1 00:00:03,570 --> 00:00:06,470 Sean Aylmer: Welcome to the Fear and Greed daily interview, I'm Sean Aylmer. 2 00:00:06,840 --> 00:00:09,980 Sean Aylmer: With everything going on in Ukraine and commodity prices, U. S. 3 00:00:09,980 --> 00:00:12,800 Sean Aylmer: interest rates, local employment; it's been very difficult to know 4 00:00:12,890 --> 00:00:16,510 Sean Aylmer: quite what to do as an investor. Certainly, markets have 5 00:00:16,510 --> 00:00:19,650 Sean Aylmer: been volatile. I wanted to have a look at how 6 00:00:19,650 --> 00:00:21,460 Sean Aylmer: we could help out investors this morning and where to 7 00:00:21,460 --> 00:00:26,189 Sean Aylmer: find opportunities. AMP Capital Australian equities portfolio manager, Dermot Ryan 8 00:00:26,190 --> 00:00:28,590 Sean Aylmer: is my guest this morning. Dermot, I've spoken to you 9 00:00:28,590 --> 00:00:31,830 Sean Aylmer: quite a bit over different times. I'm sure you can 10 00:00:31,830 --> 00:00:32,669 Sean Aylmer: give us good oil. 11 00:00:33,000 --> 00:00:35,610 Dermot Ryan: Thanks, Sean, and good to be on the show again. 12 00:00:36,030 --> 00:00:39,890 Dermot Ryan: Yeah look, it's been a very, very top down and 13 00:00:39,940 --> 00:00:44,129 Dermot Ryan: volatile market in 2022. We've come off two very strong 14 00:00:44,130 --> 00:00:48,409 Dermot Ryan: years, and you're right. Geopolitical tensions have really taken the 15 00:00:48,409 --> 00:00:51,920 Dermot Ryan: forefront, particularly in Europe, but also risks are building in 16 00:00:51,920 --> 00:00:55,640 Dermot Ryan: Asia. More importantly, all these supply chain issues that we've 17 00:00:55,640 --> 00:00:58,660 Dermot Ryan: seen over the past two years are being exacerbated by 18 00:00:58,660 --> 00:01:03,390 Dermot Ryan: this. So, we're seeing inflation come through, producer- led inflation 19 00:01:03,390 --> 00:01:07,009 Dermot Ryan: coming through, and the central banks are starting to have 20 00:01:07,010 --> 00:01:10,509 Dermot Ryan: to come off the sidelines. We saw the 25 basis 21 00:01:10,510 --> 00:01:14,470 Dermot Ryan: point move from The Fed this month, as well as 22 00:01:14,870 --> 00:01:17,470 Dermot Ryan: we think the ORBA is going to have to step 23 00:01:17,470 --> 00:01:20,350 Dermot Ryan: up and start raising rates as we get later into 24 00:01:20,350 --> 00:01:23,429 Dermot Ryan: the year. So, there's quite a lot of volatility there. 25 00:01:23,770 --> 00:01:26,360 Dermot Ryan: From the stock market point of view, it's not necessarily 26 00:01:26,360 --> 00:01:30,670 Dermot Ryan: all related to the earnings and profitability, and we've seen 27 00:01:30,680 --> 00:01:33,510 Dermot Ryan: some really big moves. Some of these tech stocks in 28 00:01:33,510 --> 00:01:37,229 Dermot Ryan: particular, just the sniff of interest rate rises, some of 29 00:01:37,230 --> 00:01:40,720 Dermot Ryan: them are off 50%, 60%, 70%. So, it's been a wild ride 30 00:01:40,860 --> 00:01:42,250 Dermot Ryan: in some corners of the market. 31 00:01:42,910 --> 00:01:44,560 Sean Aylmer: Now, let's talk about some of that. I want to 32 00:01:44,560 --> 00:01:46,720 Sean Aylmer: get onto tech stocks and banks and things like that. 33 00:01:46,720 --> 00:01:52,010 Sean Aylmer: But just as an investor, an overall guiding principle about 34 00:01:52,010 --> 00:01:54,880 Sean Aylmer: how I think about investing my money or at least 35 00:01:55,030 --> 00:01:57,940 Sean Aylmer: thinking about my portfolio at the moment, before we get 36 00:01:57,940 --> 00:01:59,240 Sean Aylmer: into specific sectors? 