Welcome to the February market update.
In our latest video, we were joined by Guy Thornewill, Pie's Head of Research UK & Europe and Senior Investment Analyst, and Toby Woods, Senior Investment Analyst for global and UK & Europe funds. We covered off these questions:
- What's been happening in markets?
- How does our UK team successfully connect with global companies throughout lockdowns?
- What kind of industries and sectors are exciting our global investment team at the moment?
- What's the feeling about the return of inflation and interest rates going up as a result?
We have also included a transcript.
Founder and CEO
Sam De Court: Hi everyone, my name is Sam De Court, and thank you for tuning in for our first video update of 2021. With me I have Mike Taylor, along with Guy Thornewill and Toby Woods from our London office.
SDC: Mike, what's been happening in markets? It's been an interesting start to the year. Seemed like markets have started pretty strong but interestingly the New Zealand market started a little bit weak. What's your view?
Mike Taylor: Yeah I mean, a lot has happened in six weeks Sam, and we can't really cover that in the 90 seconds I've got to answer this question. But of late, what we've noticed is that interest rates have started to rise. And that’s been particularly challenging for the Kiwi market, as we know, because the New Zealand market is pretty much a yield market. So when interest rates rise, that means a bit of money starts to flow out of New Zealand. Also in the Kiwi market we've seen the electricity retailers’ price fall significantly this year. There is a bit of a back story to this. When President Biden was elected last year, he has a very green thumb or a green infrastructure spend that he's forecasting to do or projecting to do in his term. So a lot of money flowed into green ETFs, and our electricity retailers have almost entirely renewable so that means that the offshore money was flowing into those ETFs. However, this year some of that money has started to flow back out again, which has meant that those stocks have really been on the nose for the first five or six weeks of 2021.
SDC: Thanks Mike. Toby, a question for you. In the past, you and Guy have talked about getting around Europe and travelling and meeting a lot of the companies you invest in face to face. Obviously you can't do that at the moment. How do you get around that?
Toby Woods: It’s a very relevant question so thanks Sam. We do meet companies and in fact, since lockdown began in March last year, we've done about 350 Zoom calls with management teams. Which is amazing, that sort of shows that if anything, access might have gone up since the crisis began. But there's plenty else we can do as well. There's a lot of information freely available, if you know what you're looking for and you know where to look. So we get lots of info from YouTube, podcasts, and different sector-specific publications. So for instance, there's a Taiwanese website called Digitimes, which has a lot of details on tech trends and data. And for what it's worth, YouTube is a fantastic source of information, if you're really trying to understand some things. As a firm, Pie has access to some data analytic tools, which we like to use. So for example, we track website visits for e-commerce companies and given we know roughly what percent of visits convert into sales and what the average sales volume is per purchase, then we can get a handle on the company's overall sales for a period. Long before the company itself publishes those details. We also have access to a vast amount of market data through Capital IQ and Bloomberg platforms, both of which have a deep pool of resources. Pie subscribes to information from experts, as well, which we can use either to read transcripts of expert opinion on companies or sectors, as well as have calls with experts ourselves. And this can be an extremely powerful information tool. We have strong relationships with the investment banks. First the global ones, and the local ones whose research we access on a daily basis and this really forms a bedrock of a lot of the analysis we do on individual companies. And then, finally, like a lot of the team at Pie, Guy and I are quite long in the tooth, having been in the industry for 25 and 15 years, respectively. So we have our own network within the city of London that we can utilise. That's been harder in lockdown, but those relationships run pretty deep so we can always reach out to contacts when we need to. So I guess when you take that all together, we pull a lot of information from various sources, all of which helps us make investment decisions, and on the whole has worked well despite the feeling of never-ending lockdowns in this side of the world.
SDC: Thanks Toby. Do you think that once lockdowns lift in the UK and Europe, you'll go back to doing as much travelling around continental Europe as you had?
TW: I think there's going to always now be a hybrid. I think there's a lot of worth going to see companies, because you get a huge amount out of going to their factories and just getting a feel for their office environment. But then, equally, probably people travelled too much in the past, and they'll be able to access companies, through Zoom and the likes, forever now. I think it's been proven to work perfectly reasonably.
SDC: Thank you. Guy, we’ll move to you now. What are the kinds of industries and sectors that are exciting you or you're paying the most attention to at the moment?
Guy Thornewill: Thanks Sam. So we had a lot of success last year, with some stocks that were Covid beneficiaries. But today I wanted to talk about something that’s a little bit different. I wanted to focus on a couple of sectors where we've been increasing exposure recently, which are the industrial sector, and also companies exposed to the factory automation trend.
