1 00:00:03,960 --> 00:00:06,870 Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. 2 00:00:07,200 --> 00:00:11,369 Sean Aylmer: High inflation has changed the way many investors manage their portfolios. 3 00:00:11,610 --> 00:00:14,159 Sean Aylmer: As one fund manager puts it, those hoping for an 4 00:00:14,160 --> 00:00:17,999 Sean Aylmer: inflationary peak and trough rather than a long-term high might 5 00:00:18,000 --> 00:00:21,450 Sean Aylmer: need to have a rethink. So, which companies and sectors 6 00:00:21,450 --> 00:00:24,570 Sean Aylmer: are providing a hedge against inflationary pressures and where does 7 00:00:24,570 --> 00:00:28,110 Sean Aylmer: gold and real estate fit into it? There's plenty to discuss. Remember, 8 00:00:28,110 --> 00:00:31,559 Sean Aylmer: this is general information only and you should seek professional 9 00:00:31,559 --> 00:00:36,690 Sean Aylmer: advice before making any personal investment decisions. Brian Arcese is 10 00:00:36,690 --> 00:00:40,260 Sean Aylmer: a portfolio manager at Foord Asset Management. He joins me 11 00:00:40,260 --> 00:00:43,050 Sean Aylmer: this morning from Singapore. Brian, welcome to Fear and Greed. 12 00:00:43,590 --> 00:00:45,000 Brian Arcese: Thank you, Sean. Thank you for having me. 13 00:00:45,630 --> 00:00:48,900 Sean Aylmer: So, we've all heard about inflation and those of us 14 00:00:48,900 --> 00:00:52,800 Sean Aylmer: who are old enough have lived through inflation previously, but 15 00:00:53,639 --> 00:00:57,720 Sean Aylmer: inflation is a totally different environment for investors, isn't it? 16 00:00:58,020 --> 00:00:59,010 Sean Aylmer: Explain why. 17 00:00:59,910 --> 00:01:02,130 Brian Arcese: No, it certainly is. I mean, I think that's a 18 00:01:02,130 --> 00:01:07,439 Brian Arcese: fantastic question, but obviously for the past 15 years, central 19 00:01:07,440 --> 00:01:12,480 Brian Arcese: banks around the world have largely been fighting deflation. Even 20 00:01:12,480 --> 00:01:18,179 Brian Arcese: most portfolio managers haven't been managing their funds long enough 21 00:01:18,420 --> 00:01:23,069 Brian Arcese: to have managed through a significant period of inflation previously. 22 00:01:23,520 --> 00:01:27,900 Brian Arcese: But it's obviously incredibly important, and the main reason that 23 00:01:27,900 --> 00:01:31,950 Brian Arcese: it is is it erodes your purchasing power and as 24 00:01:31,950 --> 00:01:35,160 Brian Arcese: an investor it erodes your capital. So you need to 25 00:01:35,160 --> 00:01:39,178 Brian Arcese: invest in a way where you earn a return higher 26 00:01:39,209 --> 00:01:42,840 Brian Arcese: than inflation, you need to earn a "real return". 27 00:01:43,590 --> 00:01:47,549 Sean Aylmer: Okay. So, how does this change the way an investor 28 00:01:47,549 --> 00:01:49,950 Sean Aylmer: should approach their portfolio? 29 00:01:51,090 --> 00:01:54,000 Brian Arcese: So, in our minds, there are a few things investors 30 00:01:54,060 --> 00:01:56,940 Brian Arcese: can and should do. I mean, if you look at 31 00:01:56,940 --> 00:02:02,219 Brian Arcese: equities in general, they are a reasonable hedge against inflation 32 00:02:02,340 --> 00:02:05,699 Brian Arcese: over the long-term, but it's very important to focus on 33 00:02:05,699 --> 00:02:10,200 Brian Arcese: equities that have real pricing power. So they either own 34 00:02:10,200 --> 00:02:13,739 Brian Arcese: real assets, for example, or they have a strong brand, 35 00:02:14,070 --> 00:02:18,119 Brian Arcese: they have the ability to price at least in line 36 00:02:18,120 --> 00:02:21,239 Brian Arcese: with inflation, if not higher. So, if you invest in 37 00:02:21,240 --> 00:02:25,470 Brian Arcese: those high quality companies that can do that, then at 38 00:02:25,470 --> 00:02:28,680 Brian Arcese: least over the longer term, that will result in a 39 00:02:28,680 --> 00:02:34,230 Brian Arcese: portfolio that outperforms inflation. Now, during periods of higher accelerating inflation, 40 00:02:34,230 --> 00:02:38,490 Brian Arcese: equities can be volatile, and so other asset classes like 41 00:02:38,490 --> 00:02:40,949 Brian Arcese: commodities for example, are equities that would be linked to 42 00:02:40,949 --> 00:02:45,720 Brian Arcese: commodities might provide investors with a more real-time inflation hedge. 