GH: What attracted you into this business at the start?
JM: Even in high school, I was interested in understanding linkages between business, the world economy and politics, and looking up the stock pages – what it meant and why share prices react. It became a lifelong pursuit, and I was fortunate to start my career with a fundamental approach to company analysis and (at?) an early quantamental shop. That put me on a journey to global equities at Platinum and then to starting Antipodes in 2015.
GH: And if after all this time, you could go back and give your 20-year-old self one lesson which you didn’t fully appreciate at the time, what would that be?
JM: As we’ve gone through each cycle, policy responses have become more and more dramatic, and we’ve now gone way beyond cutting interest rates to extraordinarily imaginative policies with QE and central banks socialising credit risk. The key lesson is don’t underestimate how pragmatic central banks will be in the face of weakening economies.
And western central banks, especially, are committed to protecting asset prices as the key transmission to the real economy. They talk about targeting inflation but really, they’re targeting and supporting the economy via higher asset prices – understanding, in my earlier years, how extreme this would become would have been helpful.
GH: Yes, it has been extraordinary how much support the central banks keep giving. You specialise in global equities and we have seen more Australian investors allocating to global whereas in the past the home bias dominated. What do you tell investors are the main reasons to hold global equities?
JM: The great opportunity is to diversify from a relatively-concentrated Australian stock market, especially away from financial and resources, and also domestic economic risk. Australia is a concentrated play on the health of the local economy and the health of China.
And the other opportunity is exposure to sectors that are not represented in the local stock market, such as semiconductors, critical enabling technology where the leading companies are American, Japanese, Taiwanese, Korean and European but not Australian. If you want to participate in certain parts of the market, you have to go offshore.
GH: We’ve had a great run in the market since the GFC and it recovered quickly from COVID. As purchase prices drive future returns, do you think it will be difficult for equities to perform as well over the next 10 years as they have over the last 10?
JM: Most definitely, yes. The best predictor of future returns is the starting multiple and that is elevated. It is very high in the US and the US represents roughly 60% of the global benchmark. So we struggle with the valuations for US equities, which are roughly 65% more expensive than the rest of the world, close to all-time highs. And then the other 40% is quite cheap in an absolute sense, certainly allowing for interest rates, and in a relative sense, as cheap as it’s ever been.
GH: Compared with the US?
JM: You’ve got this bifurcation in potential outcomes, I think similar to 2000. There is P/E dispersion everywhere, even in the US and the US represents our largest exposure. Yes, we’re underweight the benchmark significantly, but it’s still a large exposure for our portfolio.
GH: It’s very difficult to ignore the US in a global portfolio. What percentage of your book is in the US?
JM: In our long exposure, it’s roughly 40% versus a benchmark of 60%. The average P/E valuation is hiding some very expensive stocks and some very cheap stocks, so we still think there are great stock picking opportunities and we do see different investment cycles starting to emerge, such as decarbonisation.
GH: Are there any big market trends you’re backing at the moment and a couple of companies in this trend?
JM: Yes, we see reopenings emerge at a different pace around the world. One sweet spot in the next 18 months will be a return to cross border travel. Europe as an economy will do quite well and it has underperformed the US because it’s so much more dependent on international tourism. So we broadly want to be exposed to Europe domestics, whether it’s financials, specific travel exposures like Airbus and GE.
Then on the consumer side of travel, a company like Ctrip. It’s the leading online travel portal in China with a high share of outbound bookings and a dominant position. It’s a part of the market that’s not experienced a proper recovery so stocks are quite cheap. It’s a structural opportunity. We are constructive on the emergence of the Chinese middle class, and the aspirational premium consumers that we may have forgotten. But they will come back to travel. They love spending on luxury and that spending hasn’t gone away.
The theme with deep implications is decarbonisation.
Investors often play conceptual stocks as opposed to thinking about what it really means, and it means a lot for power infrastructure. It will take years. It changes the fundamental underlying composition of capital spending towards power infrastructure.
It’s a little bit like cloud computing. In the early days of the emergence of cloud computing and the evolution of SAAS software models, you really needed to work out what the longer-term implications were because it was a trend that will be around for a while.
GH: It will play out over decades. Are you seeing some winners in that space or is it too early?
JM: We like three themes. A utility company with sound regulatory protections that we like is Fortis, which will connect renewable energy to load centres. Then there’s the ‘picks and shovel’ stocks like Siemens, which is well exposed to this capex cycle of reengineering the industrial base and reinforcing the grid. And third, companies in the materials space that need to decarbonise or build that power infrastructure. Switching the auto fleet to EVs changes the demand profile for copper. Also, aluminium has an excellent supply story as China has stopped adding capacity, and it has a great demand story as a lightweight metal. So those three buckets are all interesting.
GH: And you talk about the market “irrational extrapolating”. What’s a good example of that?
JM: Well, look at what’s happening in China with tech regulation. We think the market is extrapolating in a somewhat irrational manner. We acknowledge the uncertainty but in some ways, China is catching up to the rest of the world in terms of anti-monopoly, consumer data protection, cyber security. We don’t think this is a move by the Chinese Government to stamp out these companies in their provision of consumer and ecommerce services. They still want to encourage basic consumer services and successful businesses.
Look at patents which originate in China. There is a critical dependency and that innovation is coming out of the private sector, it’s not the state-owned enterprises. I think the Government wants to coexist with the private sector and as investors, we should be able to navigate that uncertainty and use it to our advantage because I think it will reduce over time.
The strongest, largest and most dominant companies are in the best position to face that regulation, as we’ve seen with Facebook and the dominant tech companies in the world. When uncertainty has come to the fore, it’s typically an opportunity to buy the company cheaply. And then, as uncertainties dissipate, it’s typically those larger companies that have the financial and business capabilities to implement the change. Ironically, the regulations have reinforced their dominance because they have the resources to deal with the issues.
GH: Let’s look at your listed vehicles, the closed-end LIC (ASX:APL) and your plan to give investors the choice to switch into your open-ended active ETF (ASX:AGX1). Can you give some insight into why the Board chose this approach when other methods have been tried in the past, such as a tender offer structure, as the best way to remove any discount in the share price to Net Tangible Assets (NTA).
JM: AGX1, as an exchange-traded active ETF, solves permanently the NTA discount. So while we took a path to get there – buybacks, tender offer – it is the best outcome. It’s the same approach, but within a long only rather than long-short strategy, same investment philosophy, same investment team. And combining the two gives better scale and solves permanently the NTA issue.
GH: Is there any concern on your part that whereas previously, you had locked-in capital, investors can now redeem from an active ETF, that maybe there will be some loss of funds?
JM: Retention of FUM is a function of communication and performance, and we think the future is active ETFs. If we do our job, we’ll retain our investors but ultimately it’s their choice, but we thought this was an elegant solution to the discount problem.
GH: A final question. Is there a stock in your portfolio that you’re confident you will still hold 10 years from now?
JM: Well, repeating based on the great long-term opportunity, Siemens will reengineer industrial supply chains and power. If you think of the businesses that Siemens is in – supply chain solutions, manufacturing solutions, infrastructure, fortifying the grid, reducing emissions – we’ve never seen anything like this, and Siemens is going to be the stock. These are long-term capex growth exposures, and the growth rate will accelerate over the next couple of decades, and the market is significantly underestimating the long-term value of the company.
The stock I’ve owned the longest is Microsoft. It can be decades before the market efficiently prices the asset. Microsoft is getting there, Siemens hasn’t even started.
Engineers, designers, once they’re trained on these Siemens tools, it becomes similar to the Microsoft suite. It’s easy to keep using it.
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