GT: So starting with the industrial sector. I'm really referring here to companies that make industrial products and machinery. These companies had a large demand shock when Covid hit last year, of course. But demand has been steadily recovering, and we think that's going to continue well into 2021. And just as importantly, we think that valuation levels in many of these stocks in this area remain very attractive. And that can't really be said these days for a lot of the Covid beneficiaries or a lot of e-commerce stocks which have done really well. So one example we have purchased in the UK & Europe Fund and the Global Growth Fund is Biesse. So this is an Italian company that makes wood processing machines. Demand for that can be quite cyclical but it's recovering. It's also been boosted by the fact that many of their customers, who are often furniture makers, have seen pretty good demand for furniture due to the working from home trend. So I guess in a small way it’s a Covid beneficiary as well. When we first started buying Biesse a couple of months ago it was trading on an EBITDA multiple of just seven times, which looked much too cheap for a good quality company like this, and as a company, we've known over the last few years. So, since we started buying it, the shares have gone up by around 40%.
GT: The second sector I mentioned where we've been increasing exposure is factory automation. The trend towards greater factory automation is nothing new. It's been around for years, it helps companies produce more efficiently, as well as use energy more efficiently. However, despite the structural growth element, the order books for these companies are not immune to sharp slowdowns in the global economy, just like the one we witnessed last year. So demand is now recovering and, if anything in this Covid-era, companies need to become even more efficient. So another example to give you in this area that we purchased for the Global Growth Fund is ATS Automation Tooling. This is actually a Canadian company making automation equipment for healthcare, industrial, food and beverage, and markets. This company was trading at a relatively low multiple of around 12 times EBITDA when we first purchased the shares a few months ago, and the stock has also done quite well, it's up about 35%. So why has it gone up? This has been driven by a couple of things. Firstly, an acquisition of a company in Europe that makes machines for food and beverage processing and filling that they did which is going to be nicely accretive and it's going to really add to their product portfolio. And then, recently, a couple of weeks ago reported really good results showing a really strong increase in their order book. So the thesis about demand recovering is certainly coming through. So this stock has seen estimate upgrades and some rerating, and that's a great combination. So Biesse and ATS are both quite small companies, but in the Global Growth 2 Fund we've also been finding some good automation companies on the larger side. We've invested for example in global automation leaders like Schneider Electric in France, and also Keyence in Japan. So I hope that gives you a bit of a flavor of some of the areas that we're focusing on right now.
SDC: Thanks Guy, and in case anyone's wondering why Guy’s got a picture of the Eiffel Tower behind him, he is actually in his home office in Paris at the moment. Mike, over to you for the last question. There's been quite a lot of talk in the media recently about the return of inflation and interest rates going up as a result. What's your kind of feeling about that and possible flow-on effects to the markets?
MT: That is a good question Sam, and as an investment team we're paying quite close attention to inflation and interest rates, because we know that equity markets don't like high inflation. In the 1970s, equity markets had low valuations because inflation was running very high. And when inflation runs in that Goldilocks number, sort of between 1% and 3%, that’s when we see extremely high valuations for markets. So, there is some belief that the expansion in the money supply, which happened in 2020 as a result of Covid, will ultimately lead to inflation. However, we're not actually sure if that's going to happen or not because, as we know, we experienced quite a bit of QE after the GFC, and we saw no rise in inflation. As well, as Guy's been alluding to with automation, that's actually bringing down the cost of production for many things. We all know that it's cheaper to get a TV or your internet is cheaper now than it used to be, so price inflation is not really evident at the moment. Neither are we experiencing wage inflation, because that level of unemployment in most large developed countries is still quite high because of Covid. So, although there is some concern about inflation, it's not something that we are worried about at the moment. All central banks around the world, including New Zealand's own, have said that there are no rate rises on the short term horizon. They're much more focused on bringing down unemployment, and also getting inflation back to a more normal level rather than seeing it in a negative sense. And let's not forget actually that rates going up from zero is actually a positive thing. The yield curve is no longer inverted, and this is actually positive for banks, for cyclicals and it tells you that the economy is doing well. So rising rates of zero is actually a positive thing. Sure, maybe it means that your mortgage rate might be slightly higher in 12 months, and we’ve probably seen the low, but I don’t think at this stage it’s a cause for concern.
SDC: Thanks Mike. And just one other thing before we finish off, the Pie team is currently in the process of arranging Investor Days around the country in April, and invitations are likely to follow in the next couple of days. Thanks, Mike, Guy and Toby, and thanks everyone for watching. See you next time.
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