43 00:02:46,080 --> 00:02:48,840 Brian Arcese: But equities over the long- term are really one of 44 00:02:48,840 --> 00:02:52,110 Brian Arcese: the only asset classes or few asset classes that will 45 00:02:52,320 --> 00:02:54,328 Brian Arcese: give you that inflation plus return. 46 00:02:55,500 --> 00:02:58,379 Sean Aylmer: Okay. So let's just deep dive into equities a little 47 00:02:58,379 --> 00:03:00,779 Sean Aylmer: bit further in terms of pricing power. So you are 48 00:03:00,780 --> 00:03:06,419 Sean Aylmer: talking about, it might be, and listeners, please seek professional advice for your 49 00:03:06,419 --> 00:03:09,570 Sean Aylmer: own personal circumstances so any names we are using here 50 00:03:09,780 --> 00:03:12,030 Sean Aylmer: may not suit you, but it may be a toll 51 00:03:12,030 --> 00:03:16,260 Sean Aylmer: road operator, for example, whose pricing is linked to inflation 52 00:03:16,379 --> 00:03:19,290 Sean Aylmer: within the jurisdiction it operates, or it might be someone 53 00:03:19,290 --> 00:03:23,970 Sean Aylmer: who basically has a near monopoly on a good or 54 00:03:23,970 --> 00:03:26,910 Sean Aylmer: service which people are prepared to pay higher prices for. 55 00:03:27,030 --> 00:03:28,590 Sean Aylmer: Is that the sort of thing you're talking about? 56 00:03:29,070 --> 00:03:33,809 Brian Arcese: That's absolutely correct. In some companies, for example, even industrial 57 00:03:33,809 --> 00:03:40,380 Brian Arcese: companies may have contracts with inflation linkages directly in them. So, 58 00:03:40,380 --> 00:03:43,860 Brian Arcese: if we look at a high quality company called Air 59 00:03:43,860 --> 00:03:48,359 Brian Arcese: Products that's domiciled in the US, it's an industrial gases company. 60 00:03:48,719 --> 00:03:53,759 Brian Arcese: So they supply not only cyclical gases to to industrial 61 00:03:53,760 --> 00:03:57,060 Brian Arcese: commodities complex, but also gas is like oxygen, for example, 62 00:03:57,060 --> 00:04:01,170 Brian Arcese: the hospitals, so it's also a defensive company. But directly 63 00:04:01,170 --> 00:04:05,790 Brian Arcese: within their contracts, they have links to inflation. So not 64 00:04:05,790 --> 00:04:08,309 Brian Arcese: only is the brand strong in the company well- managed, 65 00:04:08,309 --> 00:04:10,319 Brian Arcese: but you can see directly in the contracts that they 66 00:04:10,320 --> 00:04:13,440 Brian Arcese: will be able to price at least in line with inflation. So, 67 00:04:13,440 --> 00:04:17,279 Brian Arcese: that gives you a very strong degree of comfort that 68 00:04:17,279 --> 00:04:20,729 Brian Arcese: through time if you invest in companies like that, you'll 69 00:04:20,730 --> 00:04:23,909 Brian Arcese: be able to compound at least in line with inflation 70 00:04:23,910 --> 00:04:25,350 Brian Arcese: and earn a real return. 71 00:04:26,580 --> 00:04:29,549 Sean Aylmer: Are there certain sectors that an investor should look at 72 00:04:29,609 --> 00:04:34,919 Sean Aylmer: first? So, I'm not sure that it's an industrialist company, but 73 00:04:35,250 --> 00:04:38,549 Sean Aylmer: are there sectors for people out there listening and you 74 00:04:38,550 --> 00:04:43,469 Sean Aylmer: want an inflationary linked return in equities? Where should they 75 00:04:43,469 --> 00:04:44,189 Sean Aylmer: start looking? 