1 00:00:03,960 --> 00:00:06,360 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,450 --> 00:00:09,869 Sean Aylmer: Aylmer. We love talking about small- cap stocks on Fear 3 00:00:09,869 --> 00:00:12,869 Sean Aylmer: and Greed. There are some really interesting stories and it's 4 00:00:12,869 --> 00:00:16,139 Sean Aylmer: always good speaking to professional investors about the opportunities they 5 00:00:16,139 --> 00:00:18,870 Sean Aylmer: see at the smaller end of the market. Remember, this 6 00:00:18,870 --> 00:00:21,779 Sean Aylmer: is general information only and you should seek professional advice 7 00:00:21,780 --> 00:00:25,919 Sean Aylmer: before making any investment decisions. Dermot Ryan is portfolio manager 8 00:00:26,099 --> 00:00:30,120 Sean Aylmer: at Renaissance Smaller Companies Fund. Dermot, welcome back to Fear 9 00:00:30,120 --> 00:00:30,690 Sean Aylmer: and Greed. 10 00:00:30,780 --> 00:00:32,939 Dermot Ryan: Thanks, Sean. Wonderful to be on your show again. 11 00:00:33,690 --> 00:00:36,028 Sean Aylmer: How are you seeing markets in the Aussie economy at 12 00:00:36,029 --> 00:00:36,510 Sean Aylmer: the moment? 13 00:00:36,930 --> 00:00:40,140 Dermot Ryan: Look, at the moment we've got very macro- driven markets. 14 00:00:40,200 --> 00:00:45,420 Dermot Ryan: There's a lot of noise and chop around inflation rates. 15 00:00:45,450 --> 00:00:49,620 Dermot Ryan: We're 18 months into a global rate hike cycle and 16 00:00:49,769 --> 00:00:51,929 Dermot Ryan: fundamentals seem to have gone out the window on the 17 00:00:51,929 --> 00:00:55,890 Dermot Ryan: stock market as a result. We're seeing consumers and investors 18 00:00:55,890 --> 00:00:58,560 Dermot Ryan: fret about these higher interest rates of what they're going 19 00:00:58,560 --> 00:01:03,000 Dermot Ryan: to mean. We're starting to see the global indicators starting 20 00:01:03,000 --> 00:01:06,809 Dermot Ryan: to slow down because of the interest rate breaks being 21 00:01:06,809 --> 00:01:10,170 Dermot Ryan: applied. And this is something we saw in the US 22 00:01:10,170 --> 00:01:13,290 Dermot Ryan: about a year ago where consumer spending kind of screeched 23 00:01:13,290 --> 00:01:15,900 Dermot Ryan: to a stop there when they were around the same 24 00:01:15,930 --> 00:01:20,160 Dermot Ryan: interest rate levels. And it's fair to say it's happening 25 00:01:20,160 --> 00:01:23,490 Dermot Ryan: here now and we're seeing a number of similar kind 26 00:01:23,490 --> 00:01:28,408 Dermot Ryan: of retail profit downgrades coming through from our local retailers 27 00:01:28,440 --> 00:01:30,720 Dermot Ryan: in the same way as we saw Walmart and all 28 00:01:30,720 --> 00:01:34,980 Dermot Ryan: the other US retailers do the same last year. What 29 00:01:34,980 --> 00:01:38,730 Dermot Ryan: we find is these induced slowdowns take a few steps 30 00:01:38,730 --> 00:01:41,910 Dermot Ryan: or a little while to set in. At the start, 31 00:01:41,910 --> 00:01:45,539 Dermot Ryan: people don't notice the interest rates going up. Then they 32 00:01:45,539 --> 00:01:48,119 Dermot Ryan: start to panic about maybe the size of their mortgage 33 00:01:48,119 --> 00:01:51,360 Dermot Ryan: or their interest bills. Then they start to pull back 34 00:01:51,360 --> 00:01:54,510 Dermot Ryan: on spending. But after a while they start to work 35 00:01:54,510 --> 00:01:58,200 Dermot Ryan: around these things. We've