Short and long-term trades in global markets
Catriona and Nick reflect on the latest US earnings season and discuss short-term opportunities as the recovery trade continues, while also looking at the long-term, structural trends that will drive performance in a post-pandemic market.
James Marlay: Hello and welcome to the latest instalment of WAM Vault. My name is James Marlay and I am your host. Today I am speaking with the Portfolio Managers of WAM Global (ASX: WGB), Catriona Burns and Nick Healy. Catriona I am going to start with you. Can you give us an insight into how you are positioning the portfolio right now?
Catriona Burns: Sure. So we have really gone through a number of phases in terms of evolving the portfolio since the pandemic hit. In early 2020, phase one was defence. We did not know what central banks were going to do, we did not know what fiscal support would be provided. So at that point we were adding companies that were in supermarkets, coronavirus beneficiaries, etcetera. Phase two, as we went through that first half of 2020, was really about structural trends. So what structural trends had been accelerated through coronavirus, and yet were multi-year stories that we thought had longevity. Then phase three as we went through into the second half of last year for us was about re-opening. So we did not have vaccines yet at that point but we were starting to lend our thoughts to what companies were well placed, had reset cost bases, set their businesses up extremely well for eventually when we did have vaccines and for when economies re-opened. And now we think we are entering phase four which is really this return to normal, so that path to normalisation. In this stage, we have had equity markets rally very strongly since the lows in March last year, and stock picking really comes to the fore. We are seeing a number of opportunities for the portfolio both short-term in re-opening plays that are not completely pricing in that opportunity, and still in those structural long-term winners where there is certainly a multi-year story. And so it is a more balanced portfolio today with valuation really as the core tenet.
James Marlay: We were talking a little earlier before we started the interview about the index at the headline level being quite subdued but underneath a lot of moving parts. Catriona, I was wondering if there were any immediate opportunities or short-term opportunities that have been presented at the moment?
Catriona Burns: Those business where they have actually taken coronavirus as an opportunity to improve their business. So they have cut costs. They have made their businesses more efficient. The industry structure might have actually improved because competitors have not had the ability to do what they have. And it might be, say travel for instance, where you had actually a lot of devastation, agents going out of business, leading to a situation where you might have an online player that is now significantly better positioned than they were prior. We love those examples of companies that are now, as we look into a global economic re-opening, actually better positioned than they were but this is not necessarily being reflected in share prices. People are looking at what this business was like historically rather than what it will be like going forward.
In that vein we see a number of opportunities in areas such as travel which I just touched on. So we like businesses such as Booking.com (NASDAQ: BKNG), we have invested in Trigano (EPA: TRI) which is the largest listed recreational vehicle manufacturer in Europe, Amadeus for example (SM: AMS). And as a second derivative of travel we like businesses like Fiserv (NASDAQ: FISV), Fidelity Information Services (NYSE: FIS), Visa (NYSE: V), which have portions of their business that are exposed to travel and as that comes back they will be beneficiaries.
Housing is another area, particularly US housing where we still see a number of opportunities. Businesses like Ferguson (LON: FERG), Carrier (NYSE: CARR) and Lowes (NYSE: LOW) we think are still very well positioned. And we think there is some longevity in that and still valuations that are not necessarily fully reflecting the opportunities these businesses have.
Media would be another example. We have talked previously about Ströer (ETR: SAX), which is the largest out of home billboard company in Germany, 60% market share, 90% as it rolls out digital billboards, has these great assets in the digital and online space that are not being valued right now but will spin out in the next few years.
Then, if I think about mining and infrastructure spend, we see a number of opportunities there. So businesses like Komatsu (TYO: 6301), Quanta Services (NYSE: PWR) and MasTec (NYSE: MTZ) which are very well positioned to benefit from these infrastructure builds and stimulus that are coming out the US. We see a significant amount of short-term opportunities as economies reopen.
James Marlay: And all the talk last year was around shifts in new trends, structural opportunities that are more of a longer term burn. What stands out now as some of the structural trends that you think remain interesting?
Catriona Burns: There has been enormous amount of debate around which trends have longevity and which are just very transient in terms of benefiting from coronavirus, but then the world will move on, and Australia is a great example of that, in that if we think about our daily lives, a lot of things have returned to what they were before. People are back in supermarkets, going to movies and concerts are restarting. But we think there are some structural trends that have really been accelerated through coronavirus and will continue to play out as we look forward.
