1 00:00:03,960 --> 00:00:07,890 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. Markets 2 00:00:07,890 --> 00:00:10,920 Sean Aylmer: are a little unsettled at the moment. In fact, when 3 00:00:10,920 --> 00:00:14,820 Sean Aylmer: aren't they? Last week's somewhat unexpected rate rise combined with 4 00:00:14,820 --> 00:00:17,550 Sean Aylmer: the banking crisis in the U. S. made for some 5 00:00:17,550 --> 00:00:21,329 Sean Aylmer: uneasy investors, but with rates peaking, what should investors be 6 00:00:21,329 --> 00:00:24,450 Sean Aylmer: thinking about right now? Remember this is general information only, 7 00:00:24,720 --> 00:00:28,170 Sean Aylmer: and you should seek professional advice before making investment decisions. 8 00:00:28,380 --> 00:00:31,710 Sean Aylmer: Matthew Kidman is a principal at Centennial Asset Management and 9 00:00:31,710 --> 00:00:34,440 Sean Aylmer: regular guest on the podcast. Matthew, welcome back to Fear 10 00:00:34,440 --> 00:00:34,920 Sean Aylmer: and Greed. 11 00:00:35,159 --> 00:00:35,760 Matthew Kidman: Hi, Sean. How are you? 12 00:00:36,840 --> 00:00:39,210 Sean Aylmer: Well, thank you. Let's start with the banks, because so 13 00:00:39,210 --> 00:00:42,960 Sean Aylmer: many of us hold bank stocks via our superfunds. They 14 00:00:42,960 --> 00:00:45,630 Sean Aylmer: really came off the boil last week, and we had 15 00:00:45,659 --> 00:00:48,600 Sean Aylmer: National Australia Bank coming out with a $ 4 billion profit. 16 00:00:48,600 --> 00:00:52,440 Sean Aylmer: We've got Westpac today. It's just profit margins seem to 17 00:00:52,440 --> 00:00:54,120 Sean Aylmer: be squeezed, but then you've got the U. S. stuff. 18 00:00:54,120 --> 00:00:55,529 Sean Aylmer: How do we think about the banks? 19 00:00:56,250 --> 00:00:58,800 Matthew Kidman: I know I've made a few comments over the last 20 00:00:58,800 --> 00:01:00,960 Matthew Kidman: say six to nine months that I thought the banks 21 00:01:00,960 --> 00:01:05,160 Matthew Kidman: were expensive, and I was wrong for so long, but 22 00:01:05,160 --> 00:01:07,860 Matthew Kidman: I think at last that's coming to fruition. The real 23 00:01:08,250 --> 00:01:10,230 Matthew Kidman: issue with the banks, it seems like ... and as you 24 00:01:10,230 --> 00:01:13,740 Matthew Kidman: said, we're getting the bank results now on Thursday, A 25 00:01:13,740 --> 00:01:16,500 Matthew Kidman: and Z so far and Westpac to be seen ... but 26 00:01:16,500 --> 00:01:19,410 Matthew Kidman: the overwhelming issue is what they call the NIM, net 27 00:01:19,410 --> 00:01:22,740 Matthew Kidman: interest margin, which is basically how much different they lend 28 00:01:22,740 --> 00:01:24,990 Matthew Kidman: money out compared to what they borrow their own money, 29 00:01:24,990 --> 00:01:28,350 Matthew Kidman: their own funding at, and that's shrinking and that's worrying 30 00:01:28,350 --> 00:01:31,380 Matthew Kidman: the market. You're seeing a selloff and prices are adjusting, 31 00:01:31,740 --> 00:01:34,110 Matthew Kidman: but people don't have to worry. It's not an issue 32 00:01:34,110 --> 00:01:36,300 Matthew Kidman: regarding what we've seen in the U. S., where the 33 00:01:36,300 --> 00:01:40,200 Matthew Kidman: regional banks are definitely under liquidity pressures, where the deposit 34 00:01:40,200 --> 00:01:42,930 Matthew Kidman: base is fleeing and we've seen a few bank failures. 35 00:01:42,930 --> 00:01:45,059 Matthew Kidman: This is a different issue. This is just about margin. 