Market Update - August 2017

By
Andrew Clifford,
User

Andrew co-founded Platinum in 1994 as the Deputy Chief Investment Officer, having worked alongside Kerr for several years at Bankers Trust and perfecting the craft of.. More

28 Aug 2017

Platinum’s CIO, Andrew Clifford, provides an update on global markets and how Platinum is positioned for the current investment environment.

A year ago, we talked about markets resembling a coiled spring.  And today, we are starting to really see the benefit from that spring uncoiling!  The crowded trades have proved, as they always do, not to be the best places to have been.

Since Britain voted, by the slimmest of margins, to sever its relationship with its biggest trading partner, the idea has percolated that what was, is not, what will be.  Bond yields hit lows, as it seemed both that policy settings were not helping median voters, and as it became increasingly clear that we are seeing synchronous global growth.

Since that time cyclical stocks have outperformed so called defensive stocks by around 25%.1  We sounded like a broken record telling people that buying no-growth companies on high P/E multiples did not make sense, even if they were rising.  The “hunt for yield” thankfully seems to have passed – the idea of buying equities for income now requires financial engineering, or it seems, considerable incentive.

But, since the start of the year the second spring has started to uncoil – that absolute certainty that the US was the only place to be.  We often heard, “but the US gives me global exposure?”  Convenient as a marketing message, but when one examines the reality, US companies, even the so-called multinationals, have huge domestic presence.  Since year end, China, Korea and India are close to 20%1 ahead of the US.

This change in market behaviour has had a positive impact for our, and your, clients – as Douglas described, performance across the board is strong and reflects well on what we absolutely believe is Australia’s strongest investment team.

We have spent the last five years upgrading the team, while facing the relative headwinds of a strong US market and the clamour for bond-proxies.  We look forward with optimism as having 10 decision makers leads to a level of engagement we have never seen in our 23 year history.  This is absolutely not decision by consensus – it is engaged debate which drives the analyst team to better stock insights.  Our work with Ben Darwin, which is on the web in video form, with more to follow, highlights this in depth.

Last quarter, we met 3,000 advisers around the country on our annual roadshow in conjunction with the FPA and our message was that there are signs that a 20-year long consistent pattern of Anglo-Saxon deficit nations is starting to change, led by the US, and including Australia, NZ, the UK and Canada, being funded by a collection of surplus nations such as Japan, Korea, China, Europe and from time to time, oil producers.

The critical protagonists in this are the European and Chinese consumers.  Recovery in Europe and structural change in China give us cause to believe that it is likely that their surpluses will shrink and the consequences on the other side are that the deficit nations will either have to tighten their belts, which is not good for economies, or raise returns to attract capital over the domestic opportunities that now exist in these regions. This is not good for asset prices.

Home bias is the curse of Australian investors, but our concern is that if we spend too much energy simply explaining that people need to get their money overseas to improve their portfolios, that the default market is the United States.  It is not exaggerating to say that it may prove to be the same bet as Australia.

So our plea to Australian investors is more nuanced than home and abroad.  Our plea is to look at increasing exposure to the collection of surplus nations – China, Japan, Korea, which are the three largest country weights in the Platinum International Fund today, and to Europe.

Human beings suffer from the pressures of social conformity, and find it difficult to process information and time.  Our media, and that of the US, do not cover the development in Asia in a balanced way, and we believe most Australians have a false perspective of the opportunity.

When investors focus on P/E ratios it is the P, the Price that dominates their focus and there is a constant sense of watching market moves to see what they are missing.  If we flip this around and look at the Earnings Yield, E/P, we bring the E, the Earnings into more acute focus.

Looking at the world through this lens and we can see what is on offer comparing it with a low risk free rate of about 2%.  US markets as a whole don’t offer much reward, particularly with profit margins potentially at peak levels.  But, we can build a very attractive risk adjusted portfolio of corporates in Europe and Asia-Pacific.  At 31 July 2017, the Platinum International Fund had its lowest long exposure to the US since 2006, and highest ever to Asia-Pacific.  The best comment we can offer on our view on markets is that if our team can still generate a good flow of ideas, and they can today, we are unlikely to yet be at the end of the market cycle.  Rising prices or deteriorating fundamentals would change that view.

More recently we have been finding more opportunities in areas like Chinese Financials, Oil -> Shell was added in quarter two and Glencore, is an interesting miner with exposure to trends in electric vehicles.  Most fund managers seem to be riding the coat-tails of FANG, but we note that were the index funds to be invited to one of the numerous “top pick” events, they would champion Apple as their top pick, with Facebook and Amazon close behind.

There is an inevitability about the emergence of Asia, led by China and this is a gaping hole in most professional portfolios, and hence, most mum and dad Australians.  We could wax lyrical about educational attainment, market dynamism, an under-supplied property market, technological leapfrogging and so on.  However, we have stated this case many times before.  With momentum starting to swing through, it feels to me, like the market is starting to price in this potential.  

Ultimately though, our job is to pick stocks.  Communicating the essence of a portfolio of 100 businesses is not easy.  The range of companies across industries and countries is deliberately diverse.  The process is repeatable, and works, so we apply it to enough opportunities to increase the odds of success.  Our top holding, Samsung, held for over 20 years, has had a stellar year, a global giant that remains cheap after a strong run.  But it might be that the Chinese internet companies are the personification we would like to leave you with. 

In an attempt to connect and bring stories to life, we may have referred to Baidu as the “Google of China”, JD.com as “Amazon”, Alibaba as “ebay” or Tencent as “Facebook”.  But this is wrong.  This is a Western mistake.  And we believe it is exactly the mistake people are making if they do not have enough exposure to Asia in their portfolios.  This is the investment opportunity of a generation and we are pleased to be making it even easier for you to access.  Facebook might after all, simply be “America’s WeChat”.
Bibilography
1 Source: RIMES Technologies.