1 00:00:04,019 --> 00:00:06,360 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,360 --> 00:00:09,658 Sean Aylmer: Aylmer. It's been well over two months since Silicon Valley 3 00:00:09,660 --> 00:00:12,660 Sean Aylmer: Bank collapsed in the US and, as the dust gradually 4 00:00:12,660 --> 00:00:15,750 Sean Aylmer: settles, there are a few lessons for investors, and those 5 00:00:15,750 --> 00:00:19,680 Sean Aylmer: lessons may reveal some opportunities in equity markets. Remember, this 6 00:00:19,680 --> 00:00:22,860 Sean Aylmer: is general information only and you should seek professional advice 7 00:00:22,860 --> 00:00:26,639 Sean Aylmer: before making any investment decisions. Brian Han is a senior 8 00:00:26,639 --> 00:00:30,209 Sean Aylmer: equity analyst at Morningstar. Brian, welcome back to Fear and Greed. 9 00:00:30,809 --> 00:00:31,770 Brian Han: Thank you for having me, Sean. 10 00:00:32,490 --> 00:00:35,399 Sean Aylmer: Now you've written a report focusing on the lessons learned 11 00:00:35,400 --> 00:00:39,000 Sean Aylmer: from the Silicon Valley Bank failure. First, though, a quick 12 00:00:39,000 --> 00:00:42,330 Sean Aylmer: recap of what actually happened at Silicon Valley Bank. 13 00:00:43,440 --> 00:00:46,559 Brian Han: Yeah, sure, and that provides a good context in terms 14 00:00:46,559 --> 00:00:48,540 Brian Han: of the lessons that we are going to talk about, 15 00:00:48,540 --> 00:00:54,449 Brian Han: Sean. Silicon Valley collapsed early March this year. Now the 16 00:00:54,480 --> 00:00:58,230 Brian Han: media and the regulators and the financial markets have performed 17 00:00:58,230 --> 00:01:02,760 Brian Han: an extensive autopsy of how and why it happened, but 18 00:01:02,760 --> 00:01:07,229 Brian Han: what I was interested in was what were the dynamics 19 00:01:07,349 --> 00:01:13,259 Brian Han: causing that collapse that have parallels to equity investing? Let's 20 00:01:13,260 --> 00:01:17,880 Brian Han: start with the dangers of borrowing short and lending long. 21 00:01:18,600 --> 00:01:23,430 Brian Han: Now, SVB collapsed because it borrowed short from its depositors 22 00:01:23,730 --> 00:01:26,730 Brian Han: because these depositors can withdraw that money at any time. 23 00:01:27,420 --> 00:01:32,700 Brian Han: But SVB used those deposits to lend long by buying 24 00:01:32,700 --> 00:01:37,170 Brian Han: instruments that mature in one, two or three years' time. 25 00:01:38,010 --> 00:01:42,208 Brian Han: So when those depositors suddenly started withdrawing their money, the 26 00:01:42,209 --> 00:01:45,330 Brian Han: bank just didn't have enough money to meet those withdrawals 27 00:01:45,630 --> 00:01:47,880 Brian Han: because all that money is tied up investments that mature 28 00:01:48,119 --> 00:01:52,500 Brian Han: much, much later. Now, that is no different to a 29 00:01:52,500 --> 00:01:58,320 Brian Han: company raising capital from shareholders. It uses that money to 30 00:01:58,320 --> 00:02:02,999 Brian Han: invest in projects which pay off over time. But as 31 00:02:03,000 --> 00:02:05,699 Brian Han: you know, many shareholders want the stock price to go 32 00:02:05,699 --> 00:02:11,460 Brian Han: up immediately. So same dynamic, borrowing short from shareholders and 33 00:02:11,460 --> 00:02:16,048 Brian Han: then lending long to investments that take time to generate 34 00:02:16,050 --> 00:02:21,149 Brian Han: returns. The only difference, though, is that borrowing short, lending 35 00:02:21,150 --> 00:02:25,709 Brian Han: long can literally break a bank with implications for jobs 36 00:02:26,070 --> 00:02:30,090 