1 00:00:05,850 --> 00:00:08,670 Sean Aylmer: Welcome to the Fear & Greed Business Interview. I'm Sean Aylmer. 2 00:00:08,670 --> 00:00:12,119 Sean Aylmer: Australia's banks have had a good run recently outperforming the 3 00:00:12,119 --> 00:00:15,899 Sean Aylmer: market by about 20% since bottoming mid last year or 4 00:00:15,900 --> 00:00:18,119 Sean Aylmer: a bit later than that. But will it continue? And 5 00:00:18,119 --> 00:00:20,340 Sean Aylmer: do some of the banks offer better value for investors 6 00:00:20,340 --> 00:00:23,190 Sean Aylmer: than others? Remember, this is general information only and you 7 00:00:23,190 --> 00:00:27,030 Sean Aylmer: should always seek professional advice before making investment decisions. Dougal Maple- 8 00:00:27,030 --> 00:00:29,940 Sean Aylmer: Brown is the Head of Australian Value Equities at Maple- 9 00:00:29,940 --> 00:00:31,949 Sean Aylmer: Brown Abbott. Dougal, welcome to Fear & Greed. 10 00:00:32,639 --> 00:00:33,120 Dougal Maple-Brown: Thank you, Sean. 11 00:00:34,229 --> 00:00:36,299 Sean Aylmer: Just can you give us (inaudible) history over the 12 00:00:36,300 --> 00:00:38,909 Sean Aylmer: last, well, maybe 6 to 12 months, why the banks 13 00:00:39,180 --> 00:00:42,089 Sean Aylmer: fell really, and then I think it was late October, 14 00:00:42,090 --> 00:00:44,879 Sean Aylmer: early November, they sort of ... That bottom there, but since 15 00:00:44,880 --> 00:00:47,460 Sean Aylmer: then they've really run hard. Just why did they fall? 16 00:00:47,460 --> 00:00:49,919 Sean Aylmer: But particularly why have they done so well since then? 17 00:00:50,549 --> 00:00:52,740 Dougal Maple-Brown: Yeah, thanks Sean. As you alluded to in the intro a bit over 18 00:00:53,100 --> 00:00:56,100 Dougal Maple-Brown: a year ago, there was maximum fear for the banks. 19 00:00:56,490 --> 00:00:58,920 Dougal Maple-Brown: So you recall then there was a mortgage war, so 20 00:00:58,920 --> 00:01:01,680 Dougal Maple-Brown: a pricing war, and there were also people pretty concerned 21 00:01:01,680 --> 00:01:04,080 Dougal Maple-Brown: about the outlook of the economy and whether the landing would be a 22 00:01:04,080 --> 00:01:06,929 Dougal Maple-Brown: soft landing or a hard landing. Now some of those 23 00:01:06,929 --> 00:01:11,639 Dougal Maple-Brown: fears never eventuated, particularly on the hard landing scenario. That's 24 00:01:11,639 --> 00:01:14,009 Dougal Maple-Brown: the first reason. And the second reason, frankly, a year 25 00:01:14,010 --> 00:01:16,140 Dougal Maple-Brown: ago, is that at least the banks that we owned, 26 00:01:16,680 --> 00:01:19,950 Dougal Maple-Brown: the cheaper ones were particularly inexpensive. So you could buy 27 00:01:20,250 --> 00:01:23,339 Dougal Maple-Brown: a year ago ANZ, Westpac on roughly book value, 10 28 00:01:23,340 --> 00:01:26,789 Dougal Maple-Brown: times forward earnings, which were pretty decent valuations in our 29 00:01:26,789 --> 00:01:30,630 Dougal Maple-Brown: view. Last October when the outlook for interest rates in 30 00:01:30,630 --> 00:01:34,229 Dougal Maple-Brown: particular changed, the outlook for the economy improved, the banks 31 00:01:34,230 --> 00:01:36,420 Dougal Maple-Brown: have been re- rated, so it's not really an earnings 32 00:01:36,420 --> 00:01:39,270 Dougal Maple-Brown: story, it's more of a re- rating. And again, those 33 00:01:39,270 --> 00:01:41,550 Dougal Maple-Brown: cheaper banks that I referred to a minute ago, no 34 00:01:41,550 --> 00:01:43,680 Dougal Maple-Brown: longer trade on book value. They're now trading on 1. 