Shani Jayamanne: Welcome to Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs. 

Mark LaMonica: The market is full of predictions. Economists, market commentators, punters. These predictions can come through RBA speeches, or a tweet from @BitDoctor1 on Twitter, who believes that many traders have found success using lunar cycles to predict market movements, especially during full moons when volatility is high. It seems like everyone knows what is going to happen with the market and when it is going to happen.  

Jayamanne: Ultimately predictions make for good stories and entertaining investing content. But as we’ve said before a good story doesn’t make a good investment.  

LaMonica: And it reinforces the notion that successful investors are nimble investors that are always adjusting their portfolios based on current conditions. We strongly disagree with that. That leads to overtrading and higher fees and taxes. And the problem with these one time predictions is that they don’t take your personal circumstances into account and you have no idea if these professional investors are even adjusting their portfolios or to what degree.   

Jayamanne: Some predictions are based on a gut feeling (or a lunar cycle). Others are based on trends. Trends are extrapolating data and occurrences into the future based on observations and evidence. Sales trends, consumer trends, spending trends – these are all trends that are inputs into analysts’ models, and allow analysts to estimate future earnings and assign a value to a share. 

LaMonica: And that leads to our next guest, Brian. So Brian Han is a Director of Equity Research at Morningstar Australia. We spoke briefly about him in our Stage 3 tax cuts episode, he was the one we talked about being a comedian, and being on the equity research team.  

Jayamanne: Brian’s coverage includes Telstra, Flight Centre, News Corp and Nine Entertainment. As well as his stock coverage, Brian writes a column for Morningstar Investor called Brianstorm and is a regular guest on our Analyst Q&A webinars, and our analyst cafes at our conference. 

LaMonica: In November, Brian put out four predictions for 2023. These predictions were based on analysis and trends that he thought would continue to play out into the next year. 

Jayamanne: For today’s episode, we’re putting Brian on the spot. It’s very easy to make predictions when there are no repercussions, and you’re never held to account on the calls that you made. So we’re doing a half yearly check in on these predictions to see whether these trends have continued into 2023 and what they mean for investors and investments.  


LaMonica: So our next guest on Investing Compass is Brian Han, and Brian is a Director of Research here at Morningstar and one of our most popular analysts. And recently I was at a conference, I was at the Australian Shareholders Conference, and somebody came up to our booth and was talking about you. And was talking about how great your writing is which we’re going to talk about today. But first maybe if you could just give a little bit of a background – your background at Morningstar what you cover, whatever you would like to say about yourself.

Brian Han: Sure Mark, and thanks for having me on today. So I’m part of a 15 analyst strong team based in Sydney and we cover just under 200 stocks across ASX and New Zealand Exchange. And me specifically I cover the Telecom sector; which includes Telstra and TPG Telecom, I cover the Media sector which covers News Corporation and Nine Entertainment, and I also cover the Leisure sector which includes companies like Flight Centre and Webjet. Now on top of that, I publish a regular report called the Brianstorm which sort of looks into various issues that impacts across the market. And the rest of the time I try to spend talking to clients and get myself invited on preeminent podcasts like this one.

LaMonica: Well exactly, well there you go. This must be the feather in your cap of your career so far.

Han: That is true Mark. I heard your numbers rival those of Tim Ferriss and Joe Rogan so I’m honoured. I’m honoured to be here.

LaMonica: Yeah, yeah. No, absolutely. Absolutely. So you mentioned Brianstorm. And that of course is the series of articles you put out periodically. And we were chatting before this. You put one out saying your four fearless predictions for 2023. And a lot of times people write things and then nobody ever calls them on their predictions. So you said you were fearless in making these and today we’re actually going to talk about them.

Han: Yeah, I’m fearful now but let’s do it.

LaMonica: Yeah but at the time you wrote it you were fearless so, let’s talk about this. We want to understand whether you still are backing up these predictions that you made, so we’ll just go through them one by one.