Brian Han: and the economy. But in an equity investment, shareholders make 37 00:02:30,090 --> 00:02:34,050 Brian Han: get impatient and sell down the stock. But a falling 38 00:02:34,050 --> 00:02:37,980 Brian Han: stock price, painful as it may be for shareholders, has 39 00:02:37,980 --> 00:02:41,849 Brian Han: no real consequences in the real world as long as 40 00:02:41,850 --> 00:02:46,858 Brian Han: the company delivers adequate returns on the investment. Over time, 41 00:02:47,520 --> 00:02:52,260 Brian Han: the stock price will usually, eventually reflect the intrinsic value 42 00:02:52,260 --> 00:02:52,829 Brian Han: of that company. 43 00:02:53,190 --> 00:02:53,669 Sean Aylmer: Okay. 44 00:02:53,910 --> 00:02:57,719 Brian Han: Then the second parallel, Sean, is this. Silicon Valley Bank 45 00:02:57,719 --> 00:03:01,710 Brian Han: collapsed because almost all of its depositing customers were in 46 00:03:01,710 --> 00:03:06,389 Brian Han: the high- tech industry. This bank consciously targeted this industry, 47 00:03:06,450 --> 00:03:10,650 Brian Han: based its whole business model on serving just this tech 48 00:03:10,650 --> 00:03:15,540 Brian Han: industry. Unfortunately, people in the tech industry, they are a 49 00:03:15,540 --> 00:03:19,620 Brian Han: very twitchy bunch. They are hyper- connected and interact with 50 00:03:19,620 --> 00:03:23,940 Brian Han: each other all the time, be it through WhatsApp, Instagram, Slack, 51 00:03:24,330 --> 00:03:27,240 Brian Han: Twitter, what have you. So when there was just a 52 00:03:27,240 --> 00:03:31,440 Brian Han: hint of SVB not having enough money to pay withdrawals, 53 00:03:31,860 --> 00:03:35,280 Brian Han: that concern just spread like wildfire in matter of minutes. 54 00:03:35,699 --> 00:03:37,680 Brian Han: So instead of a bank run, it was more like 55 00:03:37,680 --> 00:03:39,870 Brian Han: a bank flash, and before you knew it, the bank 56 00:03:39,870 --> 00:03:44,429 Brian Han: just shut up shop. Now, that is no different to 57 00:03:44,429 --> 00:03:48,810 Brian Han: a public listed company that courts short- term minded investors, 58 00:03:49,259 --> 00:03:53,520 Brian Han: such as hedge funds, day traders and event funds and 59 00:03:53,520 --> 00:03:56,520 Brian Han: quant funds. At the first sign of a slight earnings 60 00:03:56,520 --> 00:04:00,870 Brian Han: miss or disappointing news they sell and the momentum just 61 00:04:00,870 --> 00:04:05,160 Brian Han: decimates the stock price. The only difference, though, here is 62 00:04:05,160 --> 00:04:09,030 Brian Han: that having flighty shareholders who cause the stock price to 63 00:04:09,030 --> 00:04:13,500 Brian Han: tank doesn't of itself impact the company. As long as 64 00:04:13,500 --> 00:04:16,620 Brian Han: the company has the solid balance sheet and earnings fundamentals, 65 00:04:17,190 --> 00:04:21,210 Brian Han: the stock price should ultimately reflect its intrinsic value, as 66 00:04:21,210 --> 00:04:25,890 Brian Han: long as long- term shareholders replace those short- term shareholders 67 00:04:26,219 --> 00:04:26,909 Brian Han: on the register. 68 00:04:27,509 --> 00:04:31,020 Sean Aylmer: So Brian, as I'm hearing you in both the cases 69 00:04:31,020 --> 00:04:33,870 Sean Aylmer: there, the lessons we can learn from Silicon Valley Bank, 70 00:04:34,410 --> 00:04:38,010 Sean Aylmer: are you saying that the same approach can occur in 71 00:04:38,010 --> 00:04:41,849 Sean Aylmer: equity markets and that could actually be a buying opportunity? 