In this recently recorded webinar, CEO and co-CIO Andrew Clifford talks with Investment Specialist Julian McCormack on the impact of inflation, rising interest rates, the Russia-Ukraine conflict and the re-emergence of Covid in China on global equity markets. Against this market backdrop, Andrew discusses Platinum’s investment approach, drivers of recent returns and where the team is investing. A summary of the discussion is also provided below.
News that US inflation reached a new 40-year high of 8.6% per annum[1] unnerved already fragile markets this week, as speculation mounted on how many basis points the US Federal Reserve will lift rates by. It’s important to step back and understand what is the underlying cause of this inflation. The reason is straightforward – the massive amount of money printing that occurred to get us through the Covid pandemic, particularly in the US.
We have long voiced our concerns that such extraordinary levels of fiscal stimulus and money printing would lead to inflation. Price rises usually occur with a 18-24-month lag, so it’s not that surprising that it’s showing up in the numbers now. Inflation is not just evident in goods and services though, it is also in asset prices (stocks, houses) – which have been buoyed by a prolonged period of record low interest rates and the fiscal stimulus. With rates now rising and governments winding back their spending, asset prices are tumbling. We had a huge speculative bubble and valuations were insane, this is hardly a surprising outcome. It’s important to note that normally during bear markets, interest rates are usually cut on the way down. This time, we have the market going down and rates going up, creating a much more-dire situation than historically.
While valuations might be looking more reasonable now, beware the false dawn. We are now seeing the real-world effects of higher interest rates and inflation on economic activity. There are obvious companies impacted like Walmart and Target, which have had disappointing earnings numbers and huge inventories. Another area of particular concern is that money is drying up for tech start-ups. A year ago, it was billion-dollar valuations that were announced on a daily basis; today, it’s staff lay-offs. Advertising is also a key area of concern. It’s a very cyclical business and a lot of the tech start-ups are advertising businesses. We need to be very careful about earnings expectations for companies in these more exuberant areas.
Meanwhile, we have China actually stimulating their economy. China is experiencing its biggest economic downturn since opening its economy. Regulatory reforms in 2021, notably in the property sector, created uncertainty for property buyers and developers, resulting in a significant contraction in sales and very soft construction activity. The re-emergence of Covid, prompting stringent and prolonged lockdowns, has added to the economy’s woes. China has been in a bear market for many years, stock market valuations are at extraordinarily low levels. However, we expect that China will recover, it’s a dynamic market economy. The government has started to reverse some of the tight regulatory measures on property and announced stimulatory measures for the economy. China will exit from lockdown and move through this difficult phase, as we and many other countries have.
In Europe, Russia’s invasion of Ukraine has clearly had a huge impact on consumer and business confidence. Higher energy prices are further impacting consumer demand and the economy. While currently there is a lot of focus on the European Central Bank increasing interest rates and more restrictive fiscal policy, there are long-term commitments to a massive investment in their energy independence, decarbonisation and defence, so there will be a lot of government spending across Europe in the years to come. It is on quite a different path to the US and China, but the longer-term picture for Europe will slowly look better.
Turning to performance, our flagship Platinum International Fund (C Class) has returned 11% per annum over the past 10 years to 31 May 2022,[2] which is a good absolute return, but we are mindful that is a disappointing outcome in the context of such a strong market. Most of that weaker performance has occurred in the last three years, which is where we saw the massive speculative run in growth stocks. We have just been through one of the most extraordinary periods in financial markets history in terms of the divergence in the valuation of stocks. Our process looks for the best opportunities in the market and it has taken us to a lot of stocks that are out of favour, which have performed quite well but have been quite dull compared to the market favourites. Once upon a time we did own quite a lot of the likes of Alphabet, Facebook and PayPal but they reached ridiculous valuations, so we exited/reduced, which has hurt our performance. We feel this dispersion in valuation is, however, now coming to an end. We think the period of ever-lower interest rates is over and the market is going back to investing in real businesses with real cash flows.
This year, we are seeing the upside of avoiding playing in these speculative areas, with the Fund around 10% ahead of the market for the calendar year to date, with our shorts providing a significant contribution to performance.[3] A key area of focus for us in shorts has been unprofitable tech stocks, where we saw software and e-commerce stocks trading at 30-70 times sales, which had unsustainable business models and were very sensitive to interest rates. Other shorts comprised companies with dubious business models, including in the electric vehicle (EV) space, plus Covid beneficiaries who are now suffering from a massive hangover of inventory.
On the long side, our investment process tends to lead us to out-of-favour stocks. In more recent times, the market has tended to discard ‘real’ businesses that are profitable with some degree of uncertainty or cyclicality. Stocks in this bucket that we favour, which will be very familiar to our investors, include Samsung Electronics, which has grown at a good rate for a long period of time and is trading on single-digit multiples, and BMW, which is a major beneficiary of EVs and is a very profitable company that is trading on a huge discount to book value. Newer stocks include European fund platform company Allfunds and wealth manager and advisory business St. James’s Place, both are interesting and growing businesses trading at mid-teen earnings multiples.
Our emphasis will continue to be on companies with earnings, that are growing through time and trading on attractive valuations. In the future, we will look at some of the high-flyers that have been hit – but not for a while yet.
[1]Source: FactSet Research Systems.
[2] Source: Platinum Investment Management Limited. Returns are annualised and calculated using the Fund’s C Class NAV unit price. They are pre-tax, net of fees and costs and assume the reinvestment of distributions. Past performance is not a reliable indicator of future returns.
[3]The Fund (C Class) returned -4.0% from 31 December 2021 to 10 June 2022 vs. -14.5% for the MSCI AC World Net Index (A$). Past performance is not a reliable indicator of future returns.
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This information has been prepared by Platinum Investment Management Limited ABN 25 063 565 006 AFSL 221935 trading as Platinum Asset Management (“Platinum”). Platinum is the responsible entity and issuer of units in the Platinum International Fund ARSN 089 528 307 (the “Fund”). This presentation contains general information only and is not intended to provide any person with financial advice. It does not take into account any person’s (or class of persons’) investment objectives, financial situation or needs, and should not be used as the basis for making investment, financial or other decisions. You should read the entire Platinum Trust® Product Disclosure Statement (including any Supplement(s) thereto) (“PDS”) and consider your particular investment objectives, financial situation and needs before making any investment decision to invest in (or divest from) the Fund. The Fund’s target market determination is available at www.platinum.com.au/Investing-with-Us/New-Investors. You can obtain a copy of the current PDS from Platinum’s website, www.platinum.com.au or by phoning 1300 726 700 (within Australia), 0800 700 726 (within New Zealand) or +61 2 9255 7500, or by emailing to invest@platinum.com.au. You should also obtain professional advice before making an investment decision.
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