrew Clifford: It's quite different this time, inflation there was sticking up a little bit, labour markets were a little tight. We're talking about inflation at 7%, we're talking about the tightest labour markets we've seen. The rough numbers again in the US, 10 million jobs are out there, seven million people looking for a job, wages accelerating.
The thing about inflation is that, because we haven't really lived this now for a long time, is that it does need to be dealt with because if from nothing else, from a political point of view, it's very damaging to governments because simply the impact on affordability of the household budget becomes a very big deal. We're already seeing that. The best example is in the US, where you have The White House saying, we need to crunch inflation.
Given the level of inflation, the level of momentum in the economy, I don't think as we had back then, asset markets were falling, we get the Fed put, it may be there, but I think we're a long, long way from that. But the alternative scenario is that consumer confidence, as a result of COVID, and as a result of inflation, is at very low levels. We're on the precipice of a big consumer retrenchment, in which case maybe those inflationary pressures recede more quickly than expected, and rates don't turn out to be quite the concern that I have.
James Marlay: In January the Platinum portfolio enjoyed a really strong lift and strong outperformance against the benchmark. In your commentary, you questioned if it could be a sneak peek for what the rest of 2022 might hold, and be a regime change for markets. What do you mean by a regime change, and what needs to happen for this to play out?
Andrew Clifford: We've had 40 years of falling inflation and 40 years of falling interest rates. Now, of course, over that time there have been periods of rate hike cycles. When you look at the way inflation takes hold, it's not easy to get rid of. So, now, there's a lot of analysis about whether inflation is transitory. Is it just going to go away, because markets, supply chain issues go away and whatever? I think that is all a bit backward-looking. Supply chains will get sorted out. Individual things that are in short supply will be delivered. Price pressures there will ease off, but some prices don't come back. Wages is the most notable one. So, all of this stuff gets banked into inflation.
But if you look forward and think of yourself as a businessperson, I've had struggles getting supplies. When I get them, the prices are going up, they're squeezing my margins. I can borrow money very cheaply. What are you going to do? You're going to borrow and get those additional inventories or supplies in. I'm just using an example. Or maybe you're going to bring forward that new piece of plant and equipment before the suppliers put prices up.
For an individual, it might be better to get into a new home, get a car before price hikes come through. This is what becomes the perpetual inflation machine that is feeding on itself. Or even if you've just got cash, perhaps you’d better go and stock up the trolley this week with some more toilet paper before the price rise comes through. So, it's really a question of how this year unfolds. Is the psychology of inflation taking hold? It can take hold because the cost of money is so low. I can actually borrow a bit of money and get in front of those price rises. That's why rates ultimately, potentially need to go up. It just becomes a never-ending cycle. So, you could end up in a period here where inflation becomes not just persistent in the next year or two, but as we saw in the seventies, it took a very long period of time for central banks to get on top of it.
I'm not suggesting we're going to end up with the 20% rates of 1980, but we could have much higher interest rates and completely break away from the near-zero interest rate environment we've been in. So, that's the potential regime change, and it's important for equity markets because that has been a tailwind for equities for a long time, particularly for the last decade of ever high evaluations on the growth and defensive companies.
James Marlay: Again quoting from your report, you said that in January, investors got a glimpse of what happens when perfection gets questioned, and you're referring to technology stocks. In rough numbers, the NASDAQ’s down about 13% from its height towards the back end of 2021, but it's still up 700% over the past decade. I note that Platinum has a short exposure in US tech, what are some of the frailties that you think are being exposed?
Andrew Clifford: Every bull market in history has two things in common. One, it has a great story, and that great story is predominantly a true story. It's not just a made-up one, it's real. It has easy monetary conditions, lots of credit available, low interest rates. These are the things that bull markets are built on.
They die, firstly, normally, with the loss of that liquidity and higher interest rates. But the other thing is that people start looking more closely at the businesses they own, and they start to see that maybe not all is perfection, because all those cognitive biases we at Platinum talk about, is that the stock price itself is reinforcing. If the stock price has gone up, then it must be good. But it may not be... The more the price goes up, the more beautiful the company becomes.