76 00:04:45,299 --> 00:04:50,370 Brian Arcese: Yeah. So commodities, as I mentioned, it does offer more 77 00:04:50,370 --> 00:04:55,529 Brian Arcese: of a real- time hedge against inflation. So, commodities typically 78 00:04:55,560 --> 00:04:58,080 Brian Arcese: run up at least in line with inflation, if not 79 00:04:58,080 --> 00:05:00,660 Brian Arcese: ahead of it. I mean, oftentimes they may even be 80 00:05:00,660 --> 00:05:04,680 Brian Arcese: a driver of the inflation itself. So, if we look 81 00:05:04,709 --> 00:05:08,849 Brian Arcese: either within the energy space for example, there are companies 82 00:05:09,150 --> 00:05:13,740 Brian Arcese: that one could purchase, whether it's a traditional fossil fuel 83 00:05:13,740 --> 00:05:16,950 Brian Arcese: provider or an oil major that may be direct, the 84 00:05:16,950 --> 00:05:22,498 Brian Arcese: business may be directly linked to inflation or a commodities company, 85 00:05:22,500 --> 00:05:27,000 Brian Arcese: for example, where commodities broadly tend to be more closely 86 00:05:27,000 --> 00:05:31,140 Brian Arcese: linked to inflation. So companies like a Freeport-McMoRan, which would 87 00:05:31,140 --> 00:05:33,959 Brian Arcese: be the market leader or one of the two market 88 00:05:33,960 --> 00:05:39,419 Brian Arcese: leaders in copper globally. So, those are companies, because the 89 00:05:39,420 --> 00:05:44,250 Brian Arcese: revenue is really directly linked to the commodity price, offer 90 00:05:44,250 --> 00:05:47,190 Brian Arcese: more of a real- time hedge against inflation within an 91 00:05:47,190 --> 00:05:48,360 Brian Arcese: investor's portfolio. 92 00:05:48,990 --> 00:05:51,000 Sean Aylmer: Stay with me, Brian, we'll be back in a minute. 93 00:05:57,150 --> 00:06:00,390 Sean Aylmer: My guest this morning is Brian Arcese, portfolio manager at 94 00:06:00,450 --> 00:06:05,580 Sean Aylmer: Foord Asset Management. What about gold companies? And Australia has 95 00:06:05,580 --> 00:06:08,520 Sean Aylmer: a large gold company, Newcrest Mining, which is under takeover 96 00:06:08,520 --> 00:06:11,729 Sean Aylmer: offer from Newmont, which is I think it's Denver- based 97 00:06:11,730 --> 00:06:16,019 Sean Aylmer: or Colorado-based organisation. In Australia, we talk a lot about gold, 98 00:06:16,650 --> 00:06:18,990 Sean Aylmer: is that a good hedge against inflation? 99 00:06:19,470 --> 00:06:23,370 Brian Arcese: So, we invest in gold in our portfolios as well, 100 00:06:23,700 --> 00:06:27,659 Brian Arcese: though we do so more as a hedge against volatility 101 00:06:27,719 --> 00:06:33,479 Brian Arcese: and geopolitical risk rather than as a direct hedge against inflation. So, 102 00:06:33,480 --> 00:06:37,080 Brian Arcese: I think if you look at gold over the long- term, 103 00:06:37,410 --> 00:06:41,430 Brian Arcese: it has a lower correlation to inflation than some of 104 00:06:41,430 --> 00:06:44,130 Brian Arcese: the other commodities would provide. So if you wanted to 105 00:06:44,130 --> 00:06:48,599 Brian Arcese: invest in a commodity directly to hedge inflation, then we 106 00:06:48,599 --> 00:06:51,899 Brian Arcese: would suggest the commodity like copper for example, or even 107 00:06:51,900 --> 00:06:54,990 Brian Arcese: some of the fossil fuel providers. We would certainly recommend 108 00:06:54,990 --> 00:06:58,529 Brian Arcese: investing in gold as well. It's just that in our 109 00:06:58,529 --> 00:07:01,589 Brian Arcese: minds and in our portfolios, it's serving a slightly different 110 00:07:01,589 --> 00:07:05,460 Brian Arcese: purpose and hedging a different risk, which is general volatility 111 00:07:05,730 --> 00:07:08,609 Brian Arcese: and/or political risk, both of which are increasing. 112 00:07:09,630 --> 00:07:13,199 Sean Aylmer: What about real estate? Again, Australians invest in real estate 113 00:07:13,199 --> 00:07:15,960 Sean Aylmer: in their own homes, we understand that. And then in 114 00:07:15,960 --> 00:07:19,500 Sean Aylmer: a commercial sense, many of us have money in some 115 00:07:19,500 --> 00:07:22,139 Sean Aylmer: of the larger real estate investment trusts, but we also 116 00:07:22,139 --> 00:07:26,189 Sean Aylmer: see plenty of bad news from the REITs (Real Estate Investment Trusts), the property companies 117 00:07:26,580 --> 00:07:30,149 Sean Aylmer: on the back of higher interest rates and working from home, etc. 118 00:07:30,389 --> 00:07:32,880 Sean Aylmer: Where does real estate fit into the inflation picture? 