Market Update - Nov 2013
Market Update - Nov 2013
The Platinum International Fund delivered 45% returns in 12 months to 31 October 2013, 10% above market and we remain optimistic about the prospects for investing your clients’ money in global equities, particularly those outside the US.
It is important to have a framework, and as many of you know, our approach involves seeking out neglect - the unloved. Most people are seduced by certainty, momentum; a good story. We have seen recent fashions such as the hunt for yield and a yearning for predictability - household names were chased higher and higher - comfort was everything, but things are changing. For those who look backwards, Australia and the US may remain favoured, for those who look forward we suggest the rest of the world offers a lot more.
The framework today must consider as its key input that we live in a distorted world. Interest rates are no longer set by markets. The impact should be positive for equities. While we face a raft of negative headlines from our Western focused media, intent on filling column inches, we think the wrangling over debt ceilings and tapering miss the point, and as stock-pickers, we can't expend too much energy on this. Markets getting in a twist about politics and macro tend to create opportunities. It is the creation of wealth by enterprises that we seek to utilise to create wealth for our clients.
And most importantly, the world is growing. Not fast, but it is growing. The discoveries of tight gas in the US are significant as they bring costs of energy down close to Middle Eastern levels - this will create an investment cycle, off 40 year lows, ex-IT. Jobs are being created, more autos purchased, and housing prices and activity picking up. In Europe, the peripheral countries, such as Ireland, Italy and Spain are running current account surpluses - they no longer need foreign capital. We are concerned about the risks of prices falling in Europe but believe the ECB will stand behind economies and pump in more liquidity like the Fed should this happen. Japan is benefiting from a much lower Yen - witness the huge profit growth in leading companies such as Toyota. Labour reform under Abe, though challenging, would be good for the economy as a whole, but regardless if it succeeds, the leading companies are already stronger via the FX move, and evolving. China is starting to transform its economy away from the biggest investment boom in history - attacking corruption is a very positive sign, and it will grow nicely; the consumer faster. So all up, the backdrop is fine. We are not making any moral comment on the debt build up globally - for now, we are exploiting the opportunities while many investors remain quite fearful.
Composition of the portfolio is key. We note from discussions with clients that many are reluctant to use this great opportunity to use their strong Australian dollar and buy cheaper assets overseas, even as our economy starts to suffer from lack of competitiveness, more challenging terms of trade, and a shift in China's growth strategy. Too many over-emphasise the value of franking credits and then take a cursory look at the S&P, which in aggregate looks slightly pricey, with many household names they are familiar with, especially full.
We note our Brands Fund was launched in 2000 when little premium was being paid for superior companies. Today the opportunities it finds have shifted to Europe and Emerging Markets with only 9% in US listed companies.
Our Asia Fund is 98% invested today. Korea and China are especially cheap markets and many investors have given up hope on India's infrastructure while we are seeing positive signs. China is a perfect study in extrapolation. The Shanghai market is only at one third of its 2007 levels, yet earnings have doubled. One of the fastest growing economies in the world is being written off, when growth is scarcer elsewhere.
I now want to highlight three of the key areas in which we are currently investing - the internet, banks, and the US capex theme. Almost half of the International Fund is today exposed to these.
I will start with the internet and in particular, the proliferation of smartphones, which is creating a tremendous opportunity for creativity and innovation, plus it has a positive effect on development, for example, in Africa, with empowerment via information. With liquidity abounding and starting to express itself in art, high end property (and perhaps, bio-techs, which have run very hard) we would be very surprised if we don't see increasing stock-market attention on the most exciting technology of our time. The ability for companies to build global businesses with unimaginable customer bases using very little capital must be seductive. We would rather join this party early than come late once its front page news. We will be happy to pass the parcel at that stage.
We have built two collections of investments, of roughly equal scale, the former being in the enablers, the hardware, dominant companies with excellent technology and market positions, but very low valuations - the likes of Samsung, on only 7x earnings, Cisco, Ericsson, FedEx, and our latest addition in this area, Intel, the world's greatest chip maker is on 12x earnings, priced like it is ex-growth, but its only just getting started in mobile, as it has hitherto focussed on speed at the expense of power use (and it’s a trade-off). Its next generation of chips, at only 14 nanometres (28 atoms, if you will) starts to address this and the market will reappraise this great company.
On the more adventurous side, which may cause a little concern for those who confuse neglect with buying low P/E companies only (so-called value), we find some great opportunities - from Google, Chinese internet companies such as Sina (their twitter), Baidu (think Google) and Youku Toudu (think YouTube and a TV channel). A recent purchase is Korea's Naver, with its Google-like search business underpinning the stock, and its messaging application, LINE, with 300m subscribers growing at close to 1m new members a day is showing how one can profitably monetize Asian and Latin Americans using internet rather than SMS for messaging. We have also added eBay, for its PayPal payment system which could be very disruptive for traditional players in this area. Developments such as this remind us to consider for all investments today whether the internet could blindside companies, even previously loved predictables.
Moving on to the healing of the financial system. It may be hard for Australian investors to comprehend, but Banks are cyclicals - leveraged plays on economies, and in most markets of the world are cheap. Remember we advocate buying neglect and avoiding euphoria.
The distortions we discussed are helping Western banks to heal - Bank of America was our leading contributor over the last year; we made good money in Lloyds Bank too. Today, our largest holding is recent addition Intesa Sanpaolo, with 20% of Italian deposits, and it is starting to perform for us, as its underlying profitability, and likely over-provisioning, starts to gain investor attention and it has moved up from 60% to 75% of book value, around one third of the value ascribed to banks here, in an economy that is now turning upwards! But in the Emerging World, negative sentiment towards equities is enabling us to buy solid financial institutions in under-served markets such as the leading bank in Korea, KB Financial, on 70% of book; Sberbank with 60% of Russian deposits, the People's Insurance Company of China, which looks a gift on 10x earnings, and India's ICICI and IDFC.
On to capex in the US, and this is starting to build up - we have been running a few per cent in this area for a while now - companies such as Foster Wheeler, Jacobs Engineering, Baker Hughes and KBR comprise about 7% today. The shale gas discoveries, and resource finds off Africa, for example, are significant and explain to some extent why energy stocks are out of favour. A near certainty though is an investment cycle in the US, after 40 lean years. Petrochemicals and associated industries come first. Order books are building and these companies will do well on the back of this.
At Platinum we have a system that works. We call it Platinum’s DNA and many of you will have seen our short video on our website but if not, I would recommend investing 4 minutes of your time in viewing it. We rely on discipline and restraint, to control our behaviour and to exploit the opportunities that others create.
We are currently running over 75% net exposure in the International Fund, which remains near our highest exposure in 19 years. Andrew Clifford, Platinum’s CIO, points out that in 2007, we were continuously told the market was cheap, but struggled to find cheap stocks. Today, the market chatter is that it is expensive but our team is coming up with lots of ideas. Hence, we remain of the mindset, there is ample neglect out there for us to invest in, and are excited by the prospects of the companies we own.
DISCLAIMER: The above information is commentary only (i.e. our general thoughts). It is not intended to be, nor should it be construed as, investment advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.