35 00:01:43,860 --> 00:01:46,800 Dougal Maple-Brown: 2, 1. 3 times, and indeed on a PE basis 36 00:01:47,279 --> 00:01:50,070 Dougal Maple-Brown: up from about 10 times to 13 or 14 times. 37 00:01:50,610 --> 00:01:52,110 Sean Aylmer: When you talk about a PE, it's a price to 38 00:01:52,110 --> 00:01:58,140 Sean Aylmer: earnings basis, you are valuing the bank on forward earnings. 39 00:01:58,380 --> 00:02:01,620 Sean Aylmer: What is typical for one of the big banks? So 40 00:02:01,620 --> 00:02:04,079 Sean Aylmer: you said it's gone from 10 to 13. 10's cheap, is 41 00:02:04,080 --> 00:02:07,620 Sean Aylmer: 13 normal? I mean, the only way you can say 42 00:02:07,620 --> 00:02:10,139 Sean Aylmer: normal is compared to historical periods, I suppose. 43 00:02:10,740 --> 00:02:13,589 Dougal Maple-Brown: Excellent question, Sean. Yeah, we would argue that 13 times 44 00:02:13,590 --> 00:02:16,650 Dougal Maple-Brown: is about normal for an Australian bank. And to give 45 00:02:16,650 --> 00:02:19,379 Dougal Maple-Brown: you the scale, and this is only in recent times 46 00:02:19,380 --> 00:02:21,149 Dougal Maple-Brown: and even today at the top of the tree, you've 47 00:02:21,150 --> 00:02:24,660 Dougal Maple-Brown: got Commonwealth Bank, which trades over 20 times forward earnings. 48 00:02:25,260 --> 00:02:27,180 Dougal Maple-Brown: You've got National Australia Bank depending on the day of 49 00:02:27,180 --> 00:02:30,750 Dougal Maple-Brown: the week, trading on about 15 or 16 times. And as I 50 00:02:30,750 --> 00:02:33,988 Dougal Maple-Brown: alluded to earlier, AMZ and Westpac on 13 or 14 times. 51 00:02:34,380 --> 00:02:37,380 Sean Aylmer: Why does Commonwealth Bank trade so much ... Why is it 52 00:02:37,380 --> 00:02:39,660 Sean Aylmer: valued so much higher than the others? 53 00:02:41,219 --> 00:02:43,020 Dougal Maple-Brown: Yeah, Sean, I think I could probably write a small thesis on that, 54 00:02:44,010 --> 00:02:47,610 Dougal Maple-Brown: and my guess frankly is no better than anyone else 55 00:02:47,610 --> 00:02:50,819 Dougal Maple-Brown: in the market. The Commonwealth is the most valued as 56 00:02:50,820 --> 00:02:54,569 Dougal Maple-Brown: in highly rated big bank in the entire world. So 57 00:02:54,570 --> 00:02:57,480 Dougal Maple-Brown: that's not just in the Australian sense. That's in a global sense. 58 00:02:58,590 --> 00:03:01,470 Dougal Maple-Brown: It's $ 150 billion plus company trading on let's say over 59 00:03:01,470 --> 00:03:04,620 Dougal Maple-Brown: 20 times forward earnings. Lots of theories, but of course 60 00:03:04,980 --> 00:03:08,130 Dougal Maple-Brown: no one really knows. Obviously a lot of the shareholders 61 00:03:08,250 --> 00:03:11,160 Dougal Maple-Brown: in Commonwealth Bank are the original mums and dads who 62 00:03:11,580 --> 00:03:14,008 Dougal Maple-Brown: were lucky enough to get the stock in 1 of 3 63 00:03:14,008 --> 00:03:16,709 Dougal Maple-Brown: IPOs, I think it was back in the 90s, at 64 00:03:16,709 --> 00:03:19,350 Dougal Maple-Brown: single digit prices for a stock which now trades over $ 65 00:03:19,350 --> 00:03:22,110 Dougal Maple-Brown: 100. So you can see there'd be some tax paid 66 00:03:22,110 --> 00:03:23,610 Dougal Maple-Brown: on if they were to sell. 67 00:03:24,330 --> 00:03:28,830 Sean Aylmer: True. So where we stand today, will it continue? Now 68 00:03:28,830 --> 00:03:30,660 Sean Aylmer: the market has come off a