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Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. As

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Sean Aylmer: the economy reopens after the last round of lockdowns, certain

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Sean Aylmer: sectors are going to benefit much more than others. I

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Sean Aylmer: wanted to have a look today at the companies who are

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Sean Aylmer: most exposed to the reopening trade and where the opportunities

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Sean Aylmer: and risks are for investors. My guest this morning is

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Sean Aylmer: Kristiaan Rehder, portfolio manager at Kardinia Capital, part of the

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Sean Aylmer: Bennelong Funds Management Group. Kristiaan, welcome to Fear and Greed.

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Kristiaan Rehder: Hi  Sean.  Thanks  for  having  me.

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Sean Aylmer: So,  the  reopening  trade,  the  reflation  trade,  whatever  you  want 

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Sean Aylmer: to  call  it,  what  are  we  talking  about?  What's  it  mean?

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Kristiaan Rehder: Well, look, we've all been in lockdown for a while

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Kristiaan Rehder: now and we're all looking forward to getting out of it.

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Kristiaan Rehder: That's for sure. But look, this reflation trade at its

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Kristiaan Rehder: core is really about companies that are going to benefit

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Kristiaan Rehder: from the greater freedom of movement, the lifting of restrictions

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Kristiaan Rehder: that much of the Australian population is currently under, and what

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Kristiaan Rehder: that means for earnings and businesses prospects in the future. So,

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Kristiaan Rehder: if you look at kind of the spending of goods

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Kristiaan Rehder: through the pandemics, it's really come at the obvious expense

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Kristiaan Rehder: of services. So, people who've been buying more online, they've

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Kristiaan Rehder: been spending money less on leisure pursuits, and that's obvious

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Kristiaan Rehder: to all of us. But with the opening up of economies,

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Kristiaan Rehder: we expect this trend to reverse where customers will be

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Kristiaan Rehder: looking to spend more on travel, leisure pursuits, such as gaming, transport,

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Kristiaan Rehder: and that obviously feeds through to the energy sector. If

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Kristiaan Rehder: you see what's happening in Victoria and New South Wales,

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Kristiaan Rehder: approximately 50% of Australia's population is under various degrees of

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Kristiaan Rehder: stay at home orders. And that represents significant pent up

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Kristiaan Rehder: demand as far as we see it. We keep a close eye

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Kristiaan Rehder: on this and the surveys that we pay particular attention to,

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Kristiaan Rehder: show that consumers are ready to spend. In fact, the

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Kristiaan Rehder: spending intentions at the moment over the next 12 months is at record

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Kristiaan Rehder: high at levels we haven't actually seen before. Another potential

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Kristiaan Rehder: winner in terms of sector exposure is clearly going to

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Kristiaan Rehder: be the retail REIT (Real Estate Investment Trust) exposure. And companies where consumers are

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Kristiaan Rehder: looking to re-enter shopping malls, shopping malls, particularly those that

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Kristiaan Rehder: not only offer the sale of product, but also entertainment and leisure pursuits

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Kristiaan Rehder: such as movies, gyms, restaurants and the like.

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Sean Aylmer: Okay. Well, I might jump in and break some of these down.

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Sean Aylmer: So travel and tourism stocks are an obvious one. And

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Sean Aylmer: if you look at some of those on the ASX 200,

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Sean Aylmer: Corporate Travel Management, Qantas. What am I missing there? Webjet,

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Sean Aylmer: Flight Centre, they've all done pretty well in the last

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Sean Aylmer: sort of four to six weeks. I presume that's a

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Sean Aylmer: reflection of what you are talking about, but there is

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Sean Aylmer: still upside for those sorts of stocks?

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Kristiaan Rehder: Well, it's interesting. The travel sector has been very hardly done by,

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Kristiaan Rehder: in terms of their financial performance over the last 12 months. And it shouldn't come

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Kristiaan Rehder: as any surprise that at the most recent financial results,

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Kristiaan Rehder: we saw some massive losses. So Qantas lost around $2 billion.