seen from the ABS stats, a 36 00:01:58,200 --> 00:02:00,390 Dermot Ryan: lot of people going to get a second job or 37 00:02:00,420 --> 00:02:04,650 Dermot Ryan: doing more hours at work and things kind of settle 38 00:02:04,650 --> 00:02:08,700 Dermot Ryan: down after a while. In worst- case scenario, people will 39 00:02:08,910 --> 00:02:11,910 Dermot Ryan: sell some assets to get their debt position right, but 40 00:02:11,910 --> 00:02:15,870 Dermot Ryan: eventually, things settle into a new equilibrium, and demand and 41 00:02:15,870 --> 00:02:17,940 Dermot Ryan: inflation should normalize in that event. 42 00:02:18,809 --> 00:02:21,660 Sean Aylmer: Okay. So, let's bring on to the market and we're 43 00:02:21,660 --> 00:02:26,130 Sean Aylmer: here to talk about small caps. Where do small caps 44 00:02:26,220 --> 00:02:31,290 Sean Aylmer: fit into that scenario? They've certainly underperformed large caps in 45 00:02:31,290 --> 00:02:32,010 Sean Aylmer: the last little bit. 46 00:02:32,700 --> 00:02:35,579 Dermot Ryan: Yeah, I think because we've had a very prolonged interest 47 00:02:35,580 --> 00:02:39,599 Dermot Ryan: rate hiking, it's a couple of fifties to start and 48 00:02:39,599 --> 00:02:43,260 Dermot Ryan: then 25 points for month on month. And there's been kind 49 00:02:43,260 --> 00:02:47,010 Dermot Ryan: of a long slow bear market, you haven't really noticed 50 00:02:47,010 --> 00:02:50,700 Dermot Ryan: it, but the Small Ords are now down about 25% since 51 00:02:50,700 --> 00:02:55,739 Dermot Ryan: the start of 2022. That's at 20% underperformance from large caps 52 00:02:55,740 --> 00:02:59,549 Dermot Ryan: and that probably is because smaller companies don't have as 53 00:02:59,549 --> 00:03:04,020 Dermot Ryan: much pricing power as larger companies and maybe have to 54 00:03:04,020 --> 00:03:06,510 Dermot Ryan: compete harder to get good stuff. And so they're a 55 00:03:06,510 --> 00:03:09,810 Dermot Ryan: little bit more vulnerable. But what we see is that 56 00:03:09,929 --> 00:03:13,020 Dermot Ryan: when the market turns, they tend to turn and move 57 00:03:13,020 --> 00:03:17,249 Dermot Ryan: up faster than the large caps. And we think at 58 00:03:17,250 --> 00:03:20,970 Dermot Ryan: the moment the crowds and investors are a little bit 59 00:03:20,970 --> 00:03:24,780 Dermot Ryan: worried about where the short- term earnings are going. But 60 00:03:25,290 --> 00:03:28,950 Dermot Ryan: often this is the time where you start to get long- 61 00:03:28,950 --> 00:03:34,349 Dermot Ryan: term opportunities. Australia just went over 4% or 4.1% on the 62 00:03:34,350 --> 00:03:37,980 Dermot Ryan: cash rate, but similar economies like New Zealand are at 63 00:03:37,980 --> 00:03:43,500 Dermot Ryan: 5.5 and the US is 5. 25%. So we're a 64 00:03:43,500 --> 00:03:47,490 Dermot Ryan: long way towards that pinch point where the economy will 65 00:03:47,490 --> 00:03:52,379 Dermot Ryan: settle down and inflation and economic activity gets that new 66 00:03:52,379 --> 00:03:56,970 Dermot Ryan: equilibrium. But during that intervening panic, there's often really good 67 00:03:56,970 --> 00:04:01,230 Dermot Ryan: opportunities to buy companies with good industry positions that are 68 00:04:01,230 --> 00:04:05,040 Dermot Ryan: growing earnings, positive cash flow, and importantly for this part 69 00:04:05,040 --> 00:04:07,620 Dermot Ryan: of the cycle, low debt. And those are the kind 70 00:04:07,620 --> 00:04:09,660 Dermot Ryan: of companies we're looking for at Renaissance. 