little over the past 69 00:03:30,660 --> 00:03:33,269 Sean Aylmer: couple of days, but you still have banks close to 70 00:03:34,049 --> 00:03:37,680 Sean Aylmer: record or multi- year highs. Can it continue for the 71 00:03:37,680 --> 00:03:39,000 Sean Aylmer: Big 4? Let's start with them. 72 00:03:39,450 --> 00:03:41,880 Dougal Maple-Brown: Yeah, Sean, again, that's the million- dollar question we have 73 00:03:41,880 --> 00:03:45,690 Dougal Maple-Brown: to deal with every day. I'll distinguish here between absolute 74 00:03:45,690 --> 00:03:49,019 Dougal Maple-Brown: and relative valuations. So as we've discussed, I think the 75 00:03:49,020 --> 00:03:52,259 Dougal Maple-Brown: absolute valuations are pushing the top end of the range. 76 00:03:52,590 --> 00:03:55,440 Dougal Maple-Brown: Unfortunately, in my game, and I'm Aussie equity investor and 77 00:03:55,469 --> 00:03:57,600 Dougal Maple-Brown: I have to be fully invested, so I have to 78 00:03:57,600 --> 00:03:59,910 Dougal Maple-Brown: compare it to what else is in the market. And 79 00:03:59,910 --> 00:04:03,540 Dougal Maple-Brown: in our view, banks at least the cheaper ones, still 80 00:04:03,540 --> 00:04:06,509 Dougal Maple-Brown: look relatively good value compared to some very highly priced 81 00:04:06,509 --> 00:04:09,719 Dougal Maple-Brown: industrials. So again, using those PE multiples I referred to 82 00:04:09,719 --> 00:04:13,020 Dougal Maple-Brown: a minute ago, industrial stocks on average in Australia are 83 00:04:13,020 --> 00:04:16,620 Dougal Maple-Brown: trading on about 24 times forward earnings. That's the average. 84 00:04:16,890 --> 00:04:18,900 Dougal Maple-Brown: So you can understand why many are trading well above 85 00:04:18,900 --> 00:04:21,300 Dougal Maple-Brown: that. So to compare to that, a bank on 13 86 00:04:21,300 --> 00:04:25,020 Dougal Maple-Brown: or 14 times still looks okay to us relative to 87 00:04:25,500 --> 00:04:27,959 Dougal Maple-Brown: what we would say are very expensive industrial stocks. 88 00:04:28,350 --> 00:04:32,700 Sean Aylmer: Okay, so primarily there we're talking about Westpac and ANZ. And 89 00:04:32,700 --> 00:04:35,520 Sean Aylmer: my understanding has always been, but please correct me if 90 00:04:35,520 --> 00:04:38,789 Sean Aylmer: I'm wrong here, it's because banks are highly indebted. Is 91 00:04:38,790 --> 00:04:42,149 Sean Aylmer: that why they're not valued as high as other industrials? 92 00:04:42,509 --> 00:04:45,209 Dougal Maple-Brown: Yeah, that's the primary reason is that they've got more 93 00:04:45,210 --> 00:04:48,988 Dougal Maple-Brown: leverage and hence more risk. And we've seen that again 94 00:04:48,990 --> 00:04:52,080 Dougal Maple-Brown: in my investing lifetime several times, but most noticeably in 95 00:04:52,080 --> 00:04:55,290 Dougal Maple-Brown: 2008 and the global financial crisis. And the other issue 96 00:04:55,290 --> 00:04:57,750 Dougal Maple-Brown: I think people would say today is that they've got 97 00:04:57,750 --> 00:05:01,859 Dougal Maple-Brown: less growth. We're a mature economy. The Big 4 dominate 98 00:05:01,860 --> 00:05:03,900 Dougal Maple-Brown: the markets. There's not much market share they can take 99 00:05:04,080 --> 00:05:07,109 Dougal Maple-Brown: apart from each other. So yes, higher leverage and lower 100 00:05:07,110 --> 00:05:08,910 Dougal Maple-Brown: growth than the average industrial stock. 