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Welcome to Firstlinks Edition 564 with weekend update

  •   13 June 2024
  • 4

The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.

Last month, the Morningstar Investor Conference in Sydney hosted one of the most fascinating panel discussions that I’ve attended in years. Called “Inflation Confrontation – Dual Perspectives”, the panel featured Hyperion Asset Management’s Lead Portfolio Manager, Jason Orthman, and Schroders Head of Australian Equities, Martin Conlon.

The discussion turned out to be less about inflation and more about two contrasting styles of investing. For context, Hyperion is an Australian and global equities manager that’s found huge success with its growth-style of investing over the past 15 years. Meanwhile, Schroders is primarily known as the investment manager to the ultra-rich – conservative, hard-nosed, principally fundamental and value-driven.

The way Orthman and Conlon dress and talk epitomize the differing investment styles. Orthman sounds and looks like someone working at Microsoft or Google might. He’s optimistic, confident that innovation can change the world and confident that Hyperion can capture many of those changes with its investments.

Conlon is old school. He’s more pessimistic about the future, less of a believer in technology transforming the world, and more concerned with the here and now of things like industry supply and demand, and company valuations.

The Hyperion view of the world

Despite being a bottom-up investor, Orthman says that Hyperion does have a macroeconomic outlook which it uses to frame the future. He believes that after the financial crisis, the world became a low growth, low interest rate and low inflation environment. The pandemic disrupted that, though deflationary forces including ageing demographics, growing tech automation, weaker secular demand growth and high debt levels, mean a return to that pre-Covid low growth environment seems likely. Interestingly, he infers that we could be headed back to sub-2% interest rates too. Obviously, that would be favourable for long duration assets, like the growth and tech companies that Hyperion prefers.

Orthman explains that his firm is really trying the capture the tail of the market. In Australia, just 1% of companies, or 20-30 of them, have accounted for all the gains of the ASX. In the US, that figure is 4%. Hyperion tries to find these wealth creating companies.

In Australia, the wealth creators of the past were the likes of BHP and the major banks. Now, and in the future, Orthman says that’s likely to change. His firm has little interest in investing in miners or the banks, which in aggregate comprise more than half of the ASX 300.

Instead, it looks elsewhere. Hyperion likes to own monopolies – disruptors which are almost creating industries unto themselves. It’s famously been early investors in companies such as WiseTech (ASX:WTC), REA (ASX:REA), and Afterpay.

One of its biggest investments now is Block (ASX:SQ2). Afterpay got rolled into Square which then became Block. And Afterpay is about 10% of Block’s business.

Orthman acknowledges that Block is a controversial stock though he thinks it’s misunderstood, as WiseTech and REA were in their formative years. About 50% of Block’s earnings come from its Cash app. It’s a peer-to-peer product that’s gone from having the sixth largest market share in the US to number one. The product allows you to do things such as easily transferring money to a friend. Block has offered this as a free service but has added services on top, like being able to invest in Bitcoin, owning fractional interests in shares, and so on. Block also has another business with its well-known payments and point of sales system for small businesses.

Orthman believes that the younger generation are often starting off with the cash apps and not with banks, and that gives Block the potential to disrupt the traditional banking system. He says recent earnings issues at the company should be behind Block as it remains a dominant business, yet it lost control of its cost base, which is now being addressed. That should result in much higher earnings over the next few years.

The Schroders view of the world

Schroders has a very different take on markets. Conlon thinks inflation could remain a problem. He says deglobalization, remilitarization, green energy, demographics resulting in increased government spend to support the ageing, is likely to lead to more inflationary pressure.

Conlon says prices of markets are high versus history, driven by growth stocks, especially in tech. He expects a shakeout, and valuation mean reversion, at some point.

He believes long duration stocks aren’t without risk. They can operate in cyclical industries rather than be structural growth stories. Also, he finds it hard to look 10 or 20 years ahead to figure out what a company’s earnings might be then.

Conlon’s prefers to look at sectors and stocks that investors are running from, rather than towards. He cites resource stocks as attractive given his inflation outlook. He also favours pathology and radiology shares. He says they are not only solid businesses, but may also benefit from artificial intelligence potentially replacing people performing scans etc. Conlon also likes that they are preventative healthcare businesses, which are less reliant on government spending than companies that treat people after they become ill.

