Interview: The investor's guide to the reopening economy

Published Sep 30, 2021, 6:00 PM

As lockdowns end and the economy gets ready to reopen, certain sectors are going to benefit much more than others. Kristiaan Rehder, portfolio manager at Kardinia Capital, breaks down which companies are most exposed and where the opportunities are for investors.

Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. As the economy reopens after the last round of lockdowns, certain sectors are going to benefit much more than others. I wanted to have a look today at the companies who are most exposed to the reopening trade and where the opportunities and risks are for investors. My guest this morning is Kristiaan Rehder, portfolio manager at Kardinia Capital, part of the Bennelong Funds Management Group. Kristiaan, welcome to Fear and Greed.

Hi Sean. Thanks for having me.

So, the reopening trade, the reflation trade, whatever you want to call it, what are we talking about? What's it mean?

Well, look, we've all been in lockdown for a while now and we're all looking forward to getting out of it. That's for sure. But look, this reflation trade at its core is really about companies that are going to benefit from the greater freedom of movement, the lifting of restrictions that much of the Australian population is currently under, and what that means for earnings and businesses prospects in the future. So, if you look at kind of the spending of goods through the pandemics, it's really come at the obvious expense of services. So, people who've been buying more online, they've been spending money less on leisure pursuits, and that's obvious to all of us. But with the opening up of economies, we expect this trend to reverse where customers will be looking to spend more on travel, leisure pursuits, such as gaming, transport, and that obviously feeds through to the energy sector. If you see what's happening in Victoria and New South Wales, approximately 50% of Australia's population is under various degrees of stay at home orders. And that represents significant pent up demand as far as we see it. We keep a close eye on this and the surveys that we pay particular attention to, show that consumers are ready to spend. In fact, the spending intentions at the moment over the next 12 months is at record high at levels we haven't actually seen before. Another potential winner in terms of sector exposure is clearly going to be the retail REIT (Real Estate Investment Trust) exposure. And companies where consumers are looking to re-enter shopping malls, shopping malls, particularly those that not only offer the sale of product, but also entertainment and leisure pursuits such as movies, gyms, restaurants and the like.

Okay. Well, I might jump in and break some of these down. So travel and tourism stocks are an obvious one. And if you look at some of those on the ASX 200, Corporate Travel Management, Qantas. What am I missing there? Webjet, Flight Centre, they've all done pretty well in the last sort of four to six weeks. I presume that's a reflection of what you are talking about, but there is still upside for those sorts of stocks?

Well, it's interesting. The travel sector has been very hardly done by, in terms of their financial performance over the last 12 months. And it shouldn't come as any surprise that at the most recent financial results, we saw some massive losses. So Qantas lost around $2 billion. Flight Centre lost about $500 million. But remember, this is all backward looking. This is their financial performance for the previous 12 months. And you need to bear in mind that markets look forward typically 9 to 12 months. And the future is starting to look brighter for these companies. So, it's not going to be a smooth start. I think for the travel industry, there's going to be hiccups along the way. Home quarantining requirements for international travellers is going to be required. And that's going to mean that many travellers might remain hesitant to travel. Particularly as the virus is so widespread globally. But we think the future is looking brighter. We've seen Qantas come out and they monitor research monthly as to what the travel intentions are for their customer group. And they've actually seen greater demand in terms of intentions to travel overseas the next 12 months than they've ever seen before. In fact, they're three times higher than what they saw pre- pandemic. So we tend to agree with Qantas and we got a commentary coming out of Flight Centre. We actually own both those companies in the portfolio.

Okay. Interested in consumer discretionary stocks. They're sorts of ones that you would imagine when people are spending more money, getting out and doing stuff, they would do better. We're talking about the JB Hi-Fi's, Premier Investments, some of these sorts of organisations. But they actually had a pretty good COVID with respect. Economically, they had, financially, they had a pretty good COVID. What do you think of those sorts of stocks?