101 00:05:09,540 --> 00:05:11,040 Sean Aylmer: Yeah, you alluded to that at the beginning of this 102 00:05:11,040 --> 00:05:14,010 Sean Aylmer: conversation, they're not exactly growth stocks, are they? 103 00:05:14,460 --> 00:05:17,460 Dougal Maple-Brown: No, and again, on my numbers and indeed on the 104 00:05:17,460 --> 00:05:20,219 Dougal Maple-Brown: market's numbers, the banks have got very limited, if any 105 00:05:20,219 --> 00:05:22,770 Dougal Maple-Brown: growth, depending on your assumptions over the next few years. 106 00:05:23,070 --> 00:05:26,099 Dougal Maple-Brown: Credit growth's slow, net interest margin, which is fixed their 107 00:05:26,100 --> 00:05:29,580 Dougal Maple-Brown: profit margin keeps getting compressed, costs are going up more 108 00:05:29,580 --> 00:05:32,669 Dougal Maple-Brown: than normal with inflation, and most people have bad debts 109 00:05:32,670 --> 00:05:36,120 Dougal Maple-Brown: increasing as we come from pretty good conditions to less 110 00:05:36,120 --> 00:05:38,849 Dougal Maple-Brown: good conditions somewhere, it's very hard to tell when over 111 00:05:38,849 --> 00:05:41,549 Dougal Maple-Brown: the forecast period. So most people have got bank earnings 112 00:05:41,549 --> 00:05:44,790 Dougal Maple-Brown: flat. Having said that, you pick up good dividends and 113 00:05:44,790 --> 00:05:47,460 Dougal Maple-Brown: apart from ANZ, they're largely fully franked. So you can 114 00:05:47,460 --> 00:05:49,409 Dougal Maple-Brown: still get a gross dividend yield of 8 or 9%, 115 00:05:50,099 --> 00:05:52,049 Dougal Maple-Brown: which again, isn't a bad return to us in the 116 00:05:52,050 --> 00:05:52,830 Dougal Maple-Brown: current environment. 117 00:05:53,279 --> 00:05:55,049 Sean Aylmer: Stay with me, Dougal. We'll be back in a minute. 118 00:06:02,580 --> 00:06:05,400 Sean Aylmer: I am speaking to Dougal Maple- Brown, Head of Australian 119 00:06:05,400 --> 00:06:11,190 Sean Aylmer: Value Equities at Maple- Brown Abbott. What about international investors? 120 00:06:11,250 --> 00:06:14,219 Sean Aylmer: And now something that I think you were quoted in 121 00:06:14,219 --> 00:06:17,519 Sean Aylmer: one of the media outlets talking about flood of money, 122 00:06:17,520 --> 00:06:19,830 Sean Aylmer: or not a flood of money, but money from offshore 123 00:06:19,830 --> 00:06:21,029 Sean Aylmer: coming into the Australian banks. 124 00:06:21,510 --> 00:06:23,789 Dougal Maple-Brown: Yeah, there's definitely been some of that, Sean. That's one 125 00:06:23,790 --> 00:06:25,920 Dougal Maple-Brown: of those theories which there's been a bit of press 126 00:06:25,920 --> 00:06:28,529 Dougal Maple-Brown: about. Very hard to prove. So the theory, and I 127 00:06:28,529 --> 00:06:31,710 Dougal Maple-Brown: think there's some weight to it, China's been a disaster 128 00:06:31,710 --> 00:06:35,428 Dougal Maple-Brown: obviously. So people who have mandates investing in Asia and 129 00:06:35,430 --> 00:06:38,100 Dougal Maple-Brown: including Australia are taking money out of China. I think 130 00:06:38,100 --> 00:06:40,890 Dougal Maple-Brown: that's fairly obvious. Where do they put it? The other 131 00:06:40,890 --> 00:06:44,190 Dougal Maple-Brown: big markets are India and Australia. If you're taking money 132 00:06:44,250 --> 00:06:46,618 Dougal Maple-Brown: out of China because you're concerned about China and you 133 00:06:46,620 --> 00:06:48,868 Dougal Maple-Brown: put it into Australia, you probably don't want to put it 134 00:06:48,870 --> 00:06:51,178 Dougal Maple-Brown: into our resource companies, which remember, are