119 00:07:33,570 --> 00:07:36,090 Brian Arcese: I think that's a great question. Now, it is somewhat 120 00:07:36,090 --> 00:07:39,599 Brian Arcese: incongruous in that real estate is often cited both as 121 00:07:39,599 --> 00:07:44,940 Brian Arcese: an inflation hedge and as a bond proxy. Now, obviously 122 00:07:46,080 --> 00:07:48,989 Brian Arcese: when real estate is wearing its bond proxy hat and 123 00:07:48,990 --> 00:07:52,950 Brian Arcese: interest rates are rising in no small part because inflation 124 00:07:52,950 --> 00:07:57,510 Brian Arcese: is high, then valuations come down. You're obviously discounting future 125 00:07:57,510 --> 00:08:00,690 Brian Arcese: cash flows at a higher interest rate, and as a result 126 00:08:00,690 --> 00:08:04,949 Brian Arcese: of that, cap rates rise and the value of property 127 00:08:04,949 --> 00:08:07,980 Brian Arcese: can decline. Now, that's really what happens in sort of 128 00:08:07,980 --> 00:08:11,220 Brian Arcese: the first period of an inflationary environment. But when you 129 00:08:11,220 --> 00:08:14,340 Brian Arcese: play that out going forward, what you then typically see 130 00:08:14,700 --> 00:08:18,960 Brian Arcese: is that inflation itself starts to really feed its way 131 00:08:18,960 --> 00:08:22,770 Brian Arcese: back into rents, for example, and incomes. So, property over 132 00:08:22,770 --> 00:08:26,160 Brian Arcese: the long-term is a very good hedge against inflation. It 133 00:08:26,160 --> 00:08:28,770 Brian Arcese: may not feel that way in the initial bouts of 134 00:08:28,770 --> 00:08:32,460 Brian Arcese: inflation or when inflation is high and accelerating, but over 135 00:08:32,460 --> 00:08:35,820 Brian Arcese: the long-term , there's a sweet spot when inflation is 136 00:08:35,820 --> 00:08:39,030 Brian Arcese: sort of in this 2% to 4% range when real 137 00:08:39,030 --> 00:08:43,800 Brian Arcese: estate actually outperforms the rest of the listed equity market, 138 00:08:43,800 --> 00:08:47,790 Brian Arcese: for example, and offers and acts as a real inflation hedge. 139 00:08:48,570 --> 00:08:53,040 Sean Aylmer: I can't not ask you, Brian, about tech stocks only 140 00:08:53,040 --> 00:08:55,080 Sean Aylmer: because of the run they've been on in the last 141 00:08:55,080 --> 00:08:57,750 Sean Aylmer: six months and the fact that Apple's now worth $ 3 142 00:08:57,750 --> 00:09:02,610 Sean Aylmer: trillion, I can never get my head around tech stocks. 143 00:09:02,760 --> 00:09:07,260 Sean Aylmer: They run and they fall fast and sometimes not always 144 00:09:07,260 --> 00:09:09,389 Sean Aylmer: rationally in my point of view, but how do we 145 00:09:09,389 --> 00:09:11,910 Sean Aylmer: think about tech stocks in an inflationary environment? 146 00:09:12,870 --> 00:09:15,899 Brian Arcese: So, I think what we saw last year, so when 147 00:09:15,900 --> 00:09:19,740 Brian Arcese: an inflation was most acute and we saw interest rates 148 00:09:19,770 --> 00:09:23,220 Brian Arcese: rising rapidly, so I mean closer to the end than 149 00:09:23,220 --> 00:09:28,110 Brian Arcese: to the beginning, but certainly experiencing the fastest and most 150 00:09:28,110 --> 00:09:31,709 Brian Arcese: acute rate rise of the past 40 years. So, that 151 00:09:31,860 --> 00:09:35,999 Brian Arcese: can be quite problematic for long duration growth companies such 152 00:09:36,000 --> 00:09:39,328 Brian Arcese: as tech. So we saw the sector underperform significantly during 153 00:09:39,330 --> 00:09:44,519 Brian Arcese: 2022. Now that rates are nearing peak, we do think 154 00:09:44,520 --> 00:09:47,280 Brian Arcese: that there are more increases to come, but certainly they're 155 00:09:47,280 --> 00:09:50,759 Brian Arcese: closer to peak than they were 12 to 18 months ago, these 156 00:09:50,759 --> 00:09:53,968 Brian Arcese: stocks have started to perform better, investors have