71 00:04:10,379 --> 00:04:12,780 Sean Aylmer: Okay. So tell us Dermot, can you name some of 72 00:04:12,780 --> 00:04:15,780 Sean Aylmer: the companies that you're looking at that have those characteristics? 73 00:04:15,960 --> 00:04:18,990 Dermot Ryan: Absolutely. I mean we've got a number of stocks in 74 00:04:18,990 --> 00:04:21,540 Dermot Ryan: the portfolio that fit that. I mean, when I talk 75 00:04:21,540 --> 00:04:24,089 Dermot Ryan: about maybe some of the new opportunities that we're seeing 76 00:04:24,089 --> 00:04:27,690 Dermot Ryan: at the moment. I really think that there's this end 77 00:04:27,690 --> 00:04:30,690 Dermot Ryan: of financial years stock takes sale going on in the retail 78 00:04:30,690 --> 00:04:34,560 Dermot Ryan: sector at the moment. I mentioned this happened a year 79 00:04:34,560 --> 00:04:38,099 Dermot Ryan: ago in the US and what we've seen more recently has 80 00:04:38,099 --> 00:04:41,309 Dermot Ryan: been a huge number of downgrades in the last couple 81 00:04:41,309 --> 00:04:45,569 Dermot Ryan: of weeks in domestic retailers. We've seen Wesfarmers, Baby Bunting, 82 00:04:45,570 --> 00:04:50,250 Dermot Ryan: Universal, Accent Group, we've seen DJS, they're not listed, but 83 00:04:50,250 --> 00:04:55,920 Dermot Ryan: they got apparently double- digit sale declines. So we're seeing 84 00:04:55,920 --> 00:04:59,969 Dermot Ryan: some opportunities starting to emerge there. As I mentioned last 85 00:04:59,969 --> 00:05:02,610 Dermot Ryan: year in the US what we saw is that that downgrade 86 00:05:02,610 --> 00:05:05,998 Dermot Ryan: cycle broadened a little bit as the economy slowed further. 87 00:05:06,000 --> 00:05:08,010 Dermot Ryan: So what we're trying to do there is start to 88 00:05:08,010 --> 00:05:11,700 Dermot Ryan: line up some targets in retail. We have been looking 89 00:05:11,700 --> 00:05:15,599 Dermot Ryan: at some American exposed companies. One of them, to give 90 00:05:15,599 --> 00:05:18,870 Dermot Ryan: you an example would be City Chic, which is a 91 00:05:18,928 --> 00:05:24,029 Dermot Ryan: apparel retailer. They had excess inventory. They're a year further 92 00:05:24,029 --> 00:05:27,180 Dermot Ryan: down the track in the US. So they're actually trying 93 00:05:27,180 --> 00:05:30,000 Dermot Ryan: to work through that inventory cycle and coming through in 94 00:05:30,000 --> 00:05:32,460 Dermot Ryan: a bit of a turnaround on the other side of 95 00:05:32,460 --> 00:05:36,990 Dermot Ryan: that retail slowdown in the US. And investors like ourselves, 96 00:05:36,990 --> 00:05:42,149 Dermot Ryan: and actually Brett Blundy, the famous retail turnaround investor are 97 00:05:42,180 --> 00:05:46,469 Dermot Ryan: both buying some shares there. We're also looking for opportunities 98 00:05:46,470 --> 00:05:50,130 Dermot Ryan: in that retail space that may not be as impacted 99 00:05:50,130 --> 00:05:53,909 Dermot Ryan: with the over- levered cohorts. And that's an area we're 100 00:05:53,910 --> 00:05:57,238 Dermot Ryan: working at. We're not really stepping in and buying there. 