37 00:01:59,730 --> 00:02:02,870 Dermot Ryan: I guess from that way of thinking, the last decade 38 00:02:02,870 --> 00:02:05,690 Dermot Ryan: has been very low interest rates or falling interest rates 39 00:02:05,690 --> 00:02:08,619 Dermot Ryan: in Australia, but very low ones offshore. It's been low 40 00:02:08,620 --> 00:02:14,040 Dermot Ryan: levels of inflation. There's been PE expansions in areas where 41 00:02:14,040 --> 00:02:16,960 Dermot Ryan: there has been growth. What we're facing now is a 42 00:02:17,050 --> 00:02:22,310 Dermot Ryan: different set of top down inputs. So, inflation looks very 43 00:02:22,310 --> 00:02:26,870 Dermot Ryan: persistent and looks likely to be growing. So, inflation is 44 00:02:26,870 --> 00:02:29,859 Dermot Ryan: running at high single digits in Europe and the U. 45 00:02:29,860 --> 00:02:33,770 Dermot Ryan: S., and Australia is likely to be increasing from around 46 00:02:33,770 --> 00:02:36,500 Dermot Ryan: 4% now up towards those levels as we come out 47 00:02:36,500 --> 00:02:41,070 Dermot Ryan: of COVID. So, we're expecting wage and input inflation. So, 48 00:02:41,070 --> 00:02:43,549 Dermot Ryan: you've really got to look at margins when you're in 49 00:02:43,550 --> 00:02:46,900 Dermot Ryan: equities, and you also have to look at how inflation 50 00:02:46,960 --> 00:02:49,880 Dermot Ryan: may eat some of your returns in areas like fixed 51 00:02:49,880 --> 00:02:53,130 Dermot Ryan: income, where your coupons for your bonds are fixed. So, 52 00:02:53,450 --> 00:02:56,260 Dermot Ryan: they mightn't be as effective at driving returns in your 53 00:02:56,260 --> 00:02:59,500 Dermot Ryan: portfolio as we go forward. I think you also need 54 00:02:59,500 --> 00:03:02,810 Dermot Ryan: to think about where interest rates go from here, and 55 00:03:02,860 --> 00:03:05,700 Dermot Ryan: how far up they go, essentially, and try to think 56 00:03:05,700 --> 00:03:08,489 Dermot Ryan: about your portfolio and in terms of, is it very 57 00:03:08,490 --> 00:03:11,080 Dermot Ryan: levered? What areas of your portfolio have a lot of 58 00:03:11,080 --> 00:03:15,200 Dermot Ryan: gearing and debt on their balance sheets, or indeed, how 59 00:03:15,200 --> 00:03:18,330 Dermot Ryan: do they get impacted as interest rates go upwards? So 60 00:03:18,680 --> 00:03:22,419 Dermot Ryan: tech again, as they've traded without profits for a long 61 00:03:22,419 --> 00:03:24,900 Dermot Ryan: time, but the stocks have gone up because money has 62 00:03:24,900 --> 00:03:28,669 Dermot Ryan: essentially been free. But now that your cost inflation is 63 00:03:28,669 --> 00:03:31,299 Dermot Ryan: high and the price of money is going up, people 64 00:03:31,300 --> 00:03:33,470 Dermot Ryan: are not willing to wait for a couple of years 65 00:03:33,470 --> 00:03:36,680 Dermot Ryan: for a company to become profitable, and so they're reducing 66 00:03:36,690 --> 00:03:39,170 Dermot Ryan: the amount they're willing to pay for that. So, the 67 00:03:39,170 --> 00:03:42,119 Dermot Ryan: converse of that is that stocks with good cash flows 68 00:03:42,190 --> 00:03:44,960 Dermot Ryan: are actually becoming more valuable. And so that's why we're 69 00:03:44,960 --> 00:03:48,260 Dermot Ryan: seeing this big shift towards the value style of investing, 70 00:03:48,320 --> 00:03:51,720 Dermot Ryan: which is more fundamentally driven and looks for things like 71 00:03:51,950 --> 00:03:56,990 Dermot Ryan: reasonable valuations to history, cash flow dividends. And so, there's 72 00:03:56,990 --> 00:03:59,130 Dermot Ryan: been a real shift in the last three months to 73 00:03:59,730 --> 00:04:03,940 Dermot Ryan: that style, and that's probably likely to continue as we 74 00:04:03,940 --> 00:04:06,610 Dermot Ryan: go forward and as interest rates go higher from here. 75 00:04:08,230 --> 00:04:09,900 Sean Aylmer: Okay. And then you mentioned tech, and what I thought was interesting last week when The 76 00:04:09,900 --> 00:04:13,720 Sean Aylmer: Fed lifted interest rates and set out the timeframe for 77 00:04:13,720 --> 00:04:16,670 Sean Aylmer: future rate rises; the tech sector actually did really well 78 00:04:16,670 --> 00:04:19,609 Sean Aylmer: and Block, which obviously bought After pay