Platinum's guide to playing politics

-- | 29/10/2019

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Glenn Freeman: Glenn Freeman here at the Morningstar Individual Investor Conference. And I'm speaking today about global equities with Andrew Clifford from Platinum. Andrew, thanks for your time.

Politics was a key theme. And when you're talking about global stocks, you can't ignore the politics. But how do investors need to think about that? 

Andrew Clifford: One of the problems with politics is that we can't ever quite know where it's going to go. Whatever framework you try and use to work out what will happen with the trade war or with Brexit, there's no correct answer in politics. So, what really our approach as investors is to know that, that we're not particularly going to get the most rational outcome. But what happens in the market is that all of a sudden, we're very, very fearful of these outcomes. And it's the classic situation where investors throw stocks out as a result of that fear.

So, a great example of that has been with the trade war, two sectors right in the middle of are autos and electronics. And you've seen extraordinary opportunities to pick up very fine companies in autos, like BMW. It's got a great business in China that's still growing very, very quickly. You can buy it on a P/E of 7 times. In electronics, the memory chip makers, companies like Samsung and Micron, at different times in the last year have been trading at book value. It's extraordinary valuation to pick up. These companies are in a global oligopoly of three to five players in the memory chips and absolutely critical component, and you're buying them at the price that it's – you know, to set these businesses up.

So, I know that people are going to drive cars in spite of autonomous that might arrive one day; I know that people are going to be buying computers and phones. These things are, you know, fundamental to our way of life. That's not going to disappear anytime soon whatever the trade situation is. So, I don't know how it unfolds. But let's take advantage of the opportunities that it gives us.

Freeman: And another key point that you made was about interest rates and how that flows into the various sectors that you cover from global equities.

Clifford: Yeah. So, what's happening at the moment is this absolute certainty has arisen that interest rates are going to go to zero and stay there or even become negative at some point. And having had low interest rates for some time now and then this reemphasizing has driven investors to look for other places to get a yield on their savings. One of them is the stock market. And the problem with that is, they're coming into a stock market at a time they don't really want to, with all the uncertainties around politics, also uncertainties about how technology is disrupting many businesses. So, we're forcing people almost into equities, into the share market. So, when they get there, they want certainty. And the two things they've been doing to get that certainty; one is, to go into defensive sectors. And what I mean by that are things like household products, food, into real estate and infrastructure and utilities. And these have become extraordinarily expensive in most parts of the world, particularly that household goods area. Companies, like Procter & Gamble and Colgate are on P/Es of 25 times. They haven't grown in 5 to 10 years. Very, very expensive.

The other thing they've done is chase the growth stocks, mainly in technology, maybe in biotech at different stages. And some parts of these areas have got very expensive. The software-as-a-service stocks have become extraordinarily value. They're starting to roll off now as people have become wary of these businesses that never make money. But, of course, for us, that's where the crowd has gone where don't they want to be, what are they avoided at all costs, and that has been anything with uncertainty. So, anything that's got maybe a little bit of cyclicality in it or China has been a concern for people, so they've tended to avoid that. That's where the great opportunities have been.

This report appeared on 2021 Morningstar Australasia Pty Limited

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