101 00:05:57,240 --> 00:05:59,998 Dermot Ryan: So I won't give you any other retail names yet. 102 00:06:00,779 --> 00:06:02,789 Dermot Ryan: I mean the other opportunities that we're seeing at the 103 00:06:02,790 --> 00:06:05,190 Dermot Ryan: moment really are more on the resources side. 104 00:06:05,910 --> 00:06:06,988 Sean Aylmer: Go on, go on. 105 00:06:07,440 --> 00:06:09,870 Dermot Ryan: So yeah, I mean we're also in a resource bear 106 00:06:09,870 --> 00:06:13,589 Dermot Ryan: market. There's been a lot of slow economic data of 107 00:06:13,589 --> 00:06:18,118 Dermot Ryan: China. They're now stimulating again, as well as the Western 108 00:06:18,119 --> 00:06:21,750 Dermot Ryan: world is in a slowdown. So at the moment during 109 00:06:21,750 --> 00:06:25,260 Dermot Ryan: the slowdown phase, we're buying a lot of gold stocks 110 00:06:25,260 --> 00:06:28,319 Dermot Ryan: and we have been since probably September last year. And we 111 00:06:28,320 --> 00:06:33,809 Dermot Ryan: think they've got good appeal. If the slowdown decelerates faster 112 00:06:33,809 --> 00:06:37,650 Dermot Ryan: than people think, but we think as we get on 113 00:06:37,650 --> 00:06:41,279 Dermot Ryan: later in the year, we really are looking at opportunities 114 00:06:41,279 --> 00:06:45,060 Dermot Ryan: in battery, minerals again, and outside lithium. Lithium was a 115 00:06:45,360 --> 00:06:50,249 Dermot Ryan: 2020 to 2022 trade, but we think things like copper, 116 00:06:50,639 --> 00:06:55,020 Dermot Ryan: nickel, even zinc, finding companies that can get through the 117 00:06:55,020 --> 00:06:59,970 Dermot Ryan: next year but have got expandable production and new projects 118 00:06:59,970 --> 00:07:03,480 Dermot Ryan: coming through. We really like them. But in the meantime, 119 00:07:03,480 --> 00:07:05,969 Dermot Ryan: it's probably the gold names that are still in the 120 00:07:05,969 --> 00:07:09,420 Dermot Ryan: ascendancy. We've got almost a record Aussie dollar gold price. 121 00:07:09,750 --> 00:07:14,010 Dermot Ryan: And for our domestic producers, there's been some terrible quarterlies 122 00:07:14,070 --> 00:07:15,900 Dermot Ryan: up until around now, but we think they're going to 123 00:07:15,900 --> 00:07:21,360 Dermot Ryan: get better as COVID interruptions and labor force shortages ease 124 00:07:21,360 --> 00:07:24,780 Dermot Ryan: in Western Australia. So we think some of the Gold 125 00:07:24,780 --> 00:07:27,929 Dermot Ryan: Road and Ramelius and some of these stocks that we've got 126 00:07:27,929 --> 00:07:31,080 Dermot Ryan: in the portfolio are kind of well positioned in the 127 00:07:31,080 --> 00:07:31,650 Dermot Ryan: short term. 128 00:07:32,160 --> 00:07:34,290 Sean Aylmer: Stay with me Dermot, we'll be back in a minute. 129 00:07:40,349 --> 00:07:44,280 Sean Aylmer: I'm speaking to Dermot Ryan, portfolio manager at Renaissance Smaller 130 00:07:44,280 --> 00:07:48,780 Sean Aylmer: Companies Fund. Okay. So far we've been talking very, I mean the retail 131 00:07:48,780 --> 00:07:51,630 Sean Aylmer: stocks, the mining stocks have been very linked to the 132 00:07:51,630 --> 00:07:57,240 Sean Aylmer: economic cycle. What about opportunities that are less dependent on 133 00:07:57,240 --> 00:07:57,840 Sean Aylmer: the cycle? 134 00:07:58,559 --> 00:08:02,099 Dermot Ryan: Yeah, I suppose, I mean small caps are all about the individual 135 00:08:02,099 --> 00:08:07,530 Dermot Ryan: stocks. It's less about the macro generally. There's always individual 136 00:08:07,620 --> 00:08:11,370 Dermot Ryan: opportunities that you can find in the market, one we're 137 00:08:11,370 --> 00:08:14,310 Dermot Ryan: invested in at the moment that we like is Austal. 