Both may be right

Hyperion and Schroders are both fabulous investment managers. Right now, growth is the flavour of the month. If it was a kid in a classroom, it would be the cool, hip one that’s endlessly attracting attention and followers. Meanwhile, the value investor is akin to the nerdy outcast sitting at the back of the classroom, envious of the attention the cool kid is getting and waiting for them to soon trip up!

There are obvious risks to Hyperion’s view of the world. Short-term tech valuations do look excessive. In the 32 trading days to the end of last week, Nvidia (NYSE:NVDA) gained more than US$1 trillion in market value – a six week gain that’s greater than the total market capitalisation of Berkshire Hathaway (NYSE:BRKA), which Warren Buffett spent six decades building. That seems far from normal.

There’s also the risk that we don’t return to the low inflation and interest rate world that Hyperion envisages. If it doesn’t happen, the valuations of long duration assets should come under pressure.

There are question marks about how revolutionary AI will be too. Yes, it will almost certainly help with productivity and cut costs, but will it have the effect that the Internet had? It seems highly doubtful at this point.

While Martin Conlon may prove right in the near term, the long-term might be another matter. There are a few issues that value investors must grapple with, and it’s not just recent underperformance. First, technology is here to stay and understanding it will be critical to evaluating all companies, not just those in the tech sector. In my experience, a lot of value investors are sceptical of tech, if not tech averse, driven by the experience of large drawdowns in tech stocks in 2000, 2008, and 2022. Yet, a thorough knowledge of technology will be critical to future stock picking.

Second, younger generations will be the customers of tomorrow’s businesses and understanding them will be crucial as well. For instance, they seem to value convenience and technology that enables this. It’s why Block’s Cash App is proving popular. It’s why online investment platforms are taking off. It’s why ETFs and active ETFs are attracting money at the expense of managed funds. And the list goes on.

Disruption of traditional industries because of our tech-savvy younger generations is likely to continue and grow, whether value investors like it or not.

James Gruber

In this week's edition...

Last month, Meg Heffron wrote of how the new $3 million super tax is coming whether we're ready for it or not. The article garnered dozens of questions, many of them about the mechanics of how the tax will work in practice. Meg attempts to answer some of those questions in this followup piece.

Recently, Graham Hand penned an article on how life expectancy tables can be deceptive, as the data for children born today is quite different from those born decades ago. Ashley Owen offers a different perspective. He says preparing for retirement based on your 'median' life expectancy age is an error, as it means a real possibility of living a lot longer than you might have thought. You need to plan accordingly.  

We welcome Peter Thornhill back, this time on a different topic to his usual fare. Peter writes of how he's used debt recycling - replacing or 'recycling' the debt in your family home with tax-deductible debt from investments - to build his personal wealth. He says that while some people see the strategy as risky, there are ways to reduce the risk and reap the rewards.

All our lives, we're told to 'save, save, save'. And now we're being told by governments that as we retire, we should start to 'spend, spend, spend'. But it's not easy to switch from a savings mindset to a spending one. Samantha Lamas explores the psychological barriers to making the shift and what can be done about them so you can make the most of your retirement. 

There's been a surge of interest in overseas equities as the Australian market lags. VanEck's Cameron McCormack investigates various approaches to determine the best allocation of international equities within a long-term investment portfolio.

Bonds have got a bad rap after four years in the doldrums. UniSuper's David Colosimo believes that the recent downdraft means future prospects appear brighter for high quality bonds

The Ukraine war has brought Russia and China closer together. They seem intent on challenging the West and reshaping global power dynamics, despite their complex historical relationship and differing long-term interests. John West looks at the implications of the partnership for the US and its allies, including Australia. 

Two extra articles from Morningstar for the weekend. Johannes Faul shares his thoughts on the Guzman y Gomez IPO and Joseph Taylor calls out 3 high P/E shares that Morningstar think offer good value.

Lastly, in this week's whitepaper, Schroders examines why small caps have underperformed in Australia for a long period of time, and why that underperformance may continue moving forward.


