9/23/2021 12:00:00 AM

Market Update - September 2021

Welcome to the September market update.

In our latest video, we were joined by Mark Devcich, Chief Investment Officer and Portfolio Manager, and Guy Thornewill, Head of Research UK & Europe and Senior Investment Analyst. We covered off these questions.

  • It has been a really strong start to the year for most markets. What has been driving this growth?
  • Z Energy and Afterpay are two stocks that have recently had takeover bids. What sort of impact have these bids had on those companies, and are we expected to see more?
  • Some companies are issuing profit warnings due to supply chain issues. What has caused this and what is the likely impact on corporate earnings?

We have also included a transcript.

Kind regards,

Mike Taylor
CEO + Founder



Transcript:

Sam de Court:  Good morning everyone. My name is Sam De Court and welcome to our monthly video update. With me today we've got Mike Taylor down in our Havelock North office, we've got Guy Thornewill calling in from Paris, and we've got Mark Devcich calling in from his front porch over on the North Shore. Good morning and good evening guys. 

So Mark, were you at KFC at midnight in the queues?

Mark Devcich: No, I’m more of a McDonald’s fan, but I went for a run this morning and saw everyone lining up for coffees and thought the McDonald's drive thru would probably be a lot worse than that so I think I'm going to leave it a few days.

SDC: My wife's been out for a dog walk this morning, she got herself a takeaway coffee, came back with nothing for me so I'm just stuck with good old plunger coffee. Alright, let's get started. So Mike, first question for you. It has been a really strong start to the year for most markets, what's been driving this growth?

Mike Taylor: Yeah good question Sam. I think this year's growth in markets or improvement in prices has really been just a continuation of the themes that were present in 2020, but just to a lesser degree. So first of all we've got monetary policy stimulus, which has been zero interest rates, and of course in most countries, some form of QE or buying of government bonds to increase the money supply. Secondly, we've had fiscal stimulus, whether that's been wage keeper, job keeper, or stimulus in the form of infrastructure spend. Whatever it has been, there has been stimulus coming from a fiscal perspective as well. 

And thirdly, on top of that, is that after we got past the initial phase of the pandemic, consumers and businesses actually started to spend again. So we've seen quite an increase in company earnings growth over the pre-pandemic period of 2019. So those three factors combined have caused the markets to, what I’d say, perform modestly, I don't think we've had any indices really tearing away. With the exception of the US NASDAQ, which is up probably about 15 to 17% at this point in time during the year. And that's really been led by the US tech heavyweights, such as Apple and Microsoft. We don't need to look too far to see why Microsoft has performed well, when we're using their software today.

SDC: Thank you Mike. Over to you Mark. So Z Energy and Afterpay are two stocks that we hold, or we've held, across the portfolios which have recently had takeover bids. What sort of impact have these bids had on those companies and are we expected to see more takeover bids?


MD:  Yeah, you’re right Sam. So, generally takeover bids are positive. Both these companies have had nice share price reactions, post the takeovers being announced, and both are up, circa kind of 20 to 25%. Afterpay is being taken over in a script deal by Square which is a large fintech in the US. We’ve been shareholders of Afterpay for some time and we’ll receive Square shares from that takeover. Then the other one, Z Energy’s being taken over by Ampol Australian energy company that's going through its regulatory clearances right now. And in terms of future takeover bids, yeah there's actually probably three or four companies in particular, in our Australasia portfolios that we think could be takeover targets, and we're actively buying shares of these companies, because we think there could be some corporate activity. It's not a long-term strategy for us but sometimes when we think that there could be corporate appeal with a particular asset, we’ll buy shares in that company, and generally, you can do quite well in a short period of time. There are particular industries as well where there's been lots of corporate activity in Australia, such as the telco industry. The platform industry is another one. So yeah, these are some companies we're buying at the moment and because interest rates are so low, it makes quite accretive deals for the acquirer to do these acquisitions as well so we think it's probably an ongoing thematic for the next year or two.

SDC: Thank you, Mark. So Guy, some exciting news for you and Toby in the last few weeks, you've moved into your new office. Can tell us a bit about that please.

Guy Thornewill: Sure Sam, we’re very excited about the new London office. So Toby and I have been working from home for the last 18 months since the first UK lockdown in March 2020. We think we’ve managed quite well to do that and we've kept a good level of communication between us, but honestly nothing really beats face to face discussions about companies and the market. So two weeks ago we moved into a new office on Berkeley Square in Mayfair. The building’s recently refurbished, it's a lovely area of London. It's also a great location for seeing companies, because there are many other investment managers based in the area. This means Mayfair’s a key stop for companies on their physical roadshows and those are just starting to happen again right now. So yeah, we're excited and we're looking forward to spending some proper time together.

SDC: And of course you're in Paris at the moment visiting some of your family members, but you’re heading back in a couple of days. So next question for you Guy is, as we’ve all read, a number of global companies are issuing profit warnings due to supply chain issues and we probably all know people who've tried to buy new cars recently, and you can’t, because of these global semiconductor shortages. Can you talk a bit about what's caused this and what the impact is likely to be on corporate earnings?

GT: Yeah, you're right, Sam, there have been quite a few profit warnings recently due to the supply chain issues. We think there will be more to come as we head into the third quarter reporting season which is starting in a week or two. Examples include several of the car manufacturers as you mentioned, but also their suppliers. However, it's not just the shortage of semiconductor chips that caused this. It's actually much more widespread and there are several reasons. Firstly, there's been a shortage of capacity on container ships, which has caused sea freight prices to surge as much as 10 times in some cases compared to 2019 levels. And that's been leaving companies short of both product and profit. 

Secondly, the surge in Covid-19 cases linked to the Delta variant has caused a lot of factory and port shutdowns in Asia, again leaving companies short of products ranging from anything from clothing to furniture. Even lawnmower engines as we saw on the latest warning from Husqvarna this morning, which is a garden equipment company. So when you combine this with low inventories in the channel, demand which remains good as customers and businesses are still recovering from the pandemic, it's kind of created a perfect storm. So, we have been concerned about this issue for a while. It's one reason we have higher than normal cash levels in some of the international funds. And we've seen higher market volatility in the last few days because of this. Now, getting ahead of this issue has been quite important and for example we sold out of an auto parts supplier called Norma this summer, which was held in the UK and Europe Fund and the Global Growth Fund, as we were concerned about their supply chain. And in fact, last week the shares fell 20% after a profit warning, blaming exactly all these issues. However, it is really hard to know exactly where the hits will come. We don't have perfect visibility into the extent of supply chains of all our investments and, in fact, even the companies themselves can be surprised here, as we’ve seen a few times already. So we do think these issues will be overcome though, most of them are short term in nature. We'd expect the container ship rates to start falling as more capacity comes online. However, for the time being, we're a bit more cautious as we do expect further downgrades to corporate earnings over the next few weeks.


SDC: Thank you very much Guy. Thank you Mike, Guy and Mark for joining us. Thank you everyone so much for watching the video and for all your support. Have a great month ahead and we will see you next month.




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