72 00:04:41,849 --> 00:04:46,230 Sean Aylmer: Because if that does happen and can intrinsically value a 73 00:04:46,230 --> 00:04:49,380 Sean Aylmer: company at X and it goes to X minus one, 74 00:04:49,560 --> 00:04:52,320 Sean Aylmer: suddenly there are opportunities there. Is that kind of what 75 00:04:52,320 --> 00:04:52,800 Sean Aylmer: you're saying? 76 00:04:53,220 --> 00:04:56,130 Brian Han: That is exactly the nutshell of what I'm trying to 77 00:04:56,130 --> 00:04:58,738 Brian Han: say. As long as you are comfortable that the company 78 00:04:58,740 --> 00:05:03,270 Brian Han: you are investing in has solid fundamentals and financial risk 79 00:05:03,630 --> 00:05:06,450 Brian Han: is relatively limited because it had a strong balance sheet. 80 00:05:07,109 --> 00:05:09,570 Sean Aylmer: Okay. So have got any recent examples that can kind 81 00:05:09,570 --> 00:05:10,440 Sean Aylmer: of bring that to light? 82 00:05:11,400 --> 00:05:16,740 Brian Han: Yeah, sure. For instance, Brambles and Brambles is the pallet ... 83 00:05:17,160 --> 00:05:20,159 Sean Aylmer: Brambles, Brian, is one of my all- time favorite companies 84 00:05:20,160 --> 00:05:23,639 Sean Aylmer: because anyone that can own that many pallets and at 85 00:05:23,639 --> 00:05:27,510 Sean Aylmer: different times during its life has lost a few million 86 00:05:27,510 --> 00:05:29,070 Sean Aylmer: pallets, it just has to come out and say, " Sorry, we 87 00:05:29,070 --> 00:05:31,440 Sean Aylmer: lost a few million pallets," I think that's quite funny. 88 00:05:31,500 --> 00:05:34,770 Sean Aylmer: But anyway, I digress. Go on about Bramble and its 89 00:05:34,770 --> 00:05:35,130 Sean Aylmer: share price. 90 00:05:35,190 --> 00:05:37,020 Brian Han: Well, it's funny you should mention that because they have 91 00:05:37,020 --> 00:05:39,749 Brian Han: millions and millions of pallets and the percentage of pallets 92 00:05:39,750 --> 00:05:42,600 Brian Han: that gets lost is actually quite minuscule, and yet, that 93 00:05:42,600 --> 00:05:44,310 Brian Han: draws all the negative headlines. 94 00:05:44,310 --> 00:05:45,299 Sean Aylmer: All the attention, I know. 95 00:05:45,300 --> 00:05:45,660 Brian Han: Yeah. 96 00:05:46,230 --> 00:05:47,880 Sean Aylmer: Then they went for the plastic pallets for a while, 97 00:05:47,880 --> 00:05:49,170 Sean Aylmer: but they've gone back to the wood ones, so it 98 00:05:49,170 --> 00:05:51,630 Sean Aylmer: was another great Bramble story. Anyway, go on. 99 00:05:52,230 --> 00:05:55,890 Brian Han: Yeah, so that is one example. Another example might be 100 00:05:55,950 --> 00:06:00,870 Brian Han: the insurance agent called AUB, which incidentally raised capital to 101 00:06:00,930 --> 00:06:03,420 Brian Han: shore up their balance sheet, too. Now these are both 102 00:06:03,420 --> 00:06:09,840 Brian Han: examples where there were perceptions of them being value traps, 103 00:06:10,320 --> 00:06:15,270 Brian Han: but their stock prices have eventually reflected what their franchises 104 00:06:15,389 --> 00:06:19,890 Brian Han: are intrinsically worth. One thing I've got to say, though, 105 00:06:19,950 --> 00:06:23,940 Brian Han: is that just because you have an undervalued stock, it 106 00:06:23,940 --> 00:06:27,780 Brian Han: doesn't mean it will always reach its intrinsic value because, 107 00:06:27,809 --> 00:06:30,899 Brian Han: as you know, Sean, I mean stock investing is not 108 00:06:30,900 --> 00:06:34,770 Brian Han: an exact science and some stocks simply never recover, no 109 00:06:34,770 --> 00:06:38,640 Brian Han: matter how much work we put in analyzing its fundamentals. 