moved back 157 00:09:53,969 --> 00:09:58,740 Brian Arcese: into long duration, including technology, and we've had a tailwind, 158 00:09:58,740 --> 00:10:02,820 Brian Arcese: an excitement around artificial intelligence. Now, in our mind, other 159 00:10:02,820 --> 00:10:08,249 Brian Arcese: portions of the market offer more value than technology companies 160 00:10:08,460 --> 00:10:12,059 Brian Arcese: currently. It's been quite a narrow rally and not only 161 00:10:12,059 --> 00:10:15,809 Brian Arcese: within technology, but in a small subset, sort of six 162 00:10:15,809 --> 00:10:19,468 Brian Arcese: companies within that technology space that have really driven most 163 00:10:19,470 --> 00:10:22,828 Brian Arcese: of the return. So, over the long- term, it's a 164 00:10:23,429 --> 00:10:26,610 Brian Arcese: fine place to look for investment candidates, but where we 165 00:10:26,610 --> 00:10:29,789 Brian Arcese: sit today, we do think that investors would be better 166 00:10:29,789 --> 00:10:32,010 Brian Arcese: served looking in other sectors first. 167 00:10:32,490 --> 00:10:34,290 Sean Aylmer: Okay. So we're just wrapping this up. So if we're 168 00:10:34,290 --> 00:10:39,720 Sean Aylmer: looking in other sectors in terms of equities, I mean, 169 00:10:39,720 --> 00:10:44,069 Sean Aylmer: we've spoken about commodities and gold companies, but let's leave commodities 170 00:10:44,070 --> 00:10:46,259 Sean Aylmer: out, what are some of the sectors that you would 171 00:10:46,260 --> 00:10:47,340 Sean Aylmer: prefer most? 172 00:10:48,389 --> 00:10:53,040 Brian Arcese: Sure. So, for us, the energy and material space, which 173 00:10:53,040 --> 00:10:56,100 Brian Arcese: would include companies like an Air Products, so not directly 174 00:10:56,130 --> 00:11:00,900 Brian Arcese: linked commodities, for example, comprise sort of 20% plus of 175 00:11:00,900 --> 00:11:05,340 Brian Arcese: our portfolio. And that's a very meaningful allocation if you 176 00:11:05,400 --> 00:11:08,189 Brian Arcese: take for example that those two sectors combined in a 177 00:11:08,190 --> 00:11:12,390 Brian Arcese: global equity benchmark are only the high single digits. So, 178 00:11:12,540 --> 00:11:17,010 Brian Arcese: relative to how the benchmark is constructed, we're quite overweight 179 00:11:17,010 --> 00:11:19,830 Brian Arcese: there. Now, each of the companies that we invest in 180 00:11:19,830 --> 00:11:24,420 Brian Arcese: need to be high quality sound investment candidates from a 181 00:11:24,450 --> 00:11:27,060 Brian Arcese: bottoms up standpoint in their own right. So it's not 182 00:11:27,090 --> 00:11:30,240 Brian Arcese: only a top down allocation, but really when you look 183 00:11:30,240 --> 00:11:33,238 Brian Arcese: at the opportunity set across all sectors today, those are 184 00:11:33,240 --> 00:11:35,700 Brian Arcese: the ones that are screening the most attractive and where 185 00:11:35,700 --> 00:11:39,179 Brian Arcese: in our minds, investors should start to turn over rocks 186 00:11:39,179 --> 00:11:41,789 Brian Arcese: and see what companies within there may be appealing to 187 00:11:41,789 --> 00:11:44,640 Brian Arcese: them or fit their own investment profile. 188 00:11:45,510 --> 00:11:47,490 Sean Aylmer: Brian, thank you for talking to Fear and Greed. 189 00:11:47,880 --> 00:11:48,330 Brian Arcese: Thank you. 190 00:11:48,870 --> 00:11:52,619 Sean Aylmer: That was Brian Arcese, portfolio manager at Foord Asset Management. 191 00:11:52,620 --> 00:11:55,170 Sean Aylmer: This is the Fear and Greed daily interview. Remember, this 192 00:11:55,170 --> 00:11:57,900 Sean Aylmer: is general information only and you should seek professional advice 193 00:11:58,109 --> 00:12:01,350 Sean Aylmer: before making investment decisions. Join us every morning for the 194 00:12:01,350 --> 00:12:04,080 Sean Aylmer: full episode of Fear and Greed, Australia's most popular business 195 00:12:04,080 --> 00:12:06,660 Sean Aylmer: podcast. I'm Sean Aylmer. Enjoy your day.