36 00:01:45,480 --> 00:01:47,669 Matthew Kidman: To be honest, the four big banks have got no 37 00:01:47,670 --> 00:01:49,770 Matthew Kidman: one else to blame but themselves. They've been too aggressive 38 00:01:49,770 --> 00:01:52,920 Matthew Kidman: on mortgages, residential mortgages, which now is the core of 39 00:01:52,920 --> 00:01:56,340 Matthew Kidman: their business, and they've been giving incentives like cashbacks and 40 00:01:56,340 --> 00:01:59,970 Matthew Kidman: whatnot and they've basically crowded out the rest of the market. They've kind 41 00:01:59,970 --> 00:02:02,220 Matthew Kidman: of shot themselves in the foot, and now it's starting 42 00:02:02,220 --> 00:02:02,850 Matthew Kidman: to play out. 43 00:02:03,360 --> 00:02:05,970 Sean Aylmer: Okay. What about the regional banks? We've heard a lot 44 00:02:05,970 --> 00:02:10,260 Sean Aylmer: about Bank of Queensland recently, but those regional lenders, are 45 00:02:10,260 --> 00:02:11,790 Sean Aylmer: they worth thinking about? 46 00:02:12,090 --> 00:02:14,820 Matthew Kidman: Well, the problem is, as I said, the four big 47 00:02:14,820 --> 00:02:18,150 Matthew Kidman: banks ... and everyone will blame each other, they'll be finger- 48 00:02:18,150 --> 00:02:21,389 Matthew Kidman: pointing about who's giving the best deals for a mortgage ... 49 00:02:21,690 --> 00:02:24,240 Matthew Kidman: are crowding out the rest of the market, because the 50 00:02:24,240 --> 00:02:27,389 Matthew Kidman: big banks ... makes sense ... probably access funding cheaper than anyone 51 00:02:27,389 --> 00:02:29,940 Matthew Kidman: else. If they're running their margin thin, it kind of 52 00:02:29,940 --> 00:02:33,780 Matthew Kidman: knocks out everyone else getting any volume. Now, they'll write 53 00:02:33,780 --> 00:02:38,880 Matthew Kidman: some business, but it'll slow down. The regional banks fit 54 00:02:38,880 --> 00:02:41,550 Matthew Kidman: into that category. The non- bank lenders that we speak 55 00:02:41,550 --> 00:02:44,430 Matthew Kidman: to have basically stepped out of the market, because it's 56 00:02:44,430 --> 00:02:46,709 Matthew Kidman: become a little bit silly. I know all the headlines 57 00:02:46,710 --> 00:02:49,290 Matthew Kidman: have been about rate rises, paying more on your mortgage, 58 00:02:49,290 --> 00:02:52,679 Matthew Kidman: but actually, when compared to where official rates are and 59 00:02:52,740 --> 00:02:55,380 Matthew Kidman: what cost funding is, most people have been getting terrific 60 00:02:55,380 --> 00:02:58,950 Matthew Kidman: deals. For the moment, you've just got to stand clear. 61 00:02:59,190 --> 00:03:03,060 Matthew Kidman: I think what might eventuate is the four big banks 62 00:03:03,060 --> 00:03:07,440 Matthew Kidman: will stop trying to get market share, and instead what 63 00:03:07,440 --> 00:03:09,600 Matthew Kidman: they'll start to do is try to improve their margin. 64 00:03:09,600 --> 00:03:11,640 Matthew Kidman: Now, that's not easy for a bank because they've got 65 00:03:11,669 --> 00:03:15,239 Matthew Kidman: massive loan books, some loans written 15 years ago, some 66 00:03:15,270 --> 00:03:18,540 Matthew Kidman: written today, and so it's hard to change that. What 67 00:03:18,540 --> 00:03:21,720 Matthew Kidman: you might see ... and then this works back to where 68 00:03:21,720 --> 00:03:24,150 Matthew Kidman: you were talking about the interest rate cycle ... what you 69 00:03:24,150 --> 00:03:28,260 Matthew Kidman: might see is the banks trying to regather margin with out-of- 70 00:03:28,350 --> 00:03:32,550 Matthew Kidman: cycle or out- of- meeting rises in their lending rates. 