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Kristiaan Rehder: Flight Centre lost about $500 million. But remember, this is

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Kristiaan Rehder: all backward looking. This is their financial performance for the

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Kristiaan Rehder: previous 12 months. And you need to bear in mind

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Kristiaan Rehder: that markets look forward typically 9 to 12 months. And

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Kristiaan Rehder: the future is starting to look brighter for these companies. So,

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Kristiaan Rehder: it's not going to be a smooth start. I think

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Kristiaan Rehder: for the travel industry, there's going to be hiccups along

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Kristiaan Rehder: the way. Home quarantining requirements for international travellers is going

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Kristiaan Rehder: to be required. And that's going to mean that many

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Kristiaan Rehder: travellers might remain hesitant to travel. Particularly as the virus is so widespread globally.

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Kristiaan Rehder: But we think the future is looking brighter. We've seen

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Kristiaan Rehder: Qantas come out and they monitor research monthly as to

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Kristiaan Rehder: what the travel intentions are for their customer group. And

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Kristiaan Rehder: they've actually seen greater demand in terms of intentions to

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Kristiaan Rehder: travel overseas the next 12 months than they've ever seen before.

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Kristiaan Rehder: In fact, they're three times higher than what they saw pre- pandemic.

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Kristiaan Rehder: So we tend to agree with Qantas and we got a

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Kristiaan Rehder: commentary coming out of Flight Centre. We actually own both

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Kristiaan Rehder: those companies in the portfolio.

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Sean Aylmer: Okay. Interested in consumer discretionary stocks. They're sorts of ones

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Sean Aylmer: that you would imagine when people are spending more money,

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Sean Aylmer: getting out and doing stuff, they would do better. We're

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Sean Aylmer: talking about the JB Hi-Fi's, Premier Investments, some of these sorts

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Sean Aylmer: of organisations. But they actually had a pretty good COVID

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Sean Aylmer: with respect. Economically, they had, financially, they had a pretty good COVID. What do you think of those

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Sean Aylmer: sorts of stocks?

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Kristiaan Rehder: Well, that's really interesting Sean, because Australians propensity to consume never ceases

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Kristiaan Rehder: to amaze me. It really doesn't. We've just come through the pandemic

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Kristiaan Rehder: and there's certain retail stocks have never done it better.

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Kristiaan Rehder: We think Mr and Mrs. Australia's love for shopping will

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Kristiaan Rehder: continue through this final quarter of this calendar year and

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Kristiaan Rehder: most likely, well beyond. These surveys I was mentioning are

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Kristiaan Rehder: seeing elevated spending intentions pretty much across every single discretionary

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Kristiaan Rehder: category group. So on one side, you've got accessories, which

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Kristiaan Rehder: is showing strong intentions to spend on the other side you've got white goods. And

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Kristiaan Rehder: to your question, that kind of sits at odds somewhat

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Kristiaan Rehder: with the consensus views that retailers have done well, but

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Kristiaan Rehder: when life returns normal, you're going to see a tapering

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Kristiaan Rehder: of demand. Our view is that this potentially might misread

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Kristiaan Rehder: the changed circumstances and the opposite might fact be the case.

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Kristiaan Rehder: If you look at online retailers, they've also been a major

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Kristiaan Rehder: beneficiary of lockdowns as consumers switched their spending to online

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Kristiaan Rehder: channels at a faster pace than we've seen in the past.

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Kristiaan Rehder: While this may slow as economies reopen, we think this is an

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Kristiaan Rehder: enduring theme and these themes tend to last multiple years.

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Kristiaan Rehder: So online retailers we think will continue to benefit from

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Kristiaan Rehder: this shift away from bricks and mortar to online.

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Sean Aylmer: Okay. Kristiaan,  stay  with  me,  we'll  be  back  in  a  minute. 

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Sean Aylmer: I'm  speaking  to  Kristiaan Rehder,  portfolio  manager  at  Kardinia  Capital.  What 

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Sean Aylmer: other  stocks  do  you  like  in  terms  of  the  outlook 

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Sean Aylmer: for  the  next  6  to  12  months?  Or  what  sectors, 

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Sean Aylmer: if  not  stocks?

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Kristiaan Rehder: Well, look, I can talk about stocks. Look, we've just

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Kristiaan Rehder: gone through reporting season. Any company that has a June

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Kristiaan Rehder: financial year end reports their results in August. So we've

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Kristiaan Rehder: just had great visibility across the retail sector through that month.

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Kristiaan Rehder: One of the key themes that we saw through that

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Kristiaan Rehder: reporting season, was just this elevated level of inventories that

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Kristiaan Rehder: are being held by retailers. And it seems like all

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Kristiaan Rehder: the retailers are wanting to invest in inventory as a strategic play.

