In our latest video, Sam and I are joined by Toby Woods, our Senior Investment Analyst based in London. 

We cover: 

• The pullback this August after the bull market run
• The resilience of Australasian small caps
• Whether Europe and the UK are back in travel mode post-COVID

We've included the transcript as well.

Kind regards,
Mike Taylor
Founder + Chief Investment Officer

TRANSCRIPT

SAM de COURT: Hi, everyone. My name is Sam de Court and welcome to the latest video update. Joining me today is Pie Fund's Founder and Chief Investment Officer, Mike Taylor, and Toby Woods from our London investment team. Hi, Toby. Hi, Mike.

MIKE TAYLOR: Hi Sam.

TOBY WOODS: Hey Sam.

SAM de COURT: Mike, we'll start with you. So, as we've talked about, markets have had a pretty strong run this year. And then in the month of August, the first two or three weeks of August, we've seen a bit of a pullback, is this inevitable, or is it something more serious under the surface?

MIKE TAYLOR: Look, every bull market has a pullback. Some pull back 5%, some pull back 10%, some pull back 15%. You might call this a garden variety pullback at the moment. It's about 10% for the NASDAQ and around about 5% for the S&P as the day we write.

SAM de COURT: The NASDAQ was up about one and a half per cent overnight (over 21 to 22 August 2023).

MIKE TAYLOR: There you go. Thank you, doing my job.

TOBY WOODS: It rallied strongly.

MIKE TAYLOR: So, there you go. It's a kind of reflection that the markets aren't necessarily too worried. And we're not in a panic sell-down. Sell-off was caused probably by two things. Firstly, US 10-year rates have drifted up again. They touched as high as 4.3 per cent end of last week. And that's not racing away, but it is high enough to get people nervous, particularly for longer-dated earnings and companies in the NASDAQ.

So, that's reason number one. Reason number two is a little bit of weakness coming out of China. Unsurprisingly, their stop-start stimulus packages this year haven't really worked. Economists are now saying they need to re-stimulate at levels of 2008 to get the economy going. So, it remains to be seen as to what happens to China.

SAM de COURT: Mike, we've talked a lot this year about how it's been a tough environment for small caps. And you also mentioned before, the majority of this pullback we've seen in August has actually been the large US technology giants. We've actually seen with our Australasian small-cap funds, they've been pretty resilient, and a couple of them are actually up for the month of August. What's the reason for this big disparity?

MIKE TAYLOR: Yeah, so small caps have been in a bit of a tough zone for this year. Actually, even this month, the (ASX) Small Ords and the Emerging Companies index are actually quite heavily dominated by resources. We don't have that many resource names in our fund. We've got more industrial-type businesses.

It's also been reporting season, and that's typically a time for single names in the portfolio to do either really well or really badly. And this time around, we've had quite a few names that have done or performed quite well during reporting season. Still, about 10 days to go, but so far, so good. And I think if the trend continues there will be significant outperformance for Australasian funds over the reporting season. So yeah, we're pleased by that. Particularly as it was a slow start to the year.

SAM de COURT: Thanks, Mike, over to Toby. You've just come back from your annual summer holiday and you're looking very relaxed and tanned. What are you seeing out there, travel-wise? Is there still huge demand for flights, hotels, and chaos around Europe?

TOBY WOODS: Actually, conversely, I'm the wrong person to talk to about Europe because although I've been on my holidays, as you point out, I've been in Asia because my brother lives in Hong Kong. And then I've been in Scotland, so I kind of avoided the heatwave of Europe. But look, it's been really busy in Europe.

Loads of Brits are travelling properly this summer, which they couldn't do for the last few years for obvious reasons. And anecdotal evidence that we're getting is they like the beaches of the world and all the rest of it. For us, we've got a couple of stocks that have direct exposure here, which are Do & Co. and Sixt, and both of them have actually just reported record quarters. So that's their Q2 – well, the calendar Q2 – and commerce in the summer season is still looking pretty good.

Take Sixt, which is the car travel company, everybody was expecting that their prices of rental cars would come down quite significantly, having been at all-time highs as we came out of COVID. And yes, they have fallen quite a bit, but only by single digits, maximum 10%, whereas the expectation was that they were going to fall by 15, 20% back down towards where they were pre-COVID. And that just hasn't happened. And that shows you that demand has stayed really robust.

Of course, the market looks forward. There is some concern around, 'Is this trend going to continue?', especially given that consumers are feeling the pinch in their wallet. But so far, that's not in the data. I think it's pretty good for now. Let's see where it goes for the winter season, and then next summer.

SAM de COURT: Toby, you've also just had reporting season with global stocks. How did it go? What was some of the trends? What were some of the highlights? And also, how much did AI feature, because this was obviously going back sort of a month or so when AI was talk of the town?

TOBY WOODS: Firstly, just on the results themselves, I'd say it's been quite a mixed bag. There's actually been a lot of profit warnings, which is always a little bit of a warning sign in the market that companies aren't doing as well as they thought they were going to do. There isn't that much surprise, given that we're coming into this quite obvious economic headwind at the moment.

We have seen this sort of big destocking phenomenon going on. And what's difficult to really understand at the moment, is that, as you get the destocking, you're getting companies selling a lot of their inventory that they had bought, I don't know, six months ago, maybe a year ago or so when the prices of that inventory were lower than what they are now. So, there's a little bit of an inflated margin, perhaps, because they will push through price increases this year. And it's difficult to know exactly where that kind of margin level is now going to settle out post this period. I don't think there's been any real trends that we've noticed from this reporting season.

Apart from that, we just have to be on our toes endlessly. For all different types of stocks in different sectors, frankly. In terms of AI, AI has been the buzzword all year, right? I did see once that, earlier, in the S&P, the mentioning of AI has gone up 175% year-on-year in terms of the earnings reporting calls that have just happened. So companies are trying to cash in on this.

But then you've also had some of the bigger companies, like Microsoft, like Amazon, saying, 'Yes, we are seeing AI becoming a reality. But actually it's not moving the dial for our earnings yet. Can the market calm down a little bit on this?' The big one will be NVIDIA, that reports either tomorrow or Wednesday, I can't quite remember. But certainly this week, and that's the one that's going to really lead that AI charge. So, let's see where that goes.

SAM de COURT: Thanks, Toby. And Mike, back to you. You're off to the northern hemisphere soon to spend some time with Toby and the team up there in London. What's kind of the plan and one of the key objectives of the trip?

MIKE TAYLOR: Really looking forward to it. Yeah, haven't been up for 12 months. Last time we went mainly to Munich for a conference there by Berenberg. This time, I've been informed, we're also attending a conference, Citibank conference, during the week, as well. There'll probably be some additional portfolio companies that we might get into the office.

TOBY WOODS: We're keeping Mike very busy. We've got loads of new things all week, as well as that conference that you mentioned.

MIKE TAYLOR: But yeah, good to be on the ground again, over there.

SAM de COURT: Very good, Mike and Toby. Just a quick message to our audience. We have our annual investor Roadshow approaching. First two weeks of November, information to follow. In the meantime, thanks, Mike. Thanks, Toby. And thank you everyone very much for watching. We'll see you next month.

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