110 00:06:39,779 --> 00:06:42,630 Brian Han: That is because sometimes our analysis simply turns out to 111 00:06:42,630 --> 00:06:45,900 Brian Han: be wrong, or sometimes there are structural factors, and sometimes 112 00:06:45,900 --> 00:06:48,840 Brian Han: because management is just not very great at running them. 113 00:06:49,440 --> 00:06:51,299 Sean Aylmer: Stay with me, Brian. We'll be back in a minute. 114 00:06:57,330 --> 00:07:00,960 Sean Aylmer: I'm speaking to Brian Han, senior equity analyst at Morningstar. 115 00:07:02,010 --> 00:07:08,940 Sean Aylmer: Okay. So Brambles and AUB economy in past tense, we're 116 00:07:08,940 --> 00:07:12,209 Sean Aylmer: talking about the mismatch between short- term investor expectations and long- 117 00:07:12,209 --> 00:07:15,900 Sean Aylmer: term fundamentals here. Are there any at the moment that 118 00:07:15,900 --> 00:07:18,960 Sean Aylmer: could be classed as undervalued in your mind? And I'm 119 00:07:18,960 --> 00:07:23,069 Sean Aylmer: just repeating to listeners, this is not advice because everyone 120 00:07:23,070 --> 00:07:25,229 Sean Aylmer: has their own personal needs. So if you need advice, 121 00:07:25,230 --> 00:07:28,560 Sean Aylmer: go and talk to a financial planner. But Brian Han, 122 00:07:29,039 --> 00:07:31,680 Sean Aylmer: from Morningstar, tell me what are the stocks that you're 123 00:07:31,680 --> 00:07:33,690 Sean Aylmer: looking at that you think there is this mismatch? 124 00:07:34,410 --> 00:07:39,180 Brian Han: Sure, Sean. Couple of examples would be say AGL Energy. 125 00:07:39,840 --> 00:07:43,889 Brian Han: So this stock is trading at a 30% discount to 126 00:07:43,889 --> 00:07:49,260 Brian Han: our analyst valuation of, I think, $ 12.80. Now, the market 127 00:07:49,260 --> 00:07:54,420 Brian Han: is being quite fatalistic about the future of AGL's coal- 128 00:07:54,420 --> 00:07:59,190 Brian Han: fired power stations, given the environmental concerns and don't really 129 00:07:59,190 --> 00:08:01,739 Brian Han: want to wait around and see how AGL may or 130 00:08:01,740 --> 00:08:05,519 Brian Han: may not evolve. But what the market is missing, according 131 00:08:05,520 --> 00:08:07,950 Brian Han: to our analysts at least, is that over the long 132 00:08:07,950 --> 00:08:12,390 Brian Han: term there is a sustainable model for AGL in terms 133 00:08:12,390 --> 00:08:16,349 Brian Han: of running renewable energy hubs, such as wind farms and 134 00:08:16,349 --> 00:08:22,259 Brian Han: solar farms, building gas- fired power stations to fill in 135 00:08:22,260 --> 00:08:27,090 Brian Han: supply gaps left by the renewable people and then leveraging 136 00:08:27,120 --> 00:08:32,309 Brian Han: its enormous retail customer base to essentially be the scale 137 00:08:32,309 --> 00:08:36,929 Brian Han: middleman between renewable energy suppliers and the end- users such 138 00:08:36,929 --> 00:08:40,769 Brian Han: as you and I, the ultimate power consumers. So that's 139 00:08:40,770 --> 00:08:45,420 Brian Han: one example. Another example would be TPG Telecom, which is 140 00:08:45,420 --> 00:08:48,720 Brian Han: a company that I cover. Now this stock is trading 141 00:08:48,720 --> 00:08:53,940 Brian Han: at a 25% discount to our valuation of $ 7. 40. 