71 00:03:32,610 --> 00:03:34,410 Matthew Kidman: It'll be interesting to see because I think that's where 72 00:03:34,410 --> 00:03:36,240 Matthew Kidman: the market wants them to go, to restore some of 73 00:03:36,240 --> 00:03:38,101 Matthew Kidman: their margin that's getting lost at the moment. 74 00:03:38,101 --> 00:03:42,660 Sean Aylmer: Okay. Notwithstanding we had a rate rise last week, most people 75 00:03:42,660 --> 00:03:46,140 Sean Aylmer: think that we're getting towards the end of the rate 76 00:03:46,140 --> 00:03:49,260 Sean Aylmer: cycle, so the Reserve Bank will stop lifting interest rates 77 00:03:49,260 --> 00:03:52,020 Sean Aylmer: at some point. Some economists are even suggesting they may 78 00:03:52,020 --> 00:03:54,180 Sean Aylmer: have to cut rates into the future, not that far 79 00:03:54,180 --> 00:03:58,050 Sean Aylmer: into the future. As an investor, how do you think 80 00:03:58,050 --> 00:04:00,780 Sean Aylmer: about investing when rates are peaking? 81 00:04:01,530 --> 00:04:04,320 Matthew Kidman: Yeah, it's a really interesting question. Now, the first thing 82 00:04:04,320 --> 00:04:06,060 Matthew Kidman: I'd like to say before we move on to that 83 00:04:06,060 --> 00:04:09,570 Matthew Kidman: is we sat around at work thinking, " Why was the 84 00:04:09,570 --> 00:04:12,120 Matthew Kidman: market stunned that there was a rate rise?" Why was 85 00:04:12,120 --> 00:04:14,850 Matthew Kidman: it a shock or a surprise, when the Reserve Bank 86 00:04:14,880 --> 00:04:17,460 Matthew Kidman: told you very clearly they hadn't finished? They told you 87 00:04:17,460 --> 00:04:21,750 Matthew Kidman: that after they paused for that month in their previous 88 00:04:21,779 --> 00:04:25,890 Matthew Kidman: announcement, post that. The market got itself into a bind. 89 00:04:26,220 --> 00:04:28,410 Matthew Kidman: It's a national sport to blame Phil Lowe and the 90 00:04:28,410 --> 00:04:31,560 Matthew Kidman: Reserve Bank for bad policy management because they got one 91 00:04:31,560 --> 00:04:34,229 Matthew Kidman: call wrong. Well, the fact is the market has misread them 92 00:04:34,230 --> 00:04:36,210 Matthew Kidman: when they've been very clear, so the market's got to 93 00:04:36,210 --> 00:04:39,990 Matthew Kidman: take the blame there. I would think that, at 3. 94 00:04:40,410 --> 00:04:43,560 Matthew Kidman: 8 and where the inflation rate is, I know the 95 00:04:43,560 --> 00:04:45,930 Matthew Kidman: inflation rate's coming down so they're going to cross over 96 00:04:45,930 --> 00:04:47,970 Matthew Kidman: at some stage, but you would think there's at least 97 00:04:48,060 --> 00:04:51,690 Matthew Kidman: one more rate rise. Might be June, might be July. 98 00:04:52,290 --> 00:04:54,359 Matthew Kidman: Giving them a little bit of shelter is we now 99 00:04:54,360 --> 00:04:57,690 Matthew Kidman: think that the U. S. is done, it's finished, so 100 00:04:57,690 --> 00:05:00,870 Matthew Kidman: that will help them. At 3. 