So the first one that you made, the first of the four fearless predictions was – M&A goes away. So you talked about layoffs at investment banks, and M&A volume plummeting as the cost of money rises of course as we’ve seen interest rates go up. So what do you think so far? Did that prediction come true? What have you seen around that?

Han: That prediction is well and truly panning out this year so far. So far if you look at value of global M&As this year to date, it’s down about 60% compared to the same period last year. Investment banking fees in Australia is down almost 70% - was down in the first quarter and it continues to go down. And as most of the audience members would know, Credit Suisse has been shut down, taken out by UBS. We had a couple of bank failures in the US and we have investment bankers being laid off left right and center. And I know because a lot of these investment bankers are my friends and acquaintances. And all of a sudden I’m getting calls from them, you know asking me for drinks and they’re saying, “Hi”, which is funny because I’m married with two kids so I don’t have time to have drinks and to say hi but that’s the state of the land right now and it’s not pretty.

LaMonica: Okay well you can tell them that I’m available – I have no kids so I always have time for drinks. But little bit of a follow-up question. So M&A, so mergers and acquisitions in general. In some cases this can be transformative for a business, and a lot of the time it could also be, or a lot of the time it is a huge failure for a lot of business. So something that management of course likes to do but let’s talk about how this impacts investors. And you know a lot of the time what we see is that we do see of course with all of these deals is that they’re paying a huge mark up over what something was trading for, and I guess that’s good if you hold shares in that company that’s being acquired, but how about for the company that is actually acquiring? Is this something that in general as an equity analyst you see this as a constructive thing to do or is this something that destroys shareholder value? 

Han: Well Mark, when you think about it, it really doesn’t matter what I think. What I can say is, a lot of very smart people from very prestigious and smart cookie institutions have proved over and over again with research, with hard data, to show that most M&As destroy value, rather than enhancing shareholder value.

So that’s one thing to say, and the second thing to say is that all M&As, they mean well. You know you acquire something to rationalise the industry, to get scale quickly, to open up new growth avenues. But when you dig a little bit deeper, you will see that the motivations for doing a M&A, they’re usually quite warped. Because for a CEO or a Chairman, you get paid more for running bigger companies – that’s a simple fact. Secondly, some CEOs want to do acquisitions to hide the fact that they’re not running their existing businesses very well. And then there are instances where you are running your business very well and then you get this sense of hubris that you can replicate this effort in other areas, in other countries. And then finally, there’s this mentality of, don’t just sit there – do something. And investment bankers are especially good at whispering those words in the ears of Chairmans and CEOs. So when you look at it from that incentive, motivation context, you can see why people continue to do M&As, even though scientific, well, research studies have shown that they destroy value more often than not. So that’s what I’ll say, and the frustrating thing is, as a CEO or Chairman or the board, you have nothing to lose to do M&A, because if you do well, if the acquisition goes well, you get rewarded very handsomely, but if the acquisition does not go well, invariable as a CEO, you still do well. Whatever redundancy package you get, is still quite substantial. So it’s basically a matter of heads I win, tail you lose and it’s that asymmetric risk return equation that frustrates a lot of investors in the market.

LaMonica: Okay so good intentions and a lot of bad outcomes.

Han: Yeah, because a lot of those good intentions are warped with a lot of underlying intentions which you can’t point to in a spreadsheet but it’s real reasons, real rationale for doing M&As.

LaMonica: It’s a lot like when I go out for drinks – good intentions and bad outcomes, as your friends will soon experience as soon as you send them over my way.


LaMonica: We’re going move onto the second of your four fearless predictions and it is crypto dominates Oscar, Pulitzer, Emmy and Grammy. So this is your prediction around speculative crypto and the collapse we saw in price towards the end of 2023. And really what this was about is you were calling out that it’s an unbelievable story that has played out in front of our eyes, and it’s going in the same direction as the Big Short or Moneyball. Could you give a short explainer of this prediction and whether it’s going in the right direction halfway through the year or not?