and trades here, 79 00:04:20,180 --> 00:04:22,720 Sean Aylmer: that was up 10%, I think, in that next 24 hours or 80 00:04:22,720 --> 00:04:25,510 Sean Aylmer: so. Is that because of the certainty of rate rises, 81 00:04:25,510 --> 00:04:27,500 Sean Aylmer: is that why tech stocks reacted that way? 82 00:04:27,920 --> 00:04:32,290 Dermot Ryan: In that specific case, I think it's because up until a couple 83 00:04:32,290 --> 00:04:35,360 Dermot Ryan: of weeks ago, The Fed was expected to raise interest 84 00:04:35,360 --> 00:04:38,230 Dermot Ryan: rates by 50 basis points this month in March, and 85 00:04:38,230 --> 00:04:42,070 Dermot Ryan: instead, they only did 25. And so, what is actually 86 00:04:42,070 --> 00:04:45,200 Dermot Ryan: happening there is that the path of rate rises was 87 00:04:45,200 --> 00:04:49,830 Dermot Ryan: expected to be steeper. And so basically, that's caused somewhat 88 00:04:49,830 --> 00:04:52,770 Dermot Ryan: of a reversal of the sell off in tech and 89 00:04:52,770 --> 00:04:55,820 Dermot Ryan: some areas of the bond market. They actually rallied then 90 00:04:55,820 --> 00:04:59,010 Dermot Ryan: because the interest rate glide path will be less steep. 91 00:04:59,430 --> 00:05:02,169 Dermot Ryan: And that's partially because of all the uncertainty in the 92 00:05:02,170 --> 00:05:05,520 Dermot Ryan: world, and the fact that in a way, the costs 93 00:05:05,620 --> 00:05:09,010 Dermot Ryan: increases are in effect like an interest rate increase to 94 00:05:09,010 --> 00:05:13,570 Dermot Ryan: households because they reduce disposable income in the same way 95 00:05:13,570 --> 00:05:14,770 Dermot Ryan: that rising interest rates might. 96 00:05:15,140 --> 00:05:17,070 Sean Aylmer: Stay with me, Dermot. We'll be back in a minute. 97 00:05:21,890 --> 00:05:24,669 Sean Aylmer: My guest this morning is Dermot Ryan, Australian equities portfolio 98 00:05:24,670 --> 00:05:28,479 Sean Aylmer: manager at AMP Capital. Okay, what about the banks? They've been 99 00:05:28,630 --> 00:05:33,760 Sean Aylmer: remarkably resilient in the past few weeks. Is that because 100 00:05:33,760 --> 00:05:36,039 Sean Aylmer: interest rates are rising and they make more money when 101 00:05:36,040 --> 00:05:39,280 Sean Aylmer: rates are rising? How do we think about the big banks? 102 00:05:39,670 --> 00:05:41,850 Dermot Ryan: The big banks are a reasonable place to be at 103 00:05:41,850 --> 00:05:45,950 Dermot Ryan: the moment, partially the profitability has been good. Credit conditions 104 00:05:46,110 --> 00:05:49,880 Dermot Ryan: are strong. And I guess the banks also, they don't 105 00:05:49,880 --> 00:05:52,369 Dermot Ryan: want interest rates to go up too quickly because then 106 00:05:52,570 --> 00:05:55,440 Dermot Ryan: house prizes might come off, or people will get into 107 00:05:55,440 --> 00:05:58,570 Dermot Ryan: some difficulty with their loans. So, that kind of Goldilocks 108 00:05:58,620 --> 00:06:02,029 Dermot Ryan: rate rise path actually works reasonably well for banks. And 109 00:06:02,029 --> 00:06:05,270 Dermot Ryan: so what we're seeing is the domestic big four banks 110 00:06:05,300 --> 00:06:07,720 Dermot Ryan: doing well and dividends have been good. They're back on 111 00:06:07,720 --> 00:06:10,990 Dermot Ryan: track there after prudently holding back a bit of capital 112 00:06:10,990 --> 00:06:14,120 Dermot Ryan: during COVID, but they're now in good shape. But we're 113 00:06:14,120 --> 00:06:17,210 Dermot Ryan: also seeing the likes of Virgin UK, which is a 114 00:06:17,210 --> 00:06:21,320 Dermot Ryan: UK challenger bank listed in Australia is starting to perform 115 00:06:21,320 --> 00:06:25,410 Dermot Ryan: quite well, as Genworth, which is we do basically reinsurance 116 00:06:25,450 --> 00:06:28,630 Dermot Ryan: for first home buyers and high LVR for a lot 117 00:06:28,630 --> 00:06:31,060 Dermot Ryan: of the banks in Australia. So, that stock has done 118 00:06:31,060 --> 00:06:33,910 Dermot Ryan: very well over the last six months, because again, credit 119 00:06:33,910 --> 00:06:37,260 Dermot Ryan: conditions are good and the fear of very rapid rate 120 00:06:37,260 --> 00:06:39,140 Dermot Ryan: rises has dissipated somewhat. 