We’ve seen some interesting things coming through in results recently. So, I'll give three examples here. So, one, Meta or Facebook, their results were great. If you just said, here's a company, these are the numbers they produced today. Good, you'd go, pretty fantastic. But they start to speak about issues they have in their business, one with the changes with Apple and their access to data, therefore targeting their advertising. The other one is the rise of TikTok as another social media platform that's getting a lot of eyeballs. So, immediately in this environment where we start the question, we go, bang. The stocks have a massive fall. It's an interesting one as well because we've seen actually that play out by the way, in China, just as an aside, where when ByteDance or TikTok, the same owner, had huge success in China, Weibo, their advertising revenues went from growing at 75% at the start of the year to not growing at all.
And Netflix is a bit duller, but all of a sudden, all of the competition that's there, it's been there the whole time, but now we start to fear that, and fear the loss of subscriber growth.
But there's another interesting one that drew a different reaction, but which I think actually was the company that had a really poor result, which was Amazon. So, Amazon's really got two businesses. We know, obviously, e-commerce and Amazon Web Services. Now, Amazon Web Services, AWS, great business, great result, another 30% plus year, high returns on capital. Amazing. The eCommerce business over the last three years has doubled revenues, amazing. But their profits are flat. So, their profitability is half. Where people say, oh, what about the advertising business that is now part of Amazon? What about Amazon Prime and all the subscriber growth and that? Yeah. There's 60 odd billion dollars of revenue there. That hasn't helped them one bit in eCommerce.
If I just put those numbers in front of you and said, here's a company that has doubled revenues, profits are flat. You'd be going, well, there's something very wrong here. I'm very uncomfortable. Now, the story can go either way, I'm not saying it is a big problem. Maybe that will turn around here, but it's not really a picture you'd normally associate with a great deal of enthusiasm.
So, suddenly, we can look at things a little differently. Yet Amazon, because they put up prices on Amazon Prime, it's a three billion lift on a seven billion profit for the e-commerce, if nothing else happens, which is unlikely given what's happening with inflation, that's great. There will be many questioning the story once stock prices start to fall.
James Marlay: Can this just be a bump in the road rather than a turning point for some of these businesses? I guess the second point is really around how you at Platinum are accessing these frailties in perfection.
Andrew Clifford: This is the opportunity now, which is why, as an investor, through any point in the cycle you really want to have some cash because opportunities will arise. So, you'd expect us to be looking very carefully at some of the names that are being hit here. Of those three, we still have a small investment, in some of our funds, in Facebook. We're very interested in that. No strong conclusion here. The story around TikTok will be quite a problem for them, but in some of the smaller names there are things that are being thrown out and there is plenty of work being done to look at potential opportunities flowing out of that.
James Marlay: What about on the short side?
Andrew Clifford: There have been great opportunities that we've taken advantage of here in some of these very highly valued stocks. I'm talking about some of the really exciting concept stocks in EVs or clean energy or in tech. There are many of them that were trading at valuations of 30, 40 times revenue if they had revenue at all. Some are already down between 50% and 70%. Many of those will still fade and still be reasonable shorts. There are still many very highly valued stocks in tech. Also, people don't focus on this so much, but in Europe, a lot of the high valuation has been in some of the more steady growth stocks.
For example, the luxury goods companies out of Europe, which are lovely companies, but have seen their evaluations go from in the 30 times type multiples of earnings to 70, and now they've come down as well. But there's still shorts there. I think there are still shorts broadly in the market, because while we’re worrying about interest rates going up, and we are worried about the potential loss of liquidity, nothing's actually happened yet. Actually, liquidity is still pretty good.
James Marlay: Given what's transpired in China, why are you still convinced the country represents such a compelling investment opportunity?
Andrew Clifford: It’s a very dynamic market economy, whatever the front page of the papers is telling you. We have some extraordinary companies, and we have a government that has been very, very reform focused. So, I would put a lot of the changes that have come through in China that worry people, it's put in the context of a socialist or communist government being anti-business. Common prosperity is a theme in every political environment, it's what the Democrats are talking about in the US. I mean, we need to redistribute income. The last two years of COVID has been a great example of the benefit of redistributing income by providing benefits to lower income households. It's what that's all been about, and may well be an ongoing theme. I expect it to be an ongoing theme.