Han: Well Mark, I think a lot of people who invest in cryptos would love to hear me say this, but it is not going well. So for instance, I Bitcoin I believe the price is up about 70% this year so far but, but it is still down more than half from November 21 picks. So, that is precisely the point I am trying to make. I can’t tell the difference between cryptocurrencies and all the other financial bubble stuff that we have seen in history. And that’s on me because you know, when you get older, all that innocence, that wonder, that mindset to only see the potential upside, the life changing upside – that sort of dies off as you get older. And in that old and cranky state what I see is, I ask myself, what is the difference between a Bitcoin and say a tulip in the 1600s, or the South Sea company in the 1700s, or the Japanese stock market and housing bubble in the 80s, or the .com boom in the 90s r the US housing bubble in the 2000s and all the other crap that’s happened in between. So, all those bubbles when you think about it, they were just a fireball at that time, but in hindsight when you look at it you realise that they were weren’t based on any fundamental rational backing. So that’s the risk that we have. And now cryptocurrency may well be a game changer in terms of being the digital currency in the new web 3.0 world and decentralised system and all that. But I think we need to recognise that right now it still seems to be still a plaything of mainly speculators and colourful characters if you get my drift.

LaMonica: Okay and speaking of colourful characters, a big crypto investor is Will – the producer of this podcast. So you’re slowly killing Will.

Han: No, no he’s a true believer so he lectures me all the time about it so I’m learning from him as much as I am learning from myself, from my old cranky self.

LaMonica: Well that is good so you know, do you have any advice that you would give maybe contrarian investors who jumped in when we had these depressed prices at the end of last year? 

Han: Yeah Mark, the only thing I would say is just be very honest about why you are buying crypto. So are you buying it because it is down so much from it’s peak and therefore it must be cheap is that the question? Or are you buying it because you know what the fundamental price is at which point, you’re willing to sell. Or because there are some scientific reasons to suggest that the probability of these digital currencies becoming the norm is greater than not becoming the norm. But just remember, these currencies right now as they stand have no central bank backing. So it is real frontier wild stuff that you’re betting on. So just be honest why you are buying this and it’s like – I do a lot of sports betting and I tell my wife, “Honey it’s not gambling because I know what I’m doing. I know the sports teams, I know the stats, and it’s really an investment, a form of investment.” And then my wife and I will look at each other, and we’ll sort of smirk, and we all know what we’re both thinking. I am gambling. But she tolerates it, not because she believes that I know Tigers can cover a 6.5 point spread. But she tolerates it because I don’t risk any of our main wealth or our kids’ savings on it. And I think that’s the attitude people should take with crypto.

LaMonica: And also, some good martial advice as well – toleration is key to a successful long marriage.

Han: Oh, tell me about it, yeah.

LaMonica: Maybe, maybe we’ll have you back on we can do four fearless predictions on marriage.

Han: No don’t do that, that will be, that will be all wrong.

LaMonica: Okay let’s move onto your third prediction. Cybersecurity surges to top of shareholder minds. And of course we’ve all seen all of the stories about hacks, and leaks and security breaches and it’s resulted in hundreds of thousands of people, just here in Australia, having their private information get compromised. So, I guess, give a bit of an overview of that prediction, and how you think this hyperawareness of cybersecurity impacts companies in your coverage. Because certainly we’ve seen some in the telecom sector and we can talk about Telstra maybe, because I know you love talking about Telstra. 