8, inflation still with 101 00:05:00,870 --> 00:05:02,790 Matthew Kidman: a 6 in front of it? I know it's coming 102 00:05:02,790 --> 00:05:06,359 Matthew Kidman: down. It just doesn't make sense. Expect at least one 103 00:05:06,360 --> 00:05:08,489 Matthew Kidman: more, I would think, if not two, but let's work 104 00:05:08,490 --> 00:05:11,910 Matthew Kidman: with one. Now, what do you do in that environment? Well, it's 105 00:05:11,910 --> 00:05:14,520 Matthew Kidman: interesting. What you don't want to be in traditionally, when 106 00:05:14,520 --> 00:05:18,810 Matthew Kidman: rates start to flatten out and fall, is resources. That's 107 00:05:18,810 --> 00:05:22,229 Matthew Kidman: proven this year, that resources have been a pretty ordinary trade, even 108 00:05:22,230 --> 00:05:25,170 Matthew Kidman: though everyone thought that was the only place to be 109 00:05:25,170 --> 00:05:27,659 Matthew Kidman: because there's special things going on in the resources market, and there 110 00:05:27,990 --> 00:05:32,460 Matthew Kidman: is. There is an energy revolution going on. There is 111 00:05:32,460 --> 00:05:36,480 Matthew Kidman: green minerals to be bought. They probably got overbought. Anything 112 00:05:36,480 --> 00:05:41,010 Matthew Kidman: to do with the world economic cycle is now slowing 113 00:05:41,010 --> 00:05:43,740 Matthew Kidman: down to going backwards. While in the U. S. and 114 00:05:43,740 --> 00:05:46,830 Matthew Kidman: Europe and domestically we are slowing down because the rate 115 00:05:46,830 --> 00:05:49,140 Matthew Kidman: rises, China looks like to be a bit of a 116 00:05:49,140 --> 00:05:51,719 Matthew Kidman: basket case. The reopening just hasn't worked. China's got a 117 00:05:51,720 --> 00:05:54,960 Matthew Kidman: lot of excess capacity and they've got higher unemployment, so 118 00:05:54,990 --> 00:05:59,010 Matthew Kidman: forget resources. I think, as we said, you steer away 119 00:05:59,010 --> 00:06:01,170 Matthew Kidman: from the banks for the moment. They're going through probably 120 00:06:01,170 --> 00:06:04,260 Matthew Kidman: the bottom of the cycle. They'll appear again maybe later 121 00:06:04,260 --> 00:06:06,810 Matthew Kidman: in the year if that cycle plays through. What does 122 00:06:06,810 --> 00:06:09,690 Matthew Kidman: that leave you? We still think that you want to 123 00:06:09,690 --> 00:06:12,420 Matthew Kidman: look at two things. Bond yields will probably ease off 124 00:06:12,450 --> 00:06:15,810 Matthew Kidman: over the course of the year, so you want growth assets but long- 125 00:06:15,810 --> 00:06:18,089 Matthew Kidman: dated assets. That might look a bit expensive at the 126 00:06:18,089 --> 00:06:20,640 Matthew Kidman: moment, but I still think it's support. What does that 127 00:06:20,640 --> 00:06:24,330 Matthew Kidman: mean in Australia? It means, as I mentioned before, stocks 128 00:06:24,330 --> 00:06:28,200 Matthew Kidman: like Transurban, stocks like Goodman Group. Even Telstra fits into 129 00:06:28,200 --> 00:06:29,700 Matthew Kidman: that because they've got a good bit of growth at 130 00:06:29,700 --> 00:06:33,270 Matthew Kidman: the moment, and maybe Property Trust, which are under the 131 00:06:33,270 --> 00:06:37,260 Matthew Kidman: pump in the headlines, but I think they benefit from 132 00:06:37,260 --> 00:06:39,929 Matthew Kidman: lower rates and that's where we're heading. Now, if the U. 133 00:06:39,930 --> 00:06:43,560 Matthew Kidman: S. keeps producing high or strong employment numbers, maybe that 134 00:06:43,560 --> 00:06:45,719 Matthew Kidman: scenario is wrong, but that's where we're heading if you 135 00:06:45,720 --> 00:06:49,290 Matthew Kidman: think interest rates are peaking and then coming down. I 136 00:06:49,290 --> 00:06:50,430 Matthew Kidman: don't think they're going to come down as quick as 137 00:06:50,430 --> 00:06:53,070 Matthew Kidman: the market thinks, but they will support. Then I think 138 00:06:53,070 --> 00:06:57,210 Matthew Kidman: you