Weekend market update

On Friday in the US, another round of mega-cap dominance saw the Nasdaq 100 higher by 0.5% while the S&P 500 settling flat and small-cap were hammered to the tune of 1.6% on the Russell 2000, pushing that gauge to six-week lows. Treasurys continued their brisk rally as the long bond dove a further six basis points to 4.34%, its lowest since late March, while WTI crude again remained at US$78 a barrel, gold rallied to US$2,331 per ounce and bitcoin slipped to US$65,600. The VIX bounced a bit to 12.5. 

From AAP Netdesk:

The local share market on Friday finished modestly lower, losing ground for a third day out of the past four sessions - and for a third week out of the four weeks. The benchmark S&P/ASX200 index on Friday finished 25.4 points, or 0.33%, lower at 7,724.3, giving back the bulk of Thursday's gains. For the week, the ASX200 lost 135.7 points, or 1.73%. The broader All Ordinaries on Friday finished down 27.7 points, or 0.35%, at 7,974.8.

Eight of the ASX's 11 sectors finished lower on Friday, with property flat and consumer discretionary and health care slightly higher.

The telecommunications sector was the biggest loser, falling 1.1% as owner CAR Group dropped 3% and Seek dipped 1.3%.

In the heavyweight mining sector, goldminers saw red as Evolution slipped 2.2%, Northern Star slid 2% and mid-tier miner Resolute dropped 7.3%. Elsewhere in the sector, Rio Tinto fell 0.4% to $120.20, Fortescue dropped 0.9% to $23.20 and BHP dipped 0.3% to $43.09.

The big four banks were mostly slightly lower, with Westpac dipping 0.3% to $26.79 and ANZ and CBA both edging 0.1% lower, at $27.75 and $125.31. NAB was the outlier, basically flat at $35.02.

Telix Pharmaceuticals rose 0.9% to a two-week low of $16.61 after the Melbourne-based radiopharmaceutical company cancelled a proposed US initial public offering it had spent five months and "incredibly long hours" preparing for. The Nasdaq listing was not needed to raise capital and, in the end, would have required discounts that were not aligned to Telix's duty to existing shareholders, the company said.

Tabcorp gained 10.1% to a three-week high of 65.5c after the NSW government said it would review Tabcorp's proposal to increase taxes on corporate bookmakers like Sportsbet and Ladbrokes, whom Tabcorp say benefit from an uneven playing field.

The RBA meets on Tuesday, with more than 30 economists and other experts polled by all predicting the central bank will leave rates unchanged.

Curated by James Gruber and Leisa Bell

Latest updates

PDF version of Firstlinks Newsletter

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Monthly Bond and Hybrid updates from ASX

Listed Investment Company (LIC) Indicative NTA Report from Bell Potter

LIC (LMI) Monthly Review from Independent Investment Research

Monthly Investment Products update from ASX

Plus updates and announcements on the Sponsor Noticeboard on our website


June 16, 2024

Employment is at almost full capacity in the economy while productivity is virtually nil. Add in ever increasing energy costs with no respite on the horizon as reliable energy is phased out with no adequate replacement, which will suppress manufacturing activity, and it's hard to see a return to a low inflation environment any time soon.

June 14, 2024

Wouldn't 1% of Australian companies be 20-30, not 200-300?

James Gruber
June 14, 2024

Hi Craig, you are right. In Australia, it's 20-30, in the US, 200-300, according to Orthman. I believe he's referencing work from Henrik Bessimbinder. I've corrected it in the article now.

June 14, 2024

Block ( afterpay) was something I looked at 5 or 6 years ago.The price had rocketed from nowhere to ~ $14.I thought it was just a computer version of the old lay by that operated for a long time.Put the goods behind the counter and pay slowly then collect them 6 ? weeks later after the final payment .

Flavour of the month,price rocketing up,I think Graham made $50K on it taking the chance that wasn't for me.The flavour of the month and the " bubble" was enough to put me off. I think it got to ~ $160 and the takeover came in.Since then I think it has lost 50%.It might be 5 more years until the picture becomes clearer.

I have infinite patience and can wait a long time for things to happen. Even so,I'm not that patient.Perhaps a 10 year ride to nothing,or perhaps a 10 year ride and then the rocket takes off .That one is not for me.


Leave a Comment:



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