In China, many of the examples that are given of them being anti-business are actually just reform, and the same reform is being looked at here. So, the anti-monopoly movement, the crackdown on monopolistic behaviour by the likes of the big e-commerce companies, there are FTC, there are DOJ investigations going on in the US. We have our own investigations here in Australia. So, the beauty in China is that we've lived through that, we've seen the outcomes of it, and we're now on the other side of it.
So, it is this classic thing where there's so much uncertainty, but there are still these great businesses, and they will grow again. The economy has slowed down heavily, the one reform programme that really has hit the economy is around property. Again, we've written extensively about, there really isn't a property bubble here, but the government has acted early to deal with the amount of leverage used by property developers.
It's caused the problem. They're now trying to move beyond that. But I'd also say, the thing about China is that it is this uncertain more difficult environment for investors. It's not easy, but that becomes the opportunity. So, since we last spoke, I think we were probably in 23% or so in China, by the time last year came around we're down at 15%. We'd sold, we made great money out of a lot of stocks, sold them. Two of the ones that we're completely out of in our international fund, Ali Baba and Tencent, we're back in those today.
James Marlay: What level of exposure do you have to China now?
Andrew Clifford: We're back up around the 20% mark today.
James Marley: What work do you do to challenge your own conviction on the opportunity in China? Because it's clear that you're convinced and you've come around to the view and it's a long held view, so how do you get challenged on that view?
Andrew Clifford: This is a problem for all investors in any of their favoured ideas, whether it's a stock or a country or whatever. We all face that. That is confirmation bias, where everything you see, you see the upside in it.
Confirmation bias is very easy to see in other people. When I see and hear people talking about some of their beloved stocks that have taken a hit, I often say, "You're not incorporating the new news." At Platinum, we have this process of really challenging the idea that we're investing in. You've got the proponent of the idea. We sit around the table, and the idea, the discussion around it is to try and pull that idea apart.
For example, I've long been very comfortable with the idea that property is not a big problem for the country, but clearly with what we're going through last year, and the property having its first proper setback, but not that significant, Clay Smolinski, who's my other co-CIO, he took over that research and went from the ground up, and completely re-examined it and pulled it apart. While he's comfortable with it, he's probably not as enthusiastic as me, for the potential there in the stocks.
But here's the interesting thing, from the middle of last year when China's reforms were at the peak, and property was right in the centre of that, the two property stocks that we were buying at that point have both made us good money. Up 30 odd per cent since then. So, in spite of all of the fears and whatever, it had been well and truly put into the stock price back then.
James Marlay: What are some of the compelling themes that Platinum is exposed to today, and why do you like them?
Andrew Clifford: There are the e-commerce stories and the well-known ones are Tencent, Alibaba, that we've come back to, but also trip.com, which is their big online travel agent.
There's the property stocks and Ping An Insurance, which I've discussed at length previously. So, they're still there.
But travel is another big theme, because I have no doubt, as we move beyond the pandemic this year, there's going to be a boom in global travel. So, we have a variety of different companies as in Trip in China, but then we have Booking, which is the big global online travel agent. We have aerospace companies in India. We have the big Indigo Airlines, the low cost carrier there. So, there's a range of those.
Semiconductors as enablers of the tech boom, we still are very optimistic about. Semiconductors are a funny group because there are some that are in the crazy, huge valuation camp. Then there are others that have been left behind. There are still some really interesting businesses there.
Another one is autos, and we've been keen on autos for a while because clearly there's electrification, EVs happening. There are autonomous vehicles happening. But now we also have had a couple of bad years for auto sales leading up to the pandemic, this has been one really hard hit by shortages. So, we are going to have, I think, a significant boom in car sales.
Because first of all, we've got three years of very weak sales and the attraction of the new EVs, and also the autonomous features that will progressively come into cars over the next five years.
James Marley: Can you pitch me one or two high conviction ideas that are a good example of how you invest, and maybe not Ping An?