138 00:08:14,820 --> 00:08:18,450 Dermot Ryan: They're the shipbuilder. They've got operations here and also in 139 00:08:18,450 --> 00:08:24,180 Dermot Ryan: Alabama. And they are after signing a $ 5 billion deal 140 00:08:24,180 --> 00:08:28,140 Dermot Ryan: with the US on naval vessels. They've got a number 141 00:08:28,140 --> 00:08:31,140 Dermot Ryan: of different bids in place as well, which might bring 142 00:08:31,140 --> 00:08:33,869 Dermot Ryan: them into submarines. They've got enough work on hand for 143 00:08:33,870 --> 00:08:36,718 Dermot Ryan: the next five to 10 years at what will likely 144 00:08:36,719 --> 00:08:40,350 Dermot Ryan: be pretty good margins. And what we're finding is a 145 00:08:40,350 --> 00:08:42,990 Dermot Ryan: lot of, there's a buildup in defense spend with the 146 00:08:42,990 --> 00:08:46,230 Dermot Ryan: geopolitical tensions in Asia. And we think they're just very 147 00:08:46,230 --> 00:08:49,350 Dermot Ryan: well positioned now to finally be at kind of full 148 00:08:49,350 --> 00:08:52,679 Dermot Ryan: capacity on their shipyards. We've seen the stock starting to 149 00:08:52,679 --> 00:08:55,799 Dermot Ryan: run, and yet there was even a few rumors last week, there 150 00:08:55,799 --> 00:08:59,670 Dermot Ryan: was a US private equity firm looking to buy in 151 00:08:59,670 --> 00:09:02,640 Dermot Ryan: some or maybe make a bid for the company. But 152 00:09:02,820 --> 00:09:06,059 Dermot Ryan: we think that's a good stock in this particular environment 153 00:09:06,059 --> 00:09:10,290 Dermot Ryan: and it's trading below replacement value and we think a 154 00:09:10,530 --> 00:09:15,509 Dermot Ryan: good opportunity for a medium- term grower that can grow 155 00:09:15,509 --> 00:09:17,309 Dermot Ryan: independent of the economic cycle. 156 00:09:18,119 --> 00:09:19,228 Sean Aylmer: Okay. And I know, I think you're a bit of 157 00:09:19,230 --> 00:09:20,790 Sean Aylmer: a fan of Estia Health too, aren't you? 158 00:09:21,690 --> 00:09:24,720 Dermot Ryan: Yeah, well, Estia Health's another one of those examples. I 159 00:09:24,720 --> 00:09:28,469 Dermot Ryan: mean, this is an aged care stock. It's the largest 160 00:09:28,469 --> 00:09:32,160 Dermot Ryan: listed player in Australia and they're under bid at the 161 00:09:32,160 --> 00:09:35,218 Dermot Ryan: moment by Bain. But I mean that's a similar kind 162 00:09:35,219 --> 00:09:38,070 Dermot Ryan: of a story. We bought that stock in the middle 163 00:09:38,070 --> 00:09:41,458 Dermot Ryan: of COVID. A lot of people were worried about what 164 00:09:41,460 --> 00:09:44,640 Dermot Ryan: the impacts of COVID were and whether their patients would 165 00:09:44,880 --> 00:09:48,870 Dermot Ryan: get infected or how they'd staffed their facilities and the 166 00:09:48,870 --> 00:09:54,239 Dermot Ryan: stock just dropped precipitously during that period. But thankfully we 167 00:09:54,240 --> 00:09:56,760 Dermot Ryan: were able to build a big position in the stock 168 00:09:56,760 --> 00:10:00,000 Dermot Ryan: and we're now selling it for more than double, just 169 00:10:00,030 --> 00:10:02,910 Dermot Ryan: three years later. But we think even the bid that 170 00:10:02,910 --> 00:10:05,670 Dermot Ryan: Bain started, the bid at $ 3 and just raised to 3, 171 00:10:05,670 --> 00:10:09,059 