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Kristiaan Rehder: You've seen retailers such as Breville, Super Group, Kogan, all

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Kristiaan Rehder: showing these high inventory levels. And if you look at commentary

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Kristiaan Rehder: from Super Group, it gives you an insight as to

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Kristiaan Rehder: what they're thinking. And what they're basically saying is if

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Kristiaan Rehder: you don't have the inventory on the shelf or in

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Kristiaan Rehder: the warehouse today, it's unlikely you're going to have the

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Kristiaan Rehder: product to sell during that peak critical Christmas period. And

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Kristiaan Rehder: the reason for that is you're seeing bottlenecks at ports. You're seeing shipping delays,

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Kristiaan Rehder: you're seeing elevated cost to move freight. It is a real issue. And

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Kristiaan Rehder: what that means for us is you never really, as

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Kristiaan Rehder: an investor, want to see inventory growth outstripping sales growth.

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Kristiaan Rehder: This is something Kardinia is watching very closely because if

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Kristiaan Rehder: that sales heightened demand isn't met in Christmas, you might

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Kristiaan Rehder: actually see heightened promotion material. You might see their customer

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Kristiaan Rehder: being a major beneficiary into the new year in terms

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Kristiaan Rehder: of discounting. That aside, there's kind of three stocks we

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Kristiaan Rehder: have in the portfolio which is of particular interest to us.

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Kristiaan Rehder: City Chic is a company that is listed as an Australian,

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Kristiaan Rehder: especially women's wear retailer. It specialises in plus size women.

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Kristiaan Rehder: So women's sizes 14 and plus. And they sell apparel,

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Kristiaan Rehder: accessories and footwear. Terrific management team, wonderful business. They're operating

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Kristiaan Rehder: a network of 92 stores across Australia, New Zealand, and they're

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Kristiaan Rehder: branching out very successfully, I might add, into the US.

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Kristiaan Rehder: Lovisa is another one I'm not sure if many of

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Kristiaan Rehder: your listeners have heard of before, but it's fast fashion

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Kristiaan Rehder: jewellery in terms of the accessories category. They basically scan

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Kristiaan Rehder: accessories worn by celebrities, influencers, and they can copy and

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Kristiaan Rehder: mimic those items and turn them around rapidly and release

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Kristiaan Rehder: them across their store network. It's a global growth story.

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Kristiaan Rehder: 72% of their stores are offshore. They had significant exposure to the

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Kristiaan Rehder: store rollout. They rolled out 109 stores net last year,

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Kristiaan Rehder: we expect similar growth this year. And then finally one

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Kristiaan Rehder: stock that we all know of and it's been in our portfolio

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Kristiaan Rehder: for some time, that's JB Hi-Fi. Their current trading strength

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Kristiaan Rehder: is incredibly impressive considering 55% of their stores is currently closed.

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Kristiaan Rehder: We're seeing sales reverting online. And it's really those high

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Kristiaan Rehder: end items. Those kind of assisted sale products that have

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Kristiaan Rehder: been deferred. But when those stores open up, we think

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Kristiaan Rehder: that those categories will bounce back. Their current trading in

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Kristiaan Rehder: FY22 has been incredibly strong, around 20% up on the

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Kristiaan Rehder: FY19 level, if you assume the pandemic here was an anomaly.

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Kristiaan Rehder: So that business is travelling well as well.

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Sean Aylmer: Okay. Kristiaan Rehder,  tell  me,  healthcare.  I  see  the  value  in  healthcare 

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Sean Aylmer: as  a  long  term  play  because  it's  obviously  an  area 

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Sean Aylmer: of  huge  spending  in  the  next  decade,  20,  30  years 

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Sean Aylmer: as  populations  get  older.  I  cannot  make  head  nor  tail 

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Sean Aylmer: of  what  healthcare  stocks  to  buy,  why  they're  down  so 

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Sean Aylmer: much  in  recent  times?  Healthcare  to  me  is  a  mystery.