Andrew Clifford: The first one is ZTO. ZTO is a Chinese company. It is the FedEx or UPS. It's the express parcel delivery player in China. This has been a very, very competitive market, with five players making up 60% of the market alongside many other smaller companies. ZTO has progressively come out of this as the winner. They're one of two companies that have been profitable, their costs are much better, they've been taking huge share. Their parcel delivery growth rate, 40, 50% a year in recent times. They very quickly surpassed FedEx and UPS. They deliver more parcels than those two combined. It’s an incredibly well-run company. But the downside to this was, this was a brutally competitive market, the likes of Alibaba were helping fund everyone, so helping fund the competition.
So, while their volumes were up 50%, let's say, the typical revenue growth was only 30. So, they were marking time in their profits. A couple of things have happened. Clearly, Alibaba has backed away from funding it, and it's part of that competition regulation. The other thing that has happened, which we are seeing around the world, is that the way ZTO and others work is that the guy who does the final pick up and delivery is an individual contractor, like an Uber or a food delivery guy. In this squeeze of the industry, he's not getting paid. So, they've instituted minimum rates there, and that's really made it very difficult for the competition.
We think this company's just at the crest of where profits are really going to pick up. It's a very high-quality business. I know all the obsession about value and growth. We aren't getting this on a P of seven, it's on a high twenties type multiple, but we think this can grow for very, very many years, as what will be one of a small number, possibly two or three, very large express delivery companies in China. We've been there for a while, been there for three, four years. We've made some money. We've doubled our money on the initial purchases, but I just think this thing is set up for an extraordinary run, given the change in the pricing environment.
The other is MinebeaMitsumi. This company makes miniature ball bearings, with an almost global monopoly in this, but their great expertise is producing vast volumes of very small components. The company today is one of the great M&A stories, where they are going around buying other really fine Japanese companies, for example, Mitsumi, with which they now share the name. They're known for the product that is in many of our hands because they created the backlight for the Apple phone. They have fantastic product development at Mitsumi, but aren’t very good in terms of cost of delivery. Minebea is known for automation, so they've bought this company and then just turned it around in terms of profitability. They're now repeating this.
Japan has a huge industrial sector, which makes great products, but it's not particularly profitable. So, this is a company that now has a very broad industrial base, autos, phones, electronics, they're in an awful lot of areas.
We think it will grow, both through the organic part of its business and M&A, for a long time to come. You can buy this one at 15 times, and we've been there for a while again. We don't have to go off buying tech stocks on 30 times revenue, or even the big favourites when they're on 35 times earnings, because there are just very fine companies out there that are profitable and growing, and you can buy at very attractive valuations.
James Marlay: As a bit of fun, we’re talking here about travelling internationally. What has been a domestic trip or a visit that was really memorable over the past few years? Where did you go? What did you love about it?
Andrew Clifford: Well, my wife and I have had a long association with an organisation called Australian Wildlife Conservancy. It buys or manages properties to protect endangered Australian species. Our favourite thing each year is to go and visit some of the properties, and we managed each year to sneak one in before all the other trips got cancelled. So, last year we went up to a property Belo River, it's a pastoral station. It's amazing country, but also you've got all the AWC ecologists there, so we get to go and hang out with them. You get to see them doing their work, such as the trapping work they do for their research. It's very, very cool. Even on the pastoral station, you get to visit with the Belo River people. There's a lot of history and a lot of fun. So, we tend to do those trips every year.
We also did a great walking trip, the Three Capes trip in Tasmania, which is a magnificent three-day walk. It’s definitely worth doing if you're a walker.
James Marlay: Well, Andrew, thank you for talking us through how you think about investment markets today. It's been great to catch up.
For all our viewers out there, I hope you enjoyed that chat with Andrew. Remember, we're putting fresh videos up on the Livewire YouTube channel all the time, so subscribe, give us a like, and leave a comment if you enjoyed it. Thanks very much for watching.
Andrew Clifford has spent a career perfecting the craft of uncovering overlooked gems in the stock market. You can get all his latest insights by clicking on his profile page below.
2 stocks mentioned
1 fund mentioned
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Livewire is Australia’s #1 website for expert investment analysis. We work with leading investment professionals to deliver curated content that helps investors make confident and informed decisions. Safe investing and thanks for reading Livewire.
Livewire is Australia’s #1 website for expert investment analysis. We work with leading investment professionals to deliver curated content that helps investors make confident and informed decisions. Safe investing and thanks for reading Livewire.