142 00:08:54,540 --> 00:08:57,179 Brian Han: Now, the market doesn't like the fact that there is 143 00:08:57,179 --> 00:09:01,980 Brian Han: an investment phase coming up for TPG, especially as its 144 00:09:01,980 --> 00:09:06,750 Brian Han: Vodafone is far behind Telstra and Optus in terms of 145 00:09:06,750 --> 00:09:10,078 Brian Han: 5G mobile rollout. It also doesn't like the fact that 146 00:09:10,080 --> 00:09:13,679 Brian Han: TPG needs to do its own T22 program like Telstra 147 00:09:13,679 --> 00:09:18,358 Brian Han: did over the past four years in terms of simplifying, 148 00:09:18,480 --> 00:09:22,650 Brian Han: cutting costs and improving efficiency. But we've all seen how 149 00:09:22,650 --> 00:09:26,370 Brian Han: Telstra has recovered and benefited from the T22 program and 150 00:09:26,370 --> 00:09:30,090 Brian Han: how its stock price has rebounded strongly after those investors 151 00:09:30,090 --> 00:09:33,030 Brian Han: with near term concerns sold out. Now we think the 152 00:09:33,030 --> 00:09:36,270 Brian Han: same thing will happen with TPG and over the next 153 00:09:36,270 --> 00:09:40,020 Brian Han: three years we do see decent earnings growth coming through 154 00:09:40,020 --> 00:09:40,620 Brian Han: for that company. 155 00:09:41,910 --> 00:09:48,059 Sean Aylmer: Both those examples, AGL Energy and TPG, they are big kind of structural 156 00:09:48,059 --> 00:09:50,190 Sean Aylmer: issues, I suppose is a way of putting it, rather 157 00:09:50,190 --> 00:09:53,250 Sean Aylmer: than cyclical issues in both those examples. Do you get 158 00:09:53,250 --> 00:09:57,750 Sean Aylmer: most of this mismatch when there are structural changes in 159 00:09:57,750 --> 00:10:01,260 Sean Aylmer: an industry, in the TPG case, the argument being it's 160 00:10:01,260 --> 00:10:03,420 Sean Aylmer: just been a bit slower, therefore, it's going to have 161 00:10:03,420 --> 00:10:06,600 Sean Aylmer: to spend a lot of money, AGL, the world's changing, 162 00:10:06,750 --> 00:10:09,780 Sean Aylmer: how's it going to actually transition? Do you get most 163 00:10:09,780 --> 00:10:13,020 Sean Aylmer: of these opportunities when there are those sort of structural changes? 164 00:10:13,440 --> 00:10:20,250 Brian Han: Definitely, Sean, especially when people mistake cyclical or temporary changes 165 00:10:20,730 --> 00:10:26,309 Brian Han: as structural changes. Because I know structural changes, they do 166 00:10:26,309 --> 00:10:30,870 Brian Han: happen, but most of the time, structural changes are mostly 167 00:10:31,679 --> 00:10:35,100 Brian Han: in disguise as cyclical changes that people read too much 168 00:10:35,100 --> 00:10:38,910 Brian Han: into. And as you know, recency bias plays a big 169 00:10:38,910 --> 00:10:42,510 Brian Han: role in stock market psychology and whatever you read today, 170 00:10:42,570 --> 00:10:45,270 Brian Han: you try to extrapolate this wherever out into the future. 171 00:10:45,780 --> 00:10:48,208 Brian Han: So sometimes it takes a certain amount of discipline to 172 00:10:48,240 --> 00:10:51,929 Brian Han: look beyond that and perhaps to look beyond the valley 173 00:10:52,080 --> 00:10:53,790 Brian Han: to see the next mountain ahead. 174 00:10:54,390 --> 00:10:56,970 Sean Aylmer: Excellent way to finish off, Brian. Thank you very much 175 00:10:56,970 --> 00:10:58,200 Sean Aylmer: for talking to Fear and greed. 176 00:10:58,590 --> 00:10:59,490 Brian Han: No problem. Thanks, Sean. 177 00:11:00,000 --> 00:11:03,750 Sean Aylmer: That was Brian Han, senior equity analyst at Morningstar. This 178 00:11:03,750 --> 00:11:05,999 Sean Aylmer: is the Fear and Greed Daily Interview. Remember, you should 179 00:11:06,000 --> 00:11:09,150 Sean Aylmer: get professional advice before making any investment decisions. Join us 180 00:11:09,150 --> 00:11:11,340 Sean Aylmer: every morning for the full episode of Fear and Greed, 181 00:11:11,580 --> 00:11:15,750 Sean Aylmer: Australia's most popular business podcast. I'm Sean Aylmer. Enjoy your day.