TOL - 18th Sep, 2023
"There isn't an Aussie fund manager who's not buying this stock right now"
Passive investing has had its time in the sun. It's a stock picker's market now
When the going gets tough, the active hedge fund managers get going.
Four of them do, at least.
The second panel session of Livewire Live 2023, titled "Opportunities beyond "houses and holes" on the ASX", saw four of Australia's leading hedge fund managers discuss the pockets of opportunity they can see in an otherwise challenged market.
That included Philip King from Regal Funds Management, Mark Landau from L1 Capital, Tim Carleton from Auscap Asset Management, and Matt Williams from Airlie Funds Management.
"When there’s too much money in passive, the opportunities arrive for active managers," says King.
Where are they seeing those opportunities? Not in China, at least in the short term. You can forget about defensives too.
Resources are a different story, with current prices for iron ore a good bellwether for the sector writ large.
But as the namesake of the session implied, it's not all about the holes. While Australia's economy is dominated by property and mining, there are plenty of opportunities across a wide swathe of sectors, from retail to tech and healthcare.
The iron ore price is a strange, yet bullish, signal
Iron ore's strength (it's currently trading at around US$120) amid a slowing China and teetering global economy has left many analysts scratching their heads.
“We are flabbergasted that [iron ore] is holding up because steel consumption on a per-person basis peaked in 2020," says Carleton.
"And we expect that it’s at the start of a very, very long descent."
Of course the outlook for China dovetails the outlook for iron ore because of how much it consumes for steel production, as the graph below shows.
King's deeply concerned about China; particularly its property market, which he calls "a bigger bubble than Bitcoin." Yet he doesn't think the Middle Kingdom will go the deflationary way of Japan.
"There's a lot of differences between China today and Japan of 30 years ago. We just haven't seen the bubble in Chinese stocks that we saw in Japanese stocks, and a lot of the debt."
King suggests the strong iron ore price is a bullish signal as it is a net positive for commodities.
"It's very bullish for all commodities that in a rising inflation environment, with rising cost curves, commodities are holding up well despite challenges in China," notes King.
“We actually think there’s a career-defining opportunity in resources at the moment."
The index is going nowhere, but there are pockets of opportunity
King, Williams and Landau all struck a bearish tone on the outlook for markets as a whole.
Landau didn't mince his words. "It's going nowhere".
"It certainly does get tougher from here, both in the economy and probably the market," agrees Williams.
Interest rate costs, Williams adds, will continue to put downward pressure on company bottom lines.
King roundly agrees, and is uneasy about rising long-term bond yields in the US, which look set to "break out" and depress risk assets. "It makes me cautious."
Yet, there's always one in a group. A dissenting voice that goes it alone.
That voice was Tim Carleton.
"If you look at cyclically adjusted P/Es, we're about in line with the 40-year average," he said.
"So that suggests that despite whatever happens over the next two months, 12 months or 24 months, the long-term outlook is good."
Stable democracy, rule of law, private property ownership, enormous resource base, growing population, and proximity to Asia – they're all factors Carleton believes point to a strong outlook for the Aussie economy and market.
So, that's the market in aggregate.
Disaggregated is a different story...
Sectors and stocks to avoid
To begin with, defensives are failing to live up to their name.
"Even though the market overall looks fairly valued, defensive stocks look incredibly crowded and expensive," says Landau.
"Staples and healthcare; you can understand why people want to hide in these stocks, because they don't have as much macro sensitivity. But we feel they're very crowded and trading above historical averages," said Landau.
Landau and King are both steering clear of the banks.
"The best years of the banks were the last 30 years," says Landau.
"Over that period, interest rates have fallen to zero, which has inflated property values and debt. Bad debts have fallen from elevated levels to basically zero. The cost out story is largely over and now they're struggling to achieve cost growth."
Bull theses
Landau favours low PE stocks, "which we think look very attractive, are trading at the 7th percentile, in terms of how expensive they are against their 10-year average."
"Low P/E stocks have almost never traded this cheaply."
Among financials, Landau reckons it's the right time to shift into insurers, where you're seeing much stronger top-line growth and margin expansion.
"If you look at a stock like QBE Insurance Group (ASX: QBE), trading on a PE of 8.5 times, we think you'll be getting a 6% yield, and that stacks up really well compared to, say, a Commonwealth Bank (ASX: CBA) which is on 17 times and giving you a much lower dividend yield."
For King, "the real opportunity as we see it is in the small-cap sector... because they lag the large caps and they've still got some catchup to play."
King's concentrated on global leaders and resources.
"Global leaders have a huge addressable market, they're moving from losses to profits, the profits aren't so affected by a weakening economy, and the valuations aren't so affected by rising bond yields."
"We think we can easily see 5-10 times over the next few years."
Mr. King also flagged Cettire (ASX: CTT), FINEOS (ASX: FCL), Life360 (ASX: 360), Audinate (ASX: AD8) and Chrysos (ASX: C79) among his bull calls.
Carleton backed up King on the value of market leaders, including his long-term favourite Nick Scali (ASX: NCK). He flagged another name that's currently going for a steal - Resmed (ASX: RMD).
“We don’t think there’s an Aussie fund manager who’s not buying Resmed. It’s not often you get to buy a company of that quality and of that size that’s off 30%,” agreed Williams, who himself is backing James Hardie (ASX: JHX), News Corp (ASX: NWS) and EBOS (ASX: EBO).
Watch the full session here
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David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.
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David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.
Expertise
David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.
Expertise
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