about a third 135 00:06:51,178 --> 00:06:53,669 Dougal Maple-Brown: of our market because the resource stocks, the iron ore 136 00:06:53,670 --> 00:06:56,550 Dougal Maple-Brown: producers, the energy stocks are effectively a leverage pay on 137 00:06:56,550 --> 00:06:59,220 Dougal Maple-Brown: China. So if you're not going to put into resource stocks, what do you 138 00:06:59,220 --> 00:07:01,770 Dougal Maple-Brown: look for? And the big liquid banks would be a 139 00:07:01,770 --> 00:07:04,078 Dougal Maple-Brown: reasonable place to put your money, and I suspect that's 140 00:07:04,080 --> 00:07:06,630 Dougal Maple-Brown: where some of that Chinese investing money has ended up. 141 00:07:07,259 --> 00:07:10,410 Sean Aylmer: Okay, so sort of wrapping up the banks, your preferred 142 00:07:10,410 --> 00:07:13,230 Sean Aylmer: option at the moment would be Westpac and ANZ over 143 00:07:13,290 --> 00:07:15,960 Sean Aylmer: the other two, I'm assuming, or certainly over Commonwealth Bank. 144 00:07:16,530 --> 00:07:19,530 Sean Aylmer: Is it something that you would buy more into or 145 00:07:19,530 --> 00:07:21,840 Sean Aylmer: is it something just given valuations you said that they're 146 00:07:21,840 --> 00:07:24,629 Sean Aylmer: kind of normal valuations. I'm not sure whether that's fair 147 00:07:24,630 --> 00:07:27,899 Sean Aylmer: valuation or not. Is it something that you're probably not 148 00:07:27,900 --> 00:07:32,250 Sean Aylmer: going to go too much further into given their prices? 149 00:07:32,820 --> 00:07:35,760 Dougal Maple-Brown: Absolutely, Sean. I don't want to misrepresent that. They've had 150 00:07:35,760 --> 00:07:37,470 Dougal Maple-Brown: a good run, we've done very well out of them, 151 00:07:37,980 --> 00:07:40,679 Dougal Maple-Brown: but no, we're not buying banks today and at the 152 00:07:40,679 --> 00:07:42,660 Dougal Maple-Brown: margin we're probably trimming a few of them as the 153 00:07:42,660 --> 00:07:46,499 Dougal Maple-Brown: prices go up, which we should as good contrarian value investors. 154 00:07:47,609 --> 00:07:50,070 Sean Aylmer: You mentioned industrials. We're just changing tack here a bit. 155 00:07:51,150 --> 00:07:54,990 Sean Aylmer: Industrials, it's a broad church, I think the term industrials. 156 00:07:55,140 --> 00:07:55,290 Dougal Maple-Brown: Yup. 157 00:07:56,639 --> 00:07:59,280 Sean Aylmer: What areas within industrials do you think of interest? I 158 00:07:59,280 --> 00:08:00,960 Sean Aylmer: mean, I don't mind if we go stock specific or 159 00:08:01,200 --> 00:08:03,209 Sean Aylmer: just more the themes in industrials. 160 00:08:03,420 --> 00:08:06,300 Dougal Maple-Brown: Yeah, and just for your viewers, I mean, the Aussie 161 00:08:06,300 --> 00:08:10,020 Dougal Maple-Brown: equity market is roughly 20% banks, 30% resources, and 50% 162 00:08:10,020 --> 00:08:12,750 Dougal Maple-Brown: industrials. And as you alluded to, it's a broad church. 163 00:08:12,750 --> 00:08:17,009 Dougal Maple-Brown: Everything from airlines to supermarkets to telecommunications companies. I think 164 00:08:17,010 --> 00:08:18,960 Dougal Maple-Brown: the big switch for us over the last couple of 165 00:08:18,960 --> 00:08:20,909 Dougal Maple-Brown: years, as you go back a few years, people were 166 00:08:20,910 --> 00:08:25,410 Dougal Maple-Brown: talking about the expensive defensives, and again, these are generalizations. 