Areas that we think where that is the case would be in the health and wellness area. There is no doubt that coronavirus has very much shone a light on the importance of investing in health and wellbeing. We have a number of exciting businesses that are very well positioned to benefit from that trend. They would be like Avantor (NYSE: AVTR), Thermo Fisher Scientific (NYSE: TMO) and Simply Good Foods. (NASDAQ: SMPL).
Another trend that we think has been accelerated is in the digitisation of payments. If you are a company and you have been forced to go into accepting credit card, debit card, from previously having only accepted cash it is very hard to go back. We think that transition from cash and cheque is ongoing and will not slow down, but just has been accelerated through coronavirus. So we have a number of exposures there including Visa, Fiserv and FIS.
Another trend that we think is certainly been highlighted through coronavirus and the benefit of that is automation. First, we had trade wars, then we had coronavirus, and security of supply was clearly highlighted through that period. And what you have seen is that even as demand is now coming back in the US, it has been very hard to get workers that are receiving stimulus to get back into their jobs. That really plays to the hands of automating. And so we have some interesting stocks that really benefit from that thematic and that is businesses like Zebra Technologies (NASDAQ: ZBRA) which is listed in the US. They are a few of the trends that we think do have longevity beyond coronavirus.
James Marlay: Catriona we are living in unusual times. Is there anything out there that is giving you concern?
Catriona Burns: We are watching certain pockets of markets and asset price inflation, whether it is the volatility in cryptocurrency, the saving of zombie companies or the rise and fall of certain concept stocks. These are pockets that we are watching carefully. We think, whilst we do not invest in any of these areas, potentially down the track if there is fall out that might create opportunity. But yes, they are probably the areas that I would highlight that we are watching.
The other area is what happens with interest rates and what that means for certain assets and certain equity prices. Duration assets have benefitted considerably from the consistent fall in rates over the last decade and as rates rise that has consequence for any duration asset, like various technology companies. So what happens with rates is obviously a key watch point. They are probably the areas that we are watching most closely right now.
James Marlay: Nick, US earnings have recently opened the lid on how some of these companies are actually performing. What were some of the key trends or observation you could make from the recent US earnings reports? And maybe pick out some specific examples from within the portfolio as well.
Nick Healy: I would say that big picture, the earnings season in a word, was strong. Certainly for our companies we believe they ran themselves well through coronavirus. They controlled costs but they continued to invest for the future. And they kept the expectations relatively controlled. And so as economies opened up from February, what we saw was by and large, our companies were beating expectations and significantly raising the full year guidance. Now while we are in the main very happy with how our companies performed fundamentally, I would say on the day, the stocks were more muted in their responses. And this was actually seen more broadly in the MSCI World Index, where 75% of companies beat, but on average on the day stocks were down.
We like that set up. We like buying undervalued growth companies where we can see that they are operating very well and where we have attractive entry points. An example of which would be TransUnion (NYSE: TRU), which is in our view the most innovative credit bureau in the world. Our view going into earnings there was this was going to be a big beneficiary of opening up, and the prior guidance of management, which was a bit soft, was in our view just conservativism. Even today we are really positive on TransUnion. We think it will continue to beat as the rest of the world opens up and it gains traction in key new verticals like fraud, which we have seen a significant rise in, media and gaming.
Another example I would give you is Ferguson. Ferguson is a leading North American home and commercial building supply company. Although it is 100% North American, it is listed in the UK. So what we think that means is a lot of investors do not look at them, and they trade at a pretty attractive discount to peers. Similar story, our view was it was going to be an opening up beneficiary. And for Ferguson, in particular it serves mainly the professional channel. The professional channel was really held back in 2020 because of access to site issues. So it did not have very strong comparables, and we saw a great result with a 30% earnings beat and a significant raise to the full year guidance. That is a company where we think there is actually quite a lot of conservativism left in the numbers, and it is about to dual list in the US. We think the discount to peers could very well close. Those are just a few companies where we like what we see, we have added during earnings seasons, and they fit our process very well.
James Marlay: Catriona, if you were to leave investors in WAM Global with a message on your outlook for the year ahead what would you say?
Catriona Burns: We are optimistic about the year ahead. We are optimistic about economies re-opening. We think there is some nuance between which geographies, which sectors and which companies that you want to invest in. But that is an incredibly fertile hunting ground for ideas and we are finding significant opportunities and have great investments in exciting businesses.
James Marlay: Catriona and Nick, great to catch up and thanks for your time.
Nick Healy: Thank you.
Catriona Burns: Thanks.