Well, that's really interesting Sean, because Australians propensity to consume never ceases to amaze me. It really doesn't. We've just come through the pandemic and there's certain retail stocks have never done it better. We think Mr and Mrs. Australia's love for shopping will continue through this final quarter of this calendar year and most likely, well beyond. These surveys I was mentioning are seeing elevated spending intentions pretty much across every single discretionary category group. So on one side, you've got accessories, which is showing strong intentions to spend on the other side you've got white goods. And to your question, that kind of sits at odds somewhat with the consensus views that retailers have done well, but when life returns normal, you're going to see a tapering of demand. Our view is that this potentially might misread the changed circumstances and the opposite might fact be the case. If you look at online retailers, they've also been a major beneficiary of lockdowns as consumers switched their spending to online channels at a faster pace than we've seen in the past. While this may slow as economies reopen, we think this is an enduring theme and these themes tend to last multiple years. So online retailers we think will continue to benefit from this shift away from bricks and mortar to online.

Okay. Kristiaan, stay with me, we'll be back in a minute.

I'm speaking to Kristiaan Rehder, portfolio manager at Kardinia Capital. What other stocks do you like in terms of the outlook for the next 6 to 12 months? Or what sectors, if not stocks?

Well, look, I can talk about stocks. Look, we've just gone through reporting season. Any company that has a June financial year end reports their results in August. So we've just had great visibility across the retail sector through that month. One of the key themes that we saw through that reporting season, was just this elevated level of inventories that are being held by retailers. And it seems like all the retailers are wanting to invest in inventory as a strategic play. You've seen retailers such as Breville, Super Group, Kogan, all showing these high inventory levels. And if you look at commentary from Super Group, it gives you an insight as to what they're thinking. And what they're basically saying is if you don't have the inventory on the shelf or in the warehouse today, it's unlikely you're going to have the product to sell during that peak critical Christmas period. And the reason for that is you're seeing bottlenecks at ports. You're seeing shipping delays, you're seeing elevated cost to move freight. It is a real issue. And what that means for us is you never really, as an investor, want to see inventory growth outstripping sales growth. This is something Kardinia is watching very closely because if that sales heightened demand isn't met in Christmas, you might actually see heightened promotion material. You might see their customer being a major beneficiary into the new year in terms of discounting. That aside, there's kind of three stocks we have in the portfolio which is of particular interest to us. City Chic is a company that is listed as an Australian, especially women's wear retailer. It specialises in plus size women. So women's sizes 14 and plus. And they sell apparel, accessories and footwear. Terrific management team, wonderful business. They're operating a network of 92 stores across Australia, New Zealand, and they're branching out very successfully, I might add, into the US. Lovisa is another one I'm not sure if many of your listeners have heard of before, but it's fast fashion jewellery in terms of the accessories category. They basically scan accessories worn by celebrities, influencers, and they can copy and mimic those items and turn them around rapidly and release them across their store network. It's a global growth story. 72% of their stores are offshore. They had significant exposure to the store rollout. They rolled out 109 stores net last year, we expect similar growth this year. And then finally one stock that we all know of and it's been in our portfolio for some time, that's JB Hi-Fi. Their current trading strength is incredibly impressive considering 55% of their stores is currently closed. We're seeing sales reverting online. And it's really those high end items. Those kind of assisted sale products that have been deferred. But when those stores open up, we think that those categories will bounce back. Their current trading in FY22 has been incredibly strong, around 20% up on the FY19 level, if you assume the pandemic here was an anomaly. So that business is travelling well as well.

Okay. Kristiaan Rehder, tell me, healthcare. I see the value in healthcare as a long term play because it's obviously an area of huge spending in the next decade, 20, 30 years as populations get older. I cannot make head nor tail of what healthcare stocks to buy, why they're down so much in recent times? Healthcare to me is a mystery.

Yeah, healthcare's a very interesting sector. And it's one that we like very much with a couple of names in the healthcare space, which we have owned for some time. Look, when bond yields start to rise. And we've started to see that in more recent times, particularly in the US, high P/E (Price to Earnings ratio) stocks like healthcare, tech's another category, tend to come under pressure. Most healthcare stocks on the ASX are trading on elevated P/Es. And the reason for that is because they have strong growth outlooks for all the reasons you just mentioned, and they have relatively defensive earnings. So they've shown demonstrable growth over a prolonged period of time. So their track records are excellent. So let me just pick a few out. CSL, P/E of 40 times. Cochlear, P/E of 50 times. ResMed P/E of 40 times. So these are high P/E companies that are particularly vulnerable as bond yields start to rise. And that's what we're seeing in the market at the moment. No reflection on the quality of the business. It's just a valuation question. There is one stock that is in our portfolio that we think might buck the trend, that's CSL. And the reason why we think it's potentially going to buck the trend is because CSL has relied upon donors walking into their collection centres and donating blood. They fractionate that blood. They turn it into IVIG (Intravenous immune globulin) and other specialty products that treat a variety of ailments. It's an amazing product. They are highly reliant on these donors walking in their doors. With COVID, they've seen less donors walking in their collection centre network in the US. Australia's been impacted. We think CSL will benefit from the opening up, it's almost somewhat of an opening up trade. So we're very comfortable holding CSL over the next 12 months.