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Kristiaan Rehder: Yeah, healthcare's a very interesting sector. And it's one that

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Kristiaan Rehder: we like very much with a couple of names in the healthcare space,

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Kristiaan Rehder: which we have owned for some time. Look, when bond

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Kristiaan Rehder: yields start to rise. And we've started to see that

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Kristiaan Rehder: in more recent times, particularly in the US, high P/E (Price to Earnings ratio)

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Kristiaan Rehder: stocks like healthcare, tech's another category, tend to come under pressure.

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Kristiaan Rehder: Most healthcare stocks on the ASX are trading on elevated P/Es.

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Kristiaan Rehder: And the reason for that is because they have strong

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Kristiaan Rehder: growth outlooks for all the reasons you just mentioned, and they

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Kristiaan Rehder: have relatively defensive earnings. So they've shown demonstrable growth over

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Kristiaan Rehder: a prolonged period of time. So their track records are excellent.

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Kristiaan Rehder: So let me just pick a few out. CSL, P/E

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Kristiaan Rehder: of 40 times. Cochlear, P/E of 50 times. ResMed P/E of 40 times.

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Kristiaan Rehder: So these are high P/E companies that are particularly vulnerable as

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Kristiaan Rehder: bond yields start to rise. And that's what we're seeing

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Kristiaan Rehder: in the market at the moment. No reflection on the quality of the business.

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Kristiaan Rehder: It's just a valuation question. There is one stock that is

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Kristiaan Rehder: in our portfolio that we think might buck the trend,

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Kristiaan Rehder: that's CSL. And the reason why we think it's potentially

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Kristiaan Rehder: going to buck the trend is because CSL has relied upon donors walking into their

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Kristiaan Rehder: collection centres and donating blood. They fractionate that blood. They turn it into

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Kristiaan Rehder: IVIG (Intravenous immune globulin) and other specialty products that treat a variety of ailments.

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Kristiaan Rehder: It's an amazing product. They are highly reliant on these

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Kristiaan Rehder: donors walking in their doors. With COVID, they've seen less donors

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Kristiaan Rehder: walking in their collection centre network in the US. Australia's been impacted.

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Kristiaan Rehder: We think CSL will benefit from the opening up, it's

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Kristiaan Rehder: almost somewhat of an opening up trade. So we're very

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Kristiaan Rehder: comfortable holding CSL over the next 12 months.

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Sean Aylmer: Okay. We're going through the whole sectors here. This is

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Sean Aylmer: great Kristiaan. So you mentioned REITs, real estate investment trusts,

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Sean Aylmer: and the big mall owners. So you're talking about Scentre

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Sean Aylmer: and Stockland, those sorts of organisations. What's the outlook for them?

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Kristiaan Rehder: Yeah. Look, we're quite positively disposed about the retail REITs, and also

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Kristiaan Rehder: kind of the property REITs as well. They've generally done

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Kristiaan Rehder: very well in Australia. The housing market is one sector

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Kristiaan Rehder: that tends to go from strength to strength. It's interesting,

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Kristiaan Rehder: I think we're now reaching a stage where not only businesses,

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Kristiaan Rehder: but also consumers are looking through COVID in many ways.

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Kristiaan Rehder: And you're seeing that probably most obviously in the housing market.

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Kristiaan Rehder: Housing markets in not only just the capital cities, but

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Kristiaan Rehder: regional centres are just continuing to lift. That's having positive

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Kristiaan Rehder: earnings flow through into some of the housing REITs, as

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Kristiaan Rehder: well as the industrial REITs. So, we've got Charter Hall

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Kristiaan Rehder: in our portfolio, which we have held for a long

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Kristiaan Rehder: period of time. Very comfortable with that. And I think

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Kristiaan Rehder: with these REITs, whilst they will also come under pressure

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Kristiaan Rehder: for a lot of the same reasons I mentioned about

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Kristiaan Rehder: healthcare with a rising bond yield environment. We saw that

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Kristiaan Rehder: back in 2013. We also saw that very briefly last year.

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Kristiaan Rehder: We are long term investors and we're happy to hold them

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Kristiaan Rehder: for the longer term.

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Sean Aylmer: Now  we've  managed  to  have  a  whole  interview  and we've only  got 

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Sean Aylmer: about  60  seconds  left,  without  mentioning  the  big  four  banks, 

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Sean Aylmer: the  big  three  miners,  and  the  tech  stocks,  which  I 

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Sean Aylmer: think is  really  quite  remarkable.  So  Kristiaan,  I'm  going  to  put 

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Sean Aylmer: you  under  total  pressure  here,  the  banks  in  about  15  seconds.

