Mid-Quarter Market Update

By
Clay Smolinski,
User

Graduating as dux of Finance from university and a brief stint as an accountant at Grant Thornton gave Clay the grounding to deconstruct financial statements. Having started.. More

25 May 2021

The investment returns[1] for the last quarter of 2020 and first quarter of 2021 were among the strongest in the Platinum International Fund’s long history. This was driven in large part by the fund’s cyclical exposures [2] – driven by industrials, commodities and semiconductors[3].

The context for this comes from our approach of going against the crowd, which happens at sector and country levels as well as individual stocks, generally with crisis providing the opportunity.

We came into 2020 on the back of a mini industrial recession triggered by austerity, Chinese reform and the trade war. When COVID hit, low valuation was no saviour for Industrial stocks but in Quarter 2 of 2020 we significantly increased our exposure to what we might term “Growth Industrials”.

We wanted more than simple recovery stories, knowing cyclicals would likely be a fruitful hunting ground, but unsure of the timing of a recovery[4]. We did not anticipate the swiftest recovery in economic history as a base case. We added businesses with structural tailwinds on top of the cycle. This included companies like FedEx and UPM Kymmene, in addition to established positions in such as LG Chem. Travel was a big area, including Interglobe, parent of Indian airline Indigo, which is not only a scale player, but a low cost carrier - a formidable barrier to entry in a growth market, and substitute for crowded rail travel.

The portfolio benefited from the cyclical exposure. Looking back, the vaccine news in November last year boosted companies that had suffered the effects of COVID and lockdowns. This saw a rotation away from “COVID beneficiaries”. As interest rates have come off their lows, we have seen additional rotation away from the companies that had been beneficiaries of interest rate repression, back towards companies that lost their funding advantages when rates were zero, such as banks, and many incumbent leaders.  While this is often termed a growth-value rotation, it is more subtle than that.

The big issue now is a question around whether inflation will rise. We cannot know, but we can make some observations on this.

While inflation readings are picking up, the investment community and central banks are generally united in a view that this is transitory. We have seen a huge fiscal and monetary experiment unfold in recent years, and commodities, stocks and economies have moved far harder and faster than people would have thought.

While most are dismissive, we ask the question what happens if markets start to question whether the inflation is not simply transitory. People are not generally positioned for this, and the risk free rate can move quickly. Markets are generally expensive and many commentators espouse the view that valuations are underpinned by low rates. This risks meaningful sell-offs in equity markets should fear of inflation spread rapidly.

Whilst we had slowly moved away from these themes over several years, in recent months we have significantly scaled back our exposure to growth stories like Google and Facebook, cut Alibaba dramatically, and exited Tencent in the flagship portfolio.

Importantly, from a portfolio perspective, we believe that our large exposures to areas like commodities, industrials, semiconductors and banks are likely to be more immune than areas at the heart of the speculative mania, or growth and defensives that have been favoured by many as interest rates moved ever lower.

It is also worth recognising that many of the key themes emerging in markets including infrastructure roll-out, decarbonisation, automation and a generally increased focus on the E element of ESG, all point to Industrial solutions becoming more prevalent.

Despite our enthusiasm for what we own, we have been realising profits in many of our winning positions and continue to actively manage the short book, such that the net exposure is trending in the mid-70s which is probably best described as a more neutral position for us.

For investors in the Platinum Trust Funds, as we near the end of the financial year, we publish estimates of the distributions weekly on the website at: https://www.platinum.com.au/About-Platinum/Company-News/2021-Fund-Distributions-Estimates  

 


[1] Source: Platinum. Returns of C Class units. Past performance is not a reliable indicator of future returns.

[2] We looked at the market through the lens of cyclical and defensive in this March 2021 article: https://www.platinum.com.au/Insights-Tools/The-Journal/Are-Cyclicals-the-New-Defensives

[3] More background on our exposure here was in this February 2021 article: https://www.platinum.com.au/Insights-Tools/The-Journal/Semis-Halfway-There

[4] Our May 2020 “Bear Market Playbook” gives some pointers here : https://www.platinum.com.au/Insights-Tools/The-Journal/The-Bear-Market-Playbook

DISCLAIMER

Platinum Investment Management Limited ABN 25 063 565 006, AFSL 221935, trading as Platinum Asset Management (“Platinum”). This information is general in nature and does not take into account your specific needs or circumstances. You should consider your own financial position, objectives and requirements and seek professional financial advice before making any financial decisions. You should also read the Platinum International Fund’s product disclosure statement before making any decision to acquire units in the fund, a copy of which is available at www.platinum.com.au

Commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice. Certain information contained in this presentation constitutes "forward-looking statements".  Due to various risks and uncertainties, actual events or results, may differ materially from those reflected or contemplated in such forward-looking statements and no undue reliance should be placed on those forward-looking statements. To the extent permitted by law, no liability is accepted by Platinum for any loss or damage as a result of any reliance on this information.

 

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