just pick off individual stocks, in terms of individual 139 00:06:57,210 --> 00:06:59,070 Matthew Kidman: stocks that are doing well and staying close to the 140 00:06:59,070 --> 00:07:01,260 Matthew Kidman: market. That's probably more what we do, but it's a 141 00:07:01,260 --> 00:07:03,900 Matthew Kidman: sectoral thing. That's how I would play it, those longer- 142 00:07:03,900 --> 00:07:08,970 Matthew Kidman: dated big companies that have structural growth. Another group of 143 00:07:08,970 --> 00:07:11,040 Matthew Kidman: those could be the healthcare stocks that Australia's got. We've got 144 00:07:11,220 --> 00:07:12,090 Matthew Kidman: a few good ones there. 145 00:07:12,480 --> 00:07:14,550 Sean Aylmer: Stay with me, Matthew. We'll be back in a minute. 146 00:07:20,460 --> 00:07:23,250 Sean Aylmer: My guest this morning is Matthew Kidman, principal at Centennial 147 00:07:23,250 --> 00:07:27,030 Sean Aylmer: Asset Management. What about large caps versus small caps in 148 00:07:27,030 --> 00:07:27,960 Sean Aylmer: this sort of environment? 149 00:07:28,560 --> 00:07:32,460 Matthew Kidman: Yes. Large caps are still the place, because we're all still nervous. 150 00:07:32,580 --> 00:07:34,350 Matthew Kidman: I think I said last time that over the course 151 00:07:34,350 --> 00:07:36,900 Matthew Kidman: of the year, I think small caps probably come out in front. I 152 00:07:36,900 --> 00:07:40,320 Matthew Kidman: think once we're a bit clearer on interest rates peaking 153 00:07:40,860 --> 00:07:43,590 Matthew Kidman: both here, the U. S. and elsewhere in the developed 154 00:07:43,590 --> 00:07:48,510 Matthew Kidman: world, I think you start to really look back at 155 00:07:48,600 --> 00:07:51,810 Matthew Kidman: all those small caps that have struggled, and they've struggled 156 00:07:51,810 --> 00:07:54,420 Matthew Kidman: in a whole bunch of areas. I think as the 157 00:07:54,420 --> 00:07:57,300 Matthew Kidman: year moves on, I think that's the place to be, 158 00:07:57,720 --> 00:08:01,290 Matthew Kidman: if the interest rate scenario that we're talking about unfolds. 159 00:08:01,290 --> 00:08:03,720 Matthew Kidman: Now, that will require inflation to edge down, and all 160 00:08:03,720 --> 00:08:05,790 Matthew Kidman: the leading indicators will say each month it should come 161 00:08:05,790 --> 00:08:08,040 Matthew Kidman: down. It's a bit slower than what we thought because 162 00:08:08,040 --> 00:08:12,660 Matthew Kidman: services are still strong. Goods inflation is way down. As 163 00:08:12,660 --> 00:08:14,460 Matthew Kidman: we said, commodity prices have collapsed on a lot of 164 00:08:14,460 --> 00:08:17,040 Matthew Kidman: fronts and so on, so we're kind of halfway there. Now we 165 00:08:17,040 --> 00:08:20,970 Matthew Kidman: need the service industries to just ease off, and things 166 00:08:20,970 --> 00:08:25,350 Matthew Kidman: like immigration and softer employment markets and so on will 167 00:08:25,350 --> 00:08:27,360 Matthew Kidman: help that out. It's should take a bit longer. I 168 00:08:27,360 --> 00:08:29,790 Matthew Kidman: think the small caps will come through as the year unfolds. 169 00:08:30,270 --> 00:08:33,660 Sean Aylmer: How do you know, Matthew? As an investor of lots 170 00:08:33,660 --> 00:08:35,760 Sean Aylmer: of money, how do you know when to do it? 171 00:08:36,090 --> 00:08:38,550 Sean Aylmer: When we talk about these things, we talk about it 172 00:08:38,550 --> 00:08:40,229 Sean Aylmer: as things unfold, but how do you know when to 173 00:08:40,230 --> 00:08:41,309 Sean Aylmer: actually push the button? 