Welcome to the June video update.
Today we were joined by Mike Taylor and Mark Devcich and we covered off these questions:
- Why is the stock market not the economy?
- Are we continuing the active stock picking approach?
- Are the funds continuing to favour tech stocks?
- What excites us about the share market going forward?
We have also included a transcript of this update below.
Founder and CEO
Sam De Court: Hi everyone, my name’s Sam De Court, and thank you very much for tuning in. With me I have Mike Taylor and Mark Devcich. Hi Mike and Hi Mark.
Sam De Court: It’s been a whole month since our last weekly video update. And as we’ve mentioned, we are going to continue these videos monthly going forward. It’s funny because Mike and I were actually talking after the last video about how we felt a little bit sad that the videos had come to an end, because we really enjoyed doing them every week, we really enjoyed the conversations and of course we really enjoyed the feedback from you. So thanks again for watching. Anyway we are back today, so let’s get started.
Sam De Court: Mike, in the last newsletter you said the stock market is not the economy. What did you mean by this?
Mike Taylor: Two things really Sam. The first one is that markets are always forward looking. So what you see in front of you today, is not what the market is looking at. Typically the market looks anywhere between six and 12 months ahead. So if you see a situation where you’re questioning why is the market rallying in April and May, it’s because the market’s not looking at the economy in April and May,it’s trying to make an assessment and say what will the economy look like in April and May 2021. So that’s why it’s quite hard to understand, ‘Why are we having this powerful rally? But everywhere around me I see people losing their jobs.’ The market tries to anticipate what the future is going to be. Likewise when it’s going down, it’s trying to anticipate things getting worse. So it’s trying to anticipate things getting better, as a consequence, that’s why it’s been rallying.
Mike Taylor: The second point as to why the market’s not the economy is that since 2008, we’ve had extraordinary monetary policy intervention from central banks, so that started with quantitative easing, which effectively is central banks printing money to buy bonds. Now that money printing has extended since 2008 over the last decade to, in some cases, where central banks in Japan are actually buying equities. And in this crisis, when it happened, central banks really stepped up big time. So what that’s done is actually inflated asset prices, back up to where they are, and prevented a financial crisis.That was their main purpose - to prevent a financial crisis, provide liquidity to the market, and really confidence to the market. And that’s exactly what it’s done, so they’ve achieved what their goal was. And really we can’t underestimate how much money has flooded into the system, and of course that money has found its way into stocks. So two reasons really, firstly is that the market looks forward, and secondly, we’ve got a lot of money flushing into the system from central banks.
Sam De Court: Thanks Mike. Mark, over to you now. How have things been going on the stock picking front? And are planning to continue this active approach? And obviously we have talked a lot about this in the videos over the last three months.
Mark Devcich: Well we’re active managers Sam, and this has been a good environment for active managers, because there’s been lots of volatility and there has also been lots of capital raises. And in fact over the last few months, there’s been more than $20 billion raised in the Australian stock market. And that’s been due to the uncertainty in the outlook, due to Covid-19, and also question markets around some of the company’s balance sheets. A lot of these companies’ share prices have been trading down at depressed levels, and they have undertaken capital raises, which then have been at a discount to their current stock price. So they have been very attractive opportunities to participate in. We’ve participated in more than a dozen now and some of them haven’t even been companies we’ve been previously shareholders in. We’ve made some really good gains, participating in these capital raises, and that’s the benefit of active management and a passive fund manager can’t really participate in those opportunities. And the volatility, like I talked about as well, that’s been enabling us to top up some of our existing positions. Last Thursday the S&P actually fell nearly 6%. To put this in context, there’s only been 27 days since the S&P 500 index was created back in 1957, when the index has fallen over 5%. 12 of those days happened in the GFC, and we actually had 5 days happen in March of this year. So it’s a pretty rare event. Last Thursday, late last week and early this week, we topped up a number of our positions that had fallen quite significantly, just due to the volatility in the market.
Sam De Court: Thanks Mark. Our funds continue to have really high exposure to the technology sector. What are the reasons for this?
Mark Devcich: This is a topic I’m pretty passionate about. There’s a number of good reasons here. Firstly, what’s happening in the world is data is the new highly valuable commodity. Like oil was back in the industrial age, data is powering the online age. With data, there are huge benefits of economies of scale. You might have heard that there’s a race on for artificial intelligence. Artificial intelligence works by the more data you feed into the AI engine, the better that AI engine becomes, the smarter it is, and the better the product that the tech company can give to its consumers. More data leads to a better product, a better product leads to more users, which leads to more data, and then again a better product. So it’s this virtuous circle and this is the reason why these large tech companies, Google Facebook etc, are becoming so dominant and they’ll probably continue to have that dominance for a long period of time. That’s why we own them in the portfolios. More specifically on software, which we have talked about before, there’s a number of reasons why we like this industry. There’s been a complete transition over the last five years in particular to the cloud and subscription business models. And why this is important is basically software has moved from an ownership model, to a rental model. And that’s given the software companies much more power. What they can do is, if a customer stops paying them, they can simply switch the software off. One of the most famous investors, Robert Smith from Vista Equity Partners, he’s a private equity investor, but he actually thinks that customers will pay their software fees before they actually pay back interest on first ranking debt, and that’s because software powers their business and if they don’t have the software running they can’t bill their customers and can’t run their business. That’s a really important point. Another couple of reasons why we really like software is it’s very scalable. Once you write the software, have the product in place, it costs very limited amounts of money to sell it to the next customer. There are very low marginal costs of production. The other reason is there’s generally high switching costs. And Sam you’ll probably know with Sales Force, we own it in the funds, but also we use it in the office, and you get used to how to use the software, the software is embedded in a number of workflows across the organisation, and if we tried to swap out to another CRM, it would be very difficult to do that quickly and it would be very time consuming. Those are a number of reasons why software and technology is a great industry to be invested in. You can see it in the last five or 10 years, it’s been one of the best sectors in terms of stock market performance.
Sam De Court: Thanks Mark. Mike, last question for you, this is a bit of a strange one. As an investor, my question is what excites you about the future in share markets, say one to three years out.
Mike Taylor: So the main thing that excites me at the moment is the number of pessimists that are still around. When we look at investor intelligence surveys, there’s an unusually high number of pessimists amongst institutional investors, as well as retail investors about this rally. It’s a hated rally and people do say, ‘I see all the carnage out there, why is the market up?’. We’ve already talked about the reasons why the market is up, but for us, that gives me confidence that the rally has further to go. For me, I think about how I felt in 2009, and what people were saying to me when Pie was performing well in 2009, is that people didn’t believe the recovery back then, they said there was going to be a double dip recession. That there was so much damage from the financial crisis that we’d never get out of this. And obviously we saw how that unfolded. I’ve talked about the reasons why I think the market can continue to rally. In particular it is the support from central banks as well as the fiscal stimulus, so we are believers of what they are calling the tick shape recovery. We think things will get incrementally better each month and for that reason we remain positive on the next one to three years.
Sam De Court: Thank you very much. Thanks Mike, and thanks Mark. Thank you everyone for watching. Have a great week and we will see you next month.
To download our product disclosure statements, go to www.piefunds.co.nz. Past performance is not an indicator for future returns. This information is general in nature only. Before relying it on it, we recommend you discuss with an expert