Banks, shopping centres underappreciated says Martin Currie
An interview with Will Baylis, Portfolio Management of Sustainable Equity at Martin Currie.
Thank you so much for joining us Will, it would be great to get an insight into what you are seeing for the year ahead and to take our readers through the opportunities and challenges that lie ahead.
Starting on a more personal note, what is the most powerful career advice you have received?
Take a long-term view on Valuation and expected return.
What has been the most important lesson from 2020?
How quickly society and companies can adapt to change and use technology to our advantage in times of crisis.
What are you positive about in the year ahead?
The vaccine, the reopening of the Australian economy, and the strong rebound in employment, housing construction, and economic activity.
What is your biggest red flag when assessing a company?
Poor governance and sustainability. So often, a company that faces a large controversy has poor governance practices. In turn, the sustainability of a company ultimately becomes a key risk in company evaluation.
What does the best company for your portfolio look like?
A well-diversified board with an experienced management team. A strong market position, high ROIC, low debt/market value, sunk capital base, high sustainability rating. Ultimately, a proven track record of generating sustainable shareholder returns over time.
What stocks have you added lately? Why those stocks?
In the Sustainable Equity portfolio, we have recently increased our weight to the Australian banks, in particular ANZ Bank (ASX: ANZ), National Australia Bank (ASX: NAB), and CBA (ASX: CBA). With the economy reopening, large provisions for bad and doubtful debts look conservative and banks may be trading on low valuations. Banks are also leveraged to the improving credit cycle.
We have recently added to our position Nine Entertainment, which has 50% of its EBITDA derived from digital media with a large subscriber base.
We have also recently added to BHP. The high iron ore price and low cost of production are important. BHP also ranks well on sustainability, operating in cooperation with indigenous communities in the Pilbara. BHP has exited thermal coal and focuses on lower carbon emission fossil fuels such as gas.
What stocks have you sold? Why?
We have recently sold down our holding in Coca Cola Amatil. We see the takeover bid by Coca Cola Europe as opportunistic but believe on the balance of probabilities that a higher bid is unlikely and we see better absolute returns from other sectors even should the bid be adjusted.
We have also reduced our exposure to Macquarie Bank. We see it as a high-quality company, but it is trading at fair value.
What sectors are you most overweight?
We are overweight communication services and non-bank financials
What sectors are you most underweight?
We are most underweight healthcare and metals and mining
What were the key drivers of returns for your strategy over the last 3 months on a sector basis?
For the three months through the end of November, the key contributors to our positive relative returns versus the S&P/ASX 200 were our overweight positions in consumer staples and non-bank financials. Our small overweight to real estate also helped, as did our underweight to Metals and Mining and utilities. On the other hand, underweights to consumer discretionary and other materials, and a small overweight to IT detracted.
What sectors or themes do you believe will be drive returns over the next 12 months?
The vaccine for COVID-19 will enable a sustainable reopening of the economy, and domestic and eventually international borders. This will lead to increased housing construction, infrastructure spending, and a significant rebound in the services sectors such as tourism, recreation, restaurants, shopping centres, rising consumer confidence will lead to a rebound in discretionary spending. We expect companies that are leveraged to the domestic economy and have exposure to these themes will perform well in 2021.
Which sectors and companies are most challenged heading into 2021?
Wine stocks, thermal coal exporters and agricultural companies. I.e. those who rely on the Chinese market for consumption.
Which companies do you believe are most underappreciated in 2020 and beyond?
Companies that are underappreciated include owners of shopping centres, tourism related companies, construction materials and the Australian banks.