121 00:06:39,550 --> 00:06:41,800 Sean Aylmer: It seems among the miners, it all just comes down 122 00:06:41,800 --> 00:06:45,880 Sean Aylmer: to commodity prices in China, or is that too simple concept? 123 00:06:46,330 --> 00:06:50,180 Dermot Ryan: Well, of course miners... Yeah, the revenue and profit line 124 00:06:50,339 --> 00:06:54,160 Dermot Ryan: is a lot about commodity prices and the health of things. Chinese 125 00:06:54,160 --> 00:06:57,510 Dermot Ryan: growth is moderating though, and there are some worrying signs 126 00:06:57,510 --> 00:07:00,830 Dermot Ryan: in their property market, but they've come out in the 127 00:07:00,830 --> 00:07:02,520 Dermot Ryan: last week and said that they're going to try and 128 00:07:02,520 --> 00:07:07,080 Dermot Ryan: stabilize growth, and hope to attain a 5.5% growth rate 129 00:07:07,180 --> 00:07:10,290 Dermot Ryan: this year. And so, what we're seeing is iron ore 130 00:07:10,290 --> 00:07:14,300 Dermot Ryan: prices have been very strong, and are certainly pointing to 131 00:07:14,300 --> 00:07:17,820 Dermot Ryan: very large margins for producers there. But we're also seeing 132 00:07:18,020 --> 00:07:24,240 Dermot Ryan: good commodity prices across nickel, copper and all the energy 133 00:07:24,240 --> 00:07:26,960 Dermot Ryan: sector exposures as well, like even coal. 134 00:07:27,460 --> 00:07:29,620 Sean Aylmer: Yeah, okay. I never quite know how to think about 135 00:07:29,620 --> 00:07:33,270 Sean Aylmer: Coles and Woolworths, those consumer staples, those big companies, which 136 00:07:33,450 --> 00:07:36,040 Sean Aylmer: every time I read something that says " buy," the next 137 00:07:36,040 --> 00:07:40,700 Sean Aylmer: thing says " sell." How do we think about those sorts of organisations? 138 00:07:41,350 --> 00:07:45,330 Dermot Ryan: Well, these sorts of organizations, they've been COVID winners, I 139 00:07:45,330 --> 00:07:47,720 Dermot Ryan: suppose, as people haven't been able to eat out as 140 00:07:47,720 --> 00:07:50,170 Dermot Ryan: much as they would've liked perhaps over the last two 141 00:07:50,170 --> 00:07:53,690 Dermot Ryan: years. But margins have been under pressure because costs have 142 00:07:53,690 --> 00:07:56,130 Dermot Ryan: picked up and they're trying to get into new areas 143 00:07:56,130 --> 00:07:59,130 Dermot Ryan: such as home and online deliveries. And so, there's a 144 00:07:59,130 --> 00:08:03,340 Dermot Ryan: lot of spending going on, on their own infrastructure and 145 00:08:03,340 --> 00:08:08,560 Dermot Ryan: logistics capabilities. So, margins haven't been as good there. However, 146 00:08:08,560 --> 00:08:11,150 Dermot Ryan: they are spending now so they're set up for the 147 00:08:11,150 --> 00:08:15,190 Dermot Ryan: future. We think it's probably a little bit of a 148 00:08:15,190 --> 00:08:18,640 Dermot Ryan: bumpy ride for the supermarkets in the short term, but 149 00:08:18,670 --> 00:08:21,180 Dermot Ryan: longer term they're a pretty good position to be able 150 00:08:21,180 --> 00:08:25,200 Dermot Ryan: to defend their position in the market. We'd probably prefer 151 00:08:25,480 --> 00:08:28,280 Dermot Ryan: some of the more discretionary retailers at the moment, because 152 00:08:28,280 --> 00:08:30,490 Dermot Ryan: a lot of them are net cash. They don't have 153 00:08:30,490 --> 00:08:32,960 Dermot Ryan: to do that spend. And, and we think there'll be more 154 00:08:33,170 --> 00:08:36,100 Dermot Ryan: off market buybacks, the likes of which we saw from 155 00:08:36,100 --> 00:08:37,610 Dermot Ryan: JB Hi- Fi in February. 