Mid-Quarter Market Update

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/