Which stocks does Clime have that will provide attractive returns despite elevated inflation?
We believe Australia’s resource and energy companies will continue to perform well during this period of inflation At its core, the world’s inflation pressures are coming from higher commodity and input prices. Furthermore, global energy and mining companies have significantly cut their expenditure over the past decade, setting the scene for the next commodity bull market.
Our key preferences in the space remain the recently expanded operations of Woodside and BHP, due to high-quality assets and high dividends. And ALS, a service provider to mining companies, is set to benefit from a recovery in exploration expenditure.
The segment of the market that has historically performed well during periods of inflation are the Australian supermarket players, namely Woolworths and Coles.
While we may see some trading down to lower-priced items, consumers will continue to buy food and other goods. The size and strength of the big two players will see margins remain stable amid a more challenging environment for the broader consumer sector.
Which stocks do you think look cheap following the recent market volatility?
We see a sharp reversal of the pandemic-period trend from the consumption of goods to services.
Qantas has emerged this year with a lower cost base, a more efficient fleet and an improved industry structure given Virgin Australia’s more rational approach under private equity.
We see a sharp recovery in domestic and international airline travel, as pent-up savings are spent on experiences rather than home furnishings.
If my travel schedule is anything to go by, any further decline in the share price will be a very attractive opportunity for long-term investors.
Which sectors and stocks are you avoiding, or selling positions in, given the rising rate and high inflationary environment?
We will continue to avoid companies with a high price-to-earnings (PE) ratio combined with a limited earnings track record in the IT space. We believe a valuation disparity between high-PE and low-PE parts of the market has further to unwind.
With evidence that inflation was more structural than cyclical, we moved quickly to remove consumer discretionary stocks from our portfolios. We believe it is prudent to continue to avoid consumer names at present. However, the list of attractively priced, quality Australian companies is getting larger, and we look to the current period of volatility to buy these companies at a discount to our view of intrinsic value.
Which stocks do you think make appealing takeover targets?
We see strong value in a number of Australian companies. With large amounts of cash ready to be deployed by private equity and Australian super funds, we think a number of Australian companies will be taken over in the near term.
This year we have had bids for portfolio holdings Ramsay Health Care and Atlas Arteria.
I have long thought that Incitec Pivot, a current holding in the portfolio, is a prime candidate to be taken over. Both the company’s core operations in explosives and fertiliser are seeing strong market conditions, and with strategic assets in Australia and the US, global competitors will be readily able to extract strong synergies in the event of a bid.
What’s a stock that you think is being most undervalued by the market?
James Hardie Industries is starting to look extremely interesting at current levels. While increasing US interest rates will temper the demand for property, James Hardie has illustrated a strong track record of operational performance in both challenging times and good.
As a backdrop, the US housing market remains chronically undersupplied, supporting longer-term demand for Hardie’s siding business. The company is now less cyclical than in past periods as it has a large part of earnings exposed to the repair and remodel market. The business also has a clear track record of consistent growth ahead of market averages, indicating share gains.
Any hobbies or daily routines you have?
Having worked through the GFC and other periods of volatility, the most important thing is to maintain routines that give you balance.
I took up swimming a couple of years ago and find the repetitive, almost mediative nature of it allows my brain to process all that’s happening in the world, while I get rid of stress that you can’t help but take on.
I also try to read a little every day. The last book I finished was Richer, Wiser, Happier by William Green. He interviews some of the great investors of our time. The human aspect reminds me that these greats don’t get it right all the time either.
Any good podcasts or TV shows you’ve enjoyed recently?
I am a huge fan of podcasts and think this passive way of learning from history and other great investment managers helps me work through the complexity in building portfolios.
For updates on current market challenges and thinking I listen into Macro Voices, hosted by Eric Townsend. I may not agree with all of their views, but it helps me understand broader market behaviour.
In addition to building portfolios, in my role as CIO I am building a funds management business. To help me think longer term, my go-to podcast is Capital Allocators by Ted Sides.
For something completely unrelated to financial markets, as a basketball fan I really enjoyed the new Netflix movie Hustle, starring Adam Sandler.
What’s your favourite local bar or restaurant? What’s your go-to order?
- Common Room Co – Caulfield North
- Bircher Muesli
- Kale Kick Smoothie