5/23/2022 12:00:00 AM

Market Update May 2022

Welcome to the May market update. 

In our latest video, we were joined by Sydney-based Portfolio Manager and Senior Investment Analyst Michael Goltsman, and London-based Toby Woods, Senior Investment Analyst for Global and UK & Europe funds. We covered off these topics:

- How have markets performed over the past month?

- What's the feeling on the ground in Australia, and what emerging themes and trends are we feeling excited about? 

-  What's the feeling in Europe, and what global sectors could be attractive long-term winners?

We have also included a transcript.

Kind regards,

Mike Taylor
Founder + CEO

Market Update May 2022 from Pie Funds on Vimeo.


Sam de Court: Hi everyone, my name is Sam de Court and and with me today is Pie Funds founder Mike Taylor, Sydney-based portfolio manager Michael Goltsman, or as he's known in the office, Goltsy, and London-based Toby Woods. Hi Mike, Michael and Toby, and Goltsy, great to have you here for your maiden appearance. 

Michael Goltsman: Good to be here.

SDC: Before the video we were actually talking about Goltsy showing off the Sydney skyline from our new office. But unfortunately, as you can see, we're a bit late and it's dark there. 

MG: Yeah, you missed the boat there.

SDC: Mike Taylor, we'll start with you. So how have markets performed over the past month?

Mike Taylor: The past month has definitely been a month to forget Sam, I think we’re at markets are down maybe eight weeks in a row, which every time I read about it as setting a new record. It used to be the worst start to the year since the 1940s. Now I see it's the worst start to the year since 1932. I'm not sure it can probably get much worse than that as far as records go. So it's been pretty rough. It has been a sea of red. And you know, almost every asset class has underperformed this year, whether it's bonds, whether it's gold, crypto, equities, it's all been tough. I think the only sector that’s actually up in the S&P 500 is energy, which is up 40% this year. And we all know the reason for that, oil prices are up because of the war in Ukraine so it has been a bit of a tough start, been a tough month. But actually, I'm thinking that it might be the point where the markets might be looking for… it might not be the low but certainly a point where after eight weeks, we could be ready for a rally. 

SDC: Thanks Mike. Over to you in Sydney Goltsy. What's the feeling on the ground over in Australia? And are there any emerging themes and trends you're starting to feel a little bit excited about?

MG: Gidday, Sam, it's good to join you for my first Pie Funds video from our new office here. To answer your question, much like Mike said, it's a difficult market right now. Clearly the combination of supply chain issues, inflation and rising rates is causing concern around the future health of the consumer and is clearly impacting the market sentiment. So what started out as a sell-off in cash burners a few months ago has now progressed to be a much wider sell-off across sectors, as many in the market are throwing out the baby with the bathwater. To us as fundamental investors, what this presents is an opportunity to acquire some high quality, founder-led, cash-generative businesses that are getting caught up in this broader selling. So whilst it's tough, the feeling on the ground is we’re actually quite excited. And that's because we're getting a chance to buy great companies at discounts to their true value. 

In the context of the macro, every company in our portfolios is being assessed on three fundamental questions. One, how defensive are your earnings? Meaning how stable the earnings of the business would be if an economic downturn plays out. So infrastructure and healthcare-related companies are ones that we’re giving greater weights to in our portfolios at this point in time. The second question is, can you pass on inflation? Companies that can successfully increase prices and protect margins are ones that will outperform this current environment. And yes, we're also favouring them right now. And the third question is, what is your balance sheet strength? We're looking for companies with high cash positions, with little to no debt.

And in situations where there has been balance sheet concern, we have actively exited those positions. Another interesting dynamic in this market is the return of M&A, or mergers and acquisitions. Given the number of stocks that are currently trading at discounted valuations, there are signs that M&A will be an important factor in coming months. Looking at our portfolios, Uniti Wireless and Alliance Aviation are two holdings that are currently under takeover and we expect more stocks to attract interest in due course. So, in all, it's probably a long answer, but hopefully that gives you some perspective on what we're seeing and what the feeling on the ground is. 

SDC: Thanks for that Michael. And over to you now in London, Toby. What's the feeling in Europe? And what are the global sectors that you're starting to feel are looking like pretty attractive long-term winners?

Toby Woods: Yeah, okay. So just just taking a step back, getting everything into perspective. Where we are now is not where we believe we'd be this year. So Christmas time, we did not predict a war in Europe. We underestimated the inflation situation which of course is linked to the war in kind of many, but not all respects. And we certainly didn't realise we're going to end up facing a cost of living crisis. It wasn't just us, the whole market was more complacent and we were emerging from the pandemic and frankly, the prospects didn't look too bad.

Anyway, here we are, with a war that looks like it's going to drag on for some time. The good news is it feels like it's contained in Ukraine and won’t spill further but look, I have no idea how this is ultimately going to play out. Inflation is not going to be as transitory as we first thought. Some of these price rises are definitely here to stay, in particular energy costs, which is completely obvious, given we're trying not to purchase from Russia, which historically has been the biggest supplier of gas to Europe.

So we saw inflation at 7.4% in April, and it's probably going to rise moderately in May, and stay high until the base effect from the energy price surge at the end of last year kicks in more forcefully in Q4 this year. The question of course is, how the European Central Bank will respond to it, and where interest rates will go. But that's a kind of whole topic in itself. All I would say is that the fear factor is high in Europe at the moment, and this can be seen in the markets. But that's where the opportunities lie as there are always places to turn. Whether it's investing into renewable energy. We've done quite a lot of work on this and we’re excited about a few stocks in the sector, or picking up some great companies that have simply been oversold. So for instance there are lots of those in our usual hunting ground in the technology sector. In the end, Europe will be okay. The institutions are strong. The countries across the block are united, plus there are a lot of fantastic businesses. So at some point very soon we'll have a superb opportunity to put money to work as the best thing about a volatile market are the opportunities it presents. We're getting ready for that and we have a long list of high quality winners that we’ll buy as soon as we at Pie feel the market is starting to bottom out.

SDC: Thanks, Toby. That's a very optimistic ending. Back over to you Mike Taylor, currently down in Hawke's Bay. So things can feel quite heavy at times. What's something positive that has happened in the past month that's made you feel optimistic?

MT: So continuing with the optimistic theme where Toby left off is that we look at a number of indicators to assess where the market might be heading in the future and one of those that we follow closely is market sentiment. And at the moment, market sentiment is extremely bearish. Now typically what happens when you get sentiment at these low levels is the market does put in either a bear market rally or in fact it may even indicate the bottom of the market. So at this point in time, who knows whether it's going to be a bear market rally or is the low but, with the market having been down eight weeks in a row and sentiment as bearish as it is…. the market is set up for a rally at some point. Now I don't know when, or what day that might start but certainly, it's got the ingredients for that to happen anytime soon. 

Now, the second positive nugget to take away Sam is that interest rates, which had been on the way up kind of since well, maybe early 2021, or even late 2020 when they bottomed after Covid. We've reached the point in the market now where actually if there's bad news or poor economic data, actually interest rates start to come down. So we peaked at about 3.2% maybe a week or 10 days ago. And as you all know, one of the reasons for the sell-off has been rising interest rates, which affect growth stocks. So if interest rates start to come down, even though it might be attached to weaker economic growth, it's actually positive on a long-term basis for those tech stocks, which have been hit really hard. So there's two positives for you to take away and something to give you a smile on your face for the end of the night.

SDC: All right, thank you very much Mike and thank you Goltsy over in Sydney for joining us, and of course thank you very much Toby as well.  And thank you everyone very much for watching. Have a good month ahead and we’ll see you next month.

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