Dermot Ryan: 20. We think that barely even covers the replacement cost 172 00:10:09,059 --> 00:10:12,208 Dermot Ryan: for that business. So there's still potentially some oxide there 173 00:10:12,208 --> 00:10:16,078 Dermot Ryan: and a frank dividend before it goes. But I think 174 00:10:16,080 --> 00:10:21,120 Dermot Ryan: that's another example of just these idiosyncratic opportunities with asset 175 00:10:21,120 --> 00:10:23,969 Dermot Ryan: backing that you can find if you can try and 176 00:10:24,059 --> 00:10:28,049 Dermot Ryan: not sift through the panic, I suppose, and just find 177 00:10:28,049 --> 00:10:29,189 Dermot Ryan: assets that you want to own. 178 00:10:29,490 --> 00:10:31,620 Sean Aylmer: The moral of this story, it seems, or at least 179 00:10:31,620 --> 00:10:34,110 Sean Aylmer: the moral of this interview might be, it's time to 180 00:10:34,110 --> 00:10:35,670 Sean Aylmer: have a look at small caps again, Dermot. 181 00:10:36,840 --> 00:10:39,779 Dermot Ryan: Yes. Well, I think we're probably not at the bottom, 182 00:10:39,780 --> 00:10:43,049 Dermot Ryan: but it's always hard to catch that bottom of the 183 00:10:43,049 --> 00:10:48,059 Dermot Ryan: markets. But there's good reasons to believe we're getting closer 184 00:10:48,059 --> 00:10:51,990 Dermot Ryan: to that inflection point. I think inflation and interest rates 185 00:10:51,990 --> 00:10:54,660 Dermot Ryan: are going to be nearing their peak. We think that 186 00:10:54,990 --> 00:10:58,380 Dermot Ryan: once that initial pullback and spending is done, that the 187 00:10:58,380 --> 00:11:00,809 Dermot Ryan: market will and economy will settle down and people will 188 00:11:00,809 --> 00:11:03,899 Dermot Ryan: get used to the new disposable income that they have 189 00:11:04,350 --> 00:11:07,170 Dermot Ryan: and we'll start to move forward. I mean if we 190 00:11:07,170 --> 00:11:10,320 Dermot Ryan: look at the US example we're talking about earlier, the 191 00:11:10,320 --> 00:11:15,300 Dermot Ryan: US Russell 2000 retraced about 25% and it's actually been 192 00:11:15,300 --> 00:11:19,559 Dermot Ryan: rebounding. It's rebounded about 10% in the last two months. 193 00:11:19,559 --> 00:11:22,590 Dermot Ryan: So it takes a few months for these things to 194 00:11:22,590 --> 00:11:25,740 Dermot Ryan: play through, but you've got to get positioned before they 195 00:11:25,740 --> 00:11:29,130 Dermot Ryan: turn back up and it's always a good idea to start 196 00:11:29,130 --> 00:11:32,189 Dermot Ryan: to step in before that recovery comes through, so you're 197 00:11:32,190 --> 00:11:32,789 Dermot Ryan: in the market. 198 00:11:33,690 --> 00:11:35,520 Sean Aylmer: Dermot, thank you for talking to Fear and Greed. 199 00:11:36,059 --> 00:11:36,598 Dermot Ryan: Thanks, Sean. 200 00:11:37,410 --> 00:11:41,639 Sean Aylmer: That was Dermot Ryan, portfolio manager at Renaissance Smaller Companies 201 00:11:41,639 --> 00:11:44,520 Sean Aylmer: Fund. This is the Fear and Greed Daily Interview. Remember 202 00:11:44,520 --> 00:11:47,880 Sean Aylmer: you should get professional advice before making any investment decisions. 203 00:11:47,910 --> 00:11:49,860 Sean Aylmer: Join us every morning for the full episode of Fear 204 00:11:49,860 --> 00:11:53,100 Sean Aylmer: and Greed, Australia's most popular business podcast. I'm Sean Aylmer. 205 00:11:53,700 --> 00:11:54,420 Sean Aylmer: Enjoy your day.