Okay. We're going through the whole sectors here. This is great Kristiaan. So you mentioned REITs, real estate investment trusts, and the big mall owners. So you're talking about Scentre and Stockland, those sorts of organisations. What's the outlook for them?

Yeah. Look, we're quite positively disposed about the retail REITs, and also kind of the property REITs as well. They've generally done very well in Australia. The housing market is one sector that tends to go from strength to strength. It's interesting, I think we're now reaching a stage where not only businesses, but also consumers are looking through COVID in many ways. And you're seeing that probably most obviously in the housing market. Housing markets in not only just the capital cities, but regional centres are just continuing to lift. That's having positive earnings flow through into some of the housing REITs, as well as the industrial REITs. So, we've got Charter Hall in our portfolio, which we have held for a long period of time. Very comfortable with that. And I think with these REITs, whilst they will also come under pressure for a lot of the same reasons I mentioned about healthcare with a rising bond yield environment. We saw that back in 2013. We also saw that very briefly last year. We are long term investors and we're happy to hold them for the longer term.

Now we've managed to have a whole interview and we've only got about 60 seconds left, without mentioning the big four banks, the big three miners, and the tech stocks, which I think is really quite remarkable. So Kristiaan, I'm going to put you under total pressure here, the banks in about 15 seconds.

Oh look, we really like the banks. The best time to own the banks is right after a crisis or to short them just before its crisis. We're a long/short fund. So my experience is good luck trying to shorten them before a crisis. In Australia, banks tend to go up. We went quite long in the banks in April last year and we've done terrifically well out of them. In terms of the major catalyst, we saw provision underwrite winds, returning of surplus capital back to shareholders, we've kind of hit those catalysts, are now behind us. I wouldn't be surprised that the banks have been used as a funding source to move into more of the reopening stocks. I think that's probably likely what we'll see over the next six months. But that's very short term. In the longer term, still really like the banks. I think Australia's in not bad shape.

The material sector, and really specifically the big three, BHP, Fortescue and Rio Tinto.

Oh look, Sean, you're really stretching me here. I mean, there's a lot of issues coming from China at the moment. I don't think the geopolitical situation is improving at all. In terms of growth, and what we're seeing in China is that they're restricting manufacturing activity. They're trying to curb electricity consumption. They're having power cuts across China. I think that's having a direct influence in terms of their economic growth. It's starting to slow. Look, I like resources. They've come off a lot in recent times, but I am just wary of them in the short term.

And very briefly, tech stocks. We're going to lose Afterpay. Though I suppose we gain a secondary listing of Square. But there are certain other companies, Appen, WiseTech Global, Xero, who've performed really well.

Yeah, they have. Look, tech has been one of our top exposures since the pandemic in 2020. We've done very well out of that sector. It's now clearly expensive on forward multiples. When yields rise, multiples tend to derate. And it's been a demonstrable negative correlation between real yields and equity market valuation since 2015. And those companies on the highest multiples are the most at risk, which is the tech sector. So again, I wouldn't be surprised if tech is used as a funding source. We've significantly reduced our exposure to the tech sector. We've done that by reducing our long exposure. But again, we're a long/short fund, so we've been adding to our shorts as well. We don't tend to talk about the individual shorts we're short, because it's a quick way of CEOs never returning your phone call again. They tend to treat their companies like children and we fully understand that. But yes, tech is somewhere we've actually been reducing our exposure in recent times.

Kristiaan, thank you for talking to Fear and Greed.

No problem. Thank you, Sean. It was a pleasure

That was Kristiaan Rehder, portfolio manager at Kardinia Capital. This is the Fear and Greed daily interview. Join me every morning for the full Fear and Greed podcast with all the business news you need to know. I'm Sean Aylmer, enjoy your day.