Han: Yeah, so this is the prediction that I’m probably most comfortable with, but at the same time, most scared about because I believe that we as human beings are giving up too much information in this digital world. Some we are giving up voluntarily – to get things like home loans, credit cards and you know, all those kinds of things. But some we don’t even realise that we are giving up through our browsing habits and purchasing habits and all of that. And so, once we give up those information in this hyperconnected world and it’s out in a digitised form in that Everland. It is basically, technically accessible to anyone. Then it becomes a battle between those companies who have your data and they’re trying to protect them, and those other people who try to get access to those data, for whatever reason – monetary or otherwise. So that’s the battle. And in that battle, I always think that the hackers have the upper hand. I say that because they are smarter, they are more resourceful, they are more motivated and they are less incombered by rules, laws or whatever it is. And they are nomadic, and they are faceless – you can’t even catch them, you don’t even know where they are. So that is the reason why I think security measures and investments and cybersecurity will continue to increase simply because there will be more cyber hacks as we go through this digital transformation of the whole society. And I’ll give you some data, last financial year ending June 2022 there was a cyber crime committed every 7 minutes. And I’m willing to bet that that has probably increased this year and will continue to increase. So, what does that mean for companies? So as I said, I think there will be increasing investment in cybersecurity. Last week in fact, the Federal government set aside about 102 million dollars to protect its own digital infrastructure and to help small businesses protect them against cyber hacks. I think all companies will do similar things this year and next, and those investments will continue to increase. In fact Mark, I know in telco land especially that companies are employing hackers to hack into their systems so they can learn from them. And for those audience members out there. If you ever have kids come up to you and say, “What should I do at uni?”, I think cybersecurity will be a pretty good option to look into.

So I think hacks will be inevitable, there will be continuing investments to prevent those hacks, but there will be even more investments into mitigating the damage after your system has been hacked into. And that means creating a second line of defense, or come up with a system where you can destroy customer data as quickly as possible so that even if it gets hacked into, they won’t get compromised. So at the end of the day I think, I mean companies go on and on about ESG and all of that kind of stuff and that’s very important but at ground zero, I truly believe that what keeps CEOs up at night, is not some iceberg melting a millimeter overnight 2000 miles away. It’s this fear that next morning you wake up and you find your company system has been hacked into. So it is a real big issue and that is why whenever you hear these cyberattacks publicized in the newspapers, you don’t see competitors. For example, when Optus got hacked into, you didn’t hear a peep from Telstra or Vodafone saying, “Oh come to us, you know, we manage your data better”, because they all know that it could happen to anybody. So hence I think those investments in cybersecurity will continue to escalate.  

LaMonica: So from a company perspective, this is just a cost – an ongoing cost, obviously to try to prevent this, and then there’s the huge reputational damage if it happens. Are there any investment opportunities? A lot of people think okay, well I guess I can go out and invest in some of these security firms.

Han: Yes, in Australia, there’s really shortage of directly relevant investments that you can leverage off, but in the US you do have several cybersecurity firms. The names don’t really come to me in terms of the list of company names but there are more opportunities in the US and Europe targeting those cybersecurity investments than in Australia. In Australia you might say, “Oh Telstra invests in cybersecurity, maybe we can invest in that” but the contribution to earnings is so small you probably won’t move the needle.

LaMonica: Okay we’re going to move onto your fourth and last fearless prediction. So the backlash against digital tech and the resurgence of dumb tech. So your last prediction talks about the move away from social media and you know, I think as a society we’ve spoken about how addictive social media is, and we even have a moat dedicated to it a little bit – the network effect. So why do you predict that people are moving away from digital tech, and has this played out in the first half of the year? 

Han: I must say Mark, that’s probably the one prediction that I’m least confident about and I think its more of a hope than a prediction that we think about and be more intentional about the amount of time that we spend on digital technology and social media. And I am as guilty as anyone, but in answer to your question. No, the prediction is not dumb, not panning out at all, in fact it is going the opposite. I mean you look around, most of the time everybody is on some sort of a digital media. Next time you catch the train just look up and you will never see another person staring back to you daydreaming because everyone is on their screen. And I do think about how much of our lives has been hijacked in terms of focus and attention span and the consequences of that manifesting in envy, anxiety, and misery. So that was basically the genesis of that prediction which is more of a hope, and we just need to be really conscious of the financial cost of digital technology in terms of cybersecurity that we spoke about, in terms of privacy. But we also need to be aware of the human cost of digital media in terms of lost attention and addiction. And therefore, I do believe that we are going to have an increasing, brewing backlash against social media. We already have regulations, not only in Australia but around the world, this regulation against big tech and how much data that they have of us, and how much they’re exploiting it for their own benefit. So that is the regulatory backlash that we need to be very aware of if you are invested in some of those digital media and tech companies.