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Kristiaan Rehder: Oh look, we really like the banks. The best time

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Kristiaan Rehder: to own the banks is right after a crisis or

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Kristiaan Rehder: to short them just before its crisis. We're a long/short fund.

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Kristiaan Rehder: So my experience is good luck trying to shorten them

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Kristiaan Rehder: before a crisis. In Australia, banks tend to go up. We went

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Kristiaan Rehder: quite long in the banks in April last year and

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Kristiaan Rehder: we've done terrifically well out of them. In terms of

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Kristiaan Rehder: the major catalyst, we saw provision underwrite winds, returning of

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Kristiaan Rehder: surplus capital back to shareholders, we've kind of hit those catalysts,

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Kristiaan Rehder: are now behind us. I wouldn't be surprised that the

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Kristiaan Rehder: banks have been used as a funding source to move

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Kristiaan Rehder: into more of the reopening stocks. I think that's probably

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Kristiaan Rehder: likely what we'll see over the next six months. But that's

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Kristiaan Rehder: very short term. In the longer term, still really like

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Kristiaan Rehder: the banks. I think Australia's in not bad shape.

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Sean Aylmer: The  material  sector,  and  really  specifically  the  big  three,  BHP, 

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Sean Aylmer: Fortescue  and  Rio  Tinto.

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Kristiaan Rehder: Oh look, Sean, you're really stretching me here. I mean,

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Kristiaan Rehder: there's a lot of issues coming from China at the moment. I don't

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Kristiaan Rehder: think the geopolitical situation is improving at all. In terms

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Kristiaan Rehder: of growth, and what we're seeing in China is that they're

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Kristiaan Rehder: restricting manufacturing activity. They're trying to curb electricity consumption. They're

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Kristiaan Rehder: having power cuts across China. I think that's having a

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Kristiaan Rehder: direct influence in terms of their economic growth. It's starting

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Kristiaan Rehder: to slow. Look, I like resources. They've come off a

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Kristiaan Rehder: lot in recent times, but I am just wary of

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Kristiaan Rehder: them in the short term.

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Sean Aylmer: And very briefly, tech stocks. We're going to lose Afterpay.

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Sean Aylmer: Though I suppose we gain a secondary listing of Square.

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Sean Aylmer: But there are certain other companies, Appen, WiseTech Global, Xero,

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Sean Aylmer: who've performed really well.

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Kristiaan Rehder: Yeah, they have. Look, tech has been one of our

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Kristiaan Rehder: top exposures since the pandemic in 2020. We've done very

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Kristiaan Rehder: well out of that sector. It's now clearly expensive on

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Kristiaan Rehder: forward multiples. When yields rise, multiples tend to derate. And it's

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Kristiaan Rehder: been a demonstrable negative correlation between real yields and equity

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Kristiaan Rehder: market valuation since 2015. And those companies on the highest

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Kristiaan Rehder: multiples are the most at risk, which is the tech sector.

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Kristiaan Rehder: So again, I wouldn't be surprised if tech is used

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Kristiaan Rehder: as a funding source. We've significantly reduced our exposure to

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Kristiaan Rehder: the tech sector. We've done that by reducing our long exposure.

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Kristiaan Rehder: But again, we're a long/short fund, so we've been adding

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Kristiaan Rehder: to our shorts as well. We don't tend to talk

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Kristiaan Rehder: about the individual shorts we're short, because it's a quick

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Kristiaan Rehder: way of CEOs never returning your phone call again. They tend to

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Kristiaan Rehder: treat their companies like children and we fully understand that.

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Kristiaan Rehder: But yes, tech is somewhere we've actually been reducing our

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Kristiaan Rehder: exposure in recent times.

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Sean Aylmer: Kristiaan,  thank  you  for  talking  to  Fear  and  Greed.

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Kristiaan Rehder: No  problem.  Thank  you,  Sean.  It  was  a  pleasure

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Sean Aylmer: That was Kristiaan Rehder, portfolio manager at Kardinia Capital. This is the Fear and Greed

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Sean Aylmer: daily interview. Join me every morning for the full Fear

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Sean Aylmer: and Greed podcast with all the business news you need

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Sean Aylmer: to know. I'm Sean Aylmer, enjoy your day.