174 00:08:43,380 --> 00:08:46,410 Matthew Kidman: Well, the first thing you should realize is ... and this 175 00:08:46,410 --> 00:08:48,179 Matthew Kidman: is where it's hard for the really big funds, because 176 00:08:48,179 --> 00:08:49,949 Matthew Kidman: they've got to move well in advance just to move 177 00:08:49,950 --> 00:08:52,800 Matthew Kidman: their portfolio to make a meaningful difference ... but I think 178 00:08:52,800 --> 00:08:55,350 Matthew Kidman: what we've learned over the last three years is it's 179 00:08:55,350 --> 00:09:00,270 Matthew Kidman: been a different market. I haven't seen anyone forecast how 180 00:09:00,270 --> 00:09:04,590 Matthew Kidman: the markets and economies would unfold the moment Covid hit. 181 00:09:05,970 --> 00:09:09,540 Matthew Kidman: No one has forecast a correct medium- to long- term 182 00:09:09,540 --> 00:09:13,980 Matthew Kidman: scenario, so you've got to play really short- term. You 183 00:09:13,980 --> 00:09:17,070 Matthew Kidman: have these theories in your head about how things should 184 00:09:17,070 --> 00:09:20,429 Matthew Kidman: work, and then you be as nimble as possible as 185 00:09:20,429 --> 00:09:23,340 Matthew Kidman: you go through it. Now, for those who haven't got 186 00:09:23,340 --> 00:09:27,599 Matthew Kidman: the opportunity that we're talking about in terms of being 187 00:09:27,600 --> 00:09:30,839 Matthew Kidman: able to watch the market every day, I would say 188 00:09:31,140 --> 00:09:33,630 Matthew Kidman: what you need to do is pick the best of 189 00:09:33,630 --> 00:09:36,089 Matthew Kidman: breed. If you want to own a bank, own CBA 190 00:09:36,090 --> 00:09:39,120 Matthew Kidman: through the cycle. Eventually it'll come good. In five years' 191 00:09:39,120 --> 00:09:41,429 Matthew Kidman: time, you would hope you'd get a lot of dividends 192 00:09:41,460 --> 00:09:45,630 Matthew Kidman: and the share price will have moved a bit higher. Own a stock like 193 00:09:46,020 --> 00:09:50,010 Matthew Kidman: Transurban, which has the benefit of price increases, toll road 194 00:09:50,010 --> 00:09:55,290 Matthew Kidman: stuff and so on. Own those very stable big stocks. 195 00:09:56,490 --> 00:09:59,100 Matthew Kidman: If you want to play where we are today on 196 00:09:59,100 --> 00:10:02,190 Matthew Kidman: a quarter- by- quarter basis, you've got to be close 197 00:10:02,190 --> 00:10:04,830 Matthew Kidman: to the market and play, to use a football term, 198 00:10:05,130 --> 00:10:07,530 Matthew Kidman: what's in front of you, rather than a game plan 199 00:10:07,530 --> 00:10:09,120 Matthew Kidman: that's set well before the match. 200 00:10:10,080 --> 00:10:11,880 Sean Aylmer: Matthew, thank you for talking to Fear and Greed. 201 00:10:12,300 --> 00:10:12,600 Matthew Kidman: Thanks, Sean. 202 00:10:13,230 --> 00:10:16,890 Sean Aylmer: That was Matthew Kidman, principal at Centennial Asset Management. This 203 00:10:16,890 --> 00:10:19,410 Sean Aylmer: is the Fear and Greed Daily Interview. Remember this information 204 00:10:19,410 --> 00:10:22,200 Sean Aylmer: is general in nature, and you should seek professional advice 205 00:10:22,200 --> 00:10:25,410 Sean Aylmer: before making any investment decisions. Join us every morning for 206 00:10:25,410 --> 00:10:28,080 Sean Aylmer: the full episode of Fear and Greed, Australia's most popular 207 00:10:28,080 --> 00:10:30,990 Sean Aylmer: business podcast. I'm Sean Aylmer. Enjoy your day.