LaMonica: Alright so, now I’m going to put you on the spot a little bit. You talked about your coverage earlier, do you have a top pick from the companies that you cover here in Australia? 

Han: Yeah, by far the most attractive stock in my coverage right now is a telecommunication company called TPG telecom. People will know them more as the operator of Vodafone on the mobile side, and on TPG and iinet on the broadband side, but they also do a lot of corporate telecommunications. The shares are trading at 25% discount to our $7.40 valuation and in a nutshell, we like it because mobile prices are finally rising after years of competition and heavy discounting. There are benefits to that 5G, not just on the revenue side but on the cost side that I think that the market is underestimating. There are still a lot of cost outs to come, not just from the synergy from the benefit of the merger between Vodafone and TPG, but also just generally, TPG is doing its own T22 which Telstra has been doing for the past few years so they’re on that cost transformation journey too. And so, you combine all of that, we do see quite decent earnings growth coming through over the next three years.

LaMonica: And just when we think about, would we think about the business overall and I guess this is any telecom. Yeah, what are the drivers? You obviously talked about cost and price, are there any other drivers to those businesses?

Han: Yeah so, on the, on the price side, yeah, I think we underestimate just how deflationary prices have been over the past few years and that’s not a surprise in hindsight because whenever you go from one G to the next, and then that next G matures, which is 4g. When it starts maturing, price is the only lever you have because basically everybody’s got 4g and therefore price is the only sort of battleground. But as that G goes onto the next G, you have a natural buoyancy to that price because it’s giving you more speed, it’s giving you more data allowance. And even if the prices don’t go up to compensate for the billions they use to roll out 5G, the cost actually goes down per let’s say per gigabyte. The cost actually goes down 25-30% for every data that you transmit so the jaws start opening up positively in terms of higher prices and lower costs – and that happens every single time wireless goes from one G to the next. And I think we’re just seeing the start of it. And just two days ago, Telstra raised it’s prices by 7% and they will continue to do this. Now Mark you will probably be asking, “but cost of living pressures are rising, interest rates are rising, mortgage stress is increasing” – that is all true and telco products are no more immune to that. But relatively speaking, I must say, paying $60-$70 a month for your mobile service – I would consider that an essential service in this day and age. Which goes back to our whole discussion about digital media and how addicted we are to them. So I think before consumers complain about rising prices in mobile prices, just remember, 1.  you got nowhere to turn, there’s only three operates in Australia, so you got nowhere to turn and Optus and Vodafone both are raising prices, and 2. just think about how much time you spend on that mobile for your $60-$70 a month and ask yourself, do you think it’s worth it? And I certainly can’t do without them.

LaMonica: Yeah I mean, you would have to look at people on the train or daydream.

Han: Yeah I think these days I am the only person who’s actually daydreaming, which can, can be a bit creepy to strangers I think when I’m just looking around.

LaMonica: Yeah, Yeah well there you go, while you’re trying to think about the next bet you’re going to put on.

Han: Exactly, yeah.

LaMonica: Alright well we covered a lot of different things today, so everything from social media to your sports wagering, to the secret to a good marriage, so and your, and your best pick – TPG. So I think that will do it for today so thank you very much for joining us I really appreciate it.

Han: Thank you.

LaMonica: And thank you all for listening, we would love any comments or feedback in your podcast app and of course my email address is in the show notes if you have any question for me or for Brian.