167 00:08:26,370 --> 00:08:29,460 Dougal Maple-Brown: Today we are finding more value in businesses which are 168 00:08:29,460 --> 00:08:32,940 Dougal Maple-Brown: defensive, so things like the supermarkets and things like the 169 00:08:32,940 --> 00:08:35,940 Dougal Maple-Brown: liquor retailers than some of the cyclicals, (inaudible) run 170 00:08:35,940 --> 00:08:38,728 Dougal Maple-Brown: very hard. So that's been the big change over the 171 00:08:38,730 --> 00:08:41,250 Dougal Maple-Brown: last couple of years. In a relative sense, we're finding 172 00:08:41,250 --> 00:08:44,580 Dougal Maple-Brown: better value in some of the defensive names, not because 173 00:08:44,580 --> 00:08:46,890 Dougal Maple-Brown: we're terrified about the economy rolling over, but we're just 174 00:08:46,890 --> 00:08:48,900 Dougal Maple-Brown: finding better value support in those names. 175 00:08:49,740 --> 00:08:52,738 Sean Aylmer: Do you think the market generally, on that basis, do 176 00:08:52,740 --> 00:08:55,889 Sean Aylmer: you think the market has become a little overexcited about 177 00:08:55,889 --> 00:08:59,250 Sean Aylmer: what the economy's doing? I mean, this soft landing scenario 178 00:08:59,400 --> 00:09:03,540 Sean Aylmer: sounds good, and certainly earnings forecasts, well, based on the 179 00:09:03,540 --> 00:09:07,110 Sean Aylmer: share market, people are confident about earnings going forward. What 180 00:09:07,110 --> 00:09:09,660 Sean Aylmer: you just said then, it just made me think maybe 181 00:09:10,590 --> 00:09:13,139 Sean Aylmer: it's being a bit defensive, suggests that maybe we've gone 182 00:09:13,139 --> 00:09:15,660 Sean Aylmer: a bit too far on that scenario. 183 00:09:16,109 --> 00:09:17,429 Dougal Maple-Brown: Yeah, I think we've got a little bit too far 184 00:09:17,429 --> 00:09:18,840 Dougal Maple-Brown: on that one, but I'll bring it back to the 185 00:09:18,840 --> 00:09:21,690 Dougal Maple-Brown: banks again. As I've already said, the bank earnings forecasts 186 00:09:21,690 --> 00:09:27,240 Dougal Maple-Brown: are flat, so I think that they're sensible forecasts. Some 187 00:09:27,240 --> 00:09:30,330 Dougal Maple-Brown: of their cyclical industrials have got earnings growing upwards and 188 00:09:30,330 --> 00:09:33,269 Dougal Maple-Brown: onwards forever, and we all know that's very hard to 189 00:09:33,270 --> 00:09:35,609 Dougal Maple-Brown: do. So at this point in the cycle, yes, people 190 00:09:35,609 --> 00:09:38,220 Dougal Maple-Brown: tend to extrapolate the good times forever, and that definitely 191 00:09:38,220 --> 00:09:41,130 Dougal Maple-Brown: is reflected in some stocks, clearly not stocks we like. 192 00:09:41,880 --> 00:09:43,620 Sean Aylmer: Dougal, thank you for talking to Fear & Greed. 193 00:09:44,130 --> 00:09:45,449 Dougal Maple-Brown: Pleasure, Sean. Thank you for having me. 194 00:09:45,960 --> 00:09:49,049 Sean Aylmer: That was Dougal Maple- Brown, Head of Australian Value Equities 195 00:09:49,049 --> 00:09:51,929 Sean Aylmer: at Maple- Brown Abbott. This is the Fear & Greed Business 196 00:09:51,929 --> 00:09:54,660 Sean Aylmer: Interview. Remember, this is general information only, and you should 197 00:09:54,660 --> 00:09:58,078 Sean Aylmer: always seek professional advice before making investment decisions. Join us 198 00:09:58,080 --> 00:10:00,480 Sean Aylmer: every morning for the full episode of Fear & Greed Daily 199 00:10:00,480 --> 00:10:03,059 Sean Aylmer: Business News for people who make their own decisions. I'm 200 00:10:03,059 --> 00:10:04,800 Sean Aylmer: Sean Aylmer. Enjoy your day.