156 00:08:38,390 --> 00:08:41,839 Sean Aylmer: So, those consumer discretionary are the JB Hi-Fis of the world, that style 157 00:08:41,840 --> 00:08:42,460 Sean Aylmer: of company? 158 00:08:42,510 --> 00:08:45,510 Dermot Ryan: Yeah. Harvey Norman, Adairs is another one. We like that 159 00:08:45,510 --> 00:08:49,410 Dermot Ryan: one we've stepped into recently because it's half an online 160 00:08:49,410 --> 00:08:53,350 Dermot Ryan: play, so it's gotten wrapped up into that tech sell 161 00:08:53,350 --> 00:08:56,350 Dermot Ryan: off, but it's also half a bricks and mortar retailer, 162 00:08:56,350 --> 00:08:59,330 Dermot Ryan: so the stock is sold off I think over 50%. 163 00:08:59,330 --> 00:09:02,030 Dermot Ryan: So, we just thought that's not a bad position to 164 00:09:02,030 --> 00:09:05,309 Dermot Ryan: be, and if there is any other lockdowns or issues, 165 00:09:05,520 --> 00:09:08,449 Dermot Ryan: it's got both sides of the market covered. So, we 166 00:09:08,450 --> 00:09:10,559 Dermot Ryan: thought that was an interesting one for the portfolio. 167 00:09:11,140 --> 00:09:13,440 Sean Aylmer: Any others for the portfolio? I mean, that you're thinking about? 168 00:09:14,110 --> 00:09:16,429 Dermot Ryan: Well, we were really trying to think about how do 169 00:09:16,429 --> 00:09:20,890 Dermot Ryan: you manage inflation. Reporting season was good and margins were 170 00:09:20,890 --> 00:09:24,540 Dermot Ryan: actually quite strong, but what was notable was only 50% 171 00:09:24,540 --> 00:09:27,990 Dermot Ryan: of stocks gave guidance. And so, it's a tricky outlook 172 00:09:27,990 --> 00:09:30,449 Dermot Ryan: out there because there's a lot of things happening, but 173 00:09:30,490 --> 00:09:34,120 Dermot Ryan: I think there's some areas of relative certainty. We really 174 00:09:34,120 --> 00:09:37,120 Dermot Ryan: liked energy space. So, that's been a space we have 175 00:09:37,120 --> 00:09:39,839 Dermot Ryan: been long and it's done well. We've been adding to 176 00:09:40,130 --> 00:09:43,199 Dermot Ryan: Aurizon, which is a coal hole here. They've got very 177 00:09:43,200 --> 00:09:47,590 Dermot Ryan: good inflation passed through. It's essentially a regulated rail network, 178 00:09:47,690 --> 00:09:50,160 Dermot Ryan: and they've run the locomotives as well, and they're also 179 00:09:50,160 --> 00:09:53,320 Dermot Ryan: getting into grain on the west coast. And grain has 180 00:09:53,320 --> 00:09:55,640 Dermot Ryan: been one of those areas that has done well in 181 00:09:55,640 --> 00:09:59,650 Dermot Ryan: Australia because we've had favorable weather for growing, and also 182 00:09:59,650 --> 00:10:02,870 Dermot Ryan: because of those disruptions in Ukraine, which is a major 183 00:10:02,870 --> 00:10:06,339 Dermot Ryan: grain exporter, and there's quite a good opportunity there. And 184 00:10:06,340 --> 00:10:11,510 Dermot Ryan: I think similarly in the energy space, these geopolitics and 185 00:10:11,510 --> 00:10:16,470 Dermot Ryan: rising commodity areas really benefit a commodity exporter like Australia, 186 00:10:16,470 --> 00:10:18,979 Dermot Ryan: and that's one of the reasons why Aussie equities have 187 00:10:18,980 --> 00:10:22,520 Dermot Ryan: been outperforming this year relative to other major global indices. 188 00:10:23,140 --> 00:10:24,820 Sean Aylmer: Dermot, thank you for talking to Fear and Greed. 189 00:10:25,130 --> 00:10:25,740 Dermot Ryan: Thank you, Sean. 190 00:10:25,980 --> 00:10:29,339 Sean Aylmer: That was Dermot Ryan, Australian equities portfolio manager at AMP 191 00:10:29,590 --> 00:10:32,520 Sean Aylmer: Capital. This is the Fear and Greed daily interview. Join us 192 00:10:32,520 --> 00:10:34,590 Sean Aylmer: every morning for the full episode of Fear and Greed, 193 00:10:34,590 --> 00:10:38,469 Sean Aylmer: Australia's most popular business podcast. I'm Sean Aylmer, enjoy your day.