Matthew Haupt
Lead Portfolio Manager, WAM Leaders (ASX: WLE)
Will Deer Investment Specialist

Wilson Asset Management


Will Deer: Hello, my name is Will Deer and I’m an investment specialist at Wilson Asset Management. I’m here with Matt Haupt, who is the Lead Portfolio Manager of WAM Leaders (ASX: WLE). I want to ask you about the macro environment, it’s an important input in your investment process and it feels quite confusing at the moment. We have high interest rates because of inflation, yet we also have tax cuts coming. How can we make sense of this?

Matt Haupt: That’s a great question, a great place to start because normally what you have is fiscal policy being a counter -cyclical buffer and now what you’re seeing is the fiscal policy inflaming some inflation while central banks are trying their hardest to slow things down.

Will Deer: That’s what’s made it really confusing this time around because you have that pro -cyclical fiscal push rather than that counter-cyclical push. In other words, are interest rates going to stay high for longer? Is that what you’re saying?

Matt Haupt: You’re looking at the underlying inflation at the moment. Services inflation has been very, very sticky. Goods have been in a period of disinflation, but we’re seeing commodity prices pick up. We’re seeing manufacturing activity pick up. We think goods inflation is going to pick up as well. What that means is we’re probably going to have higher rates for longer. The caveat here is around the labour market. The labour market has been so tight with no real signs of weakness yet that if the labour market were to break, what we just said around sleep here will get forgotten. Central banks will respond to weaker labour markets. Okay, so it sounds like it’s around the corner then. You’re starting to see some signs, early signs of labour weakness, but it’s really too early to call that, but that sticky inflation is here for longer, so it’s really going to be the labour market, which will be the key factor which will determine monetary policy from here.

Will Deer: Where do you expect that weakness to come, are there certain industries and sectors that are more vulnerable?

Matt Haupt: The retail sector is one that’s under pressure at the moment, seeing as retail sales in Australia are really, really weak. We have some of the Commonwealth Bank data out for April and it looked incredibly weak. And then in the US as well, you’ve had some retail sales weakness as well. But it’s a really, it’s a consumer-led economy, developed economy, so it’s really around those services and retail where we expect the first science to come through.

Will Deer: At the start of the year, you were very clear in saying that the market was expecting too many rate cuts, certainly relative to the bond market and therefore you had quite a defensive portfolio. Have you been rewarded for being defensive?

Matt Haupt: We have just recently, but the first part of the year was actually quite payable, as the market ignored all the interest rate cuts coming out and was happy to run with the more speculative end of the market. But we have found that walking back now, but again, we think the market always goes too far. Why now? Now we think they’ve probably taken out too many cuts. In Australia they’ve got a hike in the forward curve now. So again, we tend to gyrate between extremes, and I think we’re probably at an extreme of interest rate hikes coming back into the market. But we just got to see how it develops for the rest of the year, but we could be at a potential high point on the higher for the longer as well.

Will Deer: What are some of the changes that you’ve made to the portfolio and where have you got high conviction?

Matt Haupt: The biggest change we’ve introduced into the portfolio is really around energy and the shortage of energy. Particularly in Australia, you’ve got obviously big demands on electric vehicles, computing power, AI, data centers. They do need to be powered from something. We’re seeing a bit of a shortage. a shortage at the moment, so we are really looking for the Australian government to introduce a proper framework for domestic energy and we think the beneficiaries here will be around gas being a viable and the most sensible choice of a transition energy policy. We’re hoping for more change around gas, and that will benefit quite a few industries as well. And when we lock is IPI. which do a lot of the gas transmission. We think that would be an incredibly important hub for energy transmission for Australia, for the next 10, 15 years as the use of gas increases to meet this energy demand.

Will Deer: And can we just touch on China? I mean, China is a very important buyer of a lot of Australian minerals and Australian goods. You’ve spoken about treasury wines. Do you still feel that that’s going to be a positive tailwind? for Australian equities?

Matt Haupt: China is incredibly tough because they’re going through a really tough period at the moment. The policy has been turned on and turned off. We just got recent credit data which was really, really weak but then on the next day there’s this issuance of long-term bonds which we think is an incredibly important part of pulling China out of the mess they’re in at the moment. The mess is really around the property sector, I mean they did a massive overbuild and they’re trying to, obviously the first point of call was to slow it down and now they’ve slowed it down to a point where house prices are starting to fall. They were okay with the volume change but when prices change that affects consumption. So now they’re responding to that and now they’ve got long-term bonds being issued. We think China will keep implementing policy to support house prices and the recent policy change of buying stock, existing stock and unfinished stock and getting them completed is a positive. But the cycle for China is going to be pretty tough, like the demographics are in their favour, but they’re more longer-term trends. We think short term, the policy response from China is probably going to be okay. There are some short-term trades there, and in particular, I mean, things are going to be okay. It has been incredibly strong despite everyone saying it’s a very weak environment and copper obviously with the more global trade as well but copper is obviously China are a big importer of that as well, we think the short-term is probably going to be okay.

Will Deer: Can you just run through one stock example of a business that you like at the moment that you think is materially undervalued?

Matt Haupt: The big one for us is Orora (ASX: ORA). Orora we’ve talked about before and it’s been through a series of downgrades unfortunately which we thought the market were aware of but for us Orora, these Orora make cans and bottles for high-end liquor and wine. These businesses are quite boring in normal circumstances. They trade at GDP plus. What you’ve seen is the massive change from the coast to the ocean, impacting the way people stock the wine and the spirits and also the way they consume them. We’re just going through a normalisation period now and the market in these uncertain times or these uncertain times are very short-term focused. The quality of this business is great and the long -term trends are great. We think as we move through this, we call it a normalisation phase. this business is incredibly valuable and trading at a hugely discounted value to its peers. So again, we think the normalisation cycle as it comes through and is proven, the stock will re-rate.

Will Deer: Thanks very much Matt and thanks for watching.


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