Why Tribeca's so upbeat on stocks

-- | 07/05/2021

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Lex Hall: Quite simply, there's never been a better environment for active investors and stock pickers and the current market conditions are ripe with opportunities. That's the upbeat assessment from Tribeca Investment Partners. And with me today to discuss that is Jun Bei Liu, who oversees Tribeca's Alpha Plus Long Short Fund.

Welcome to Morningstar, Jun Bei. Thanks for joining us.

Jun Bei Liu: Well, thank you so much for having me.

Hall: And I should say, welcome back, because you did spend a bit of time way back in your career at Morningstar. What gives you such confidence about the future for Australia's equity market, is it Australia's response to COVID-19, in particular?

Liu: Absolutely. So two things we're addressing here. One is my expectations of the equity market, which I'm very confident of, and one is about active investors' active return. So, with the equity market, you're absolutely right, Australian share market has actually never been in a better position, well not never, for the last five, 10 years. This is probably one of the best position for the Australian market relative to the global markets. One is that our COVID condition is far better than any other country. We spent 15 per cent of our GDP and given it to our consumer, and they have been spending, which is fantastic for our economy. And we are seeing—every indicator is suggesting our economy is recovering very, very well, in line, ahead of expectations. With that combined, we are expecting to see good earnings growth for the next 12 months, a good return of dividend yield because our dividend is always—has always been the highest in the world, but COVID really disrupted that in the last 12 months. But next 12 month, we are expecting big growth in the dividend. And with that combined, certainly our equity market is looking very strong.

Hall: OK, well, we'll talk about opportunities and a bit about shorting too, because it's one of those sort of "all weather" funds. It's a long/short equity strategy since inception in 2006. It posted 9.47 per cent versus 6.8 per cent. And its benchmark is the S&P/ASX 200 Accumulation Index. Before we talk about buying opportunities Jun Bei, what gives your fund the edge over the index? Is it this ability to short companies? Or are there particular names that you hold that don't appear in the ASX 200?

Liu: Look, I guess a bit of everything, I think the bigger part is that, you know, we're very bottom-up focus on the businesses. The companies the underlying driver of those businesses. And we stay ahead of the rest of everyone else the rest of the market. So be there fast. And the ability to short, it just means we can capitalise on our information edge. You know when things are bad, because most of investor can only leverage to the upside, not to the downside. So, for us that both really, really work. And also we have this opportunity so 10 per cent of our portfolio, up to 10 per cent, we can invest outside our ASX 200. So that has given us enormous amount of opportunity over the last 12 months on IPOs on some smaller companies and more exciting business models to generate extra return.

Hall: OK, and opportunities, where do you see them today?

Liu: We see plenty of opportunities as we touched on before in many sectors. If we take growth sector, for example, you know, we like the likes of the Afterpay (APT), the buy now, pay later sector, we think the growth future addressable market is enormous. And take other sector, for example, more on the value end if we talk to Treasury Wine Estates (TWE), which hold a huge inventory of those premium Penfolds wine in their warehouse, and yet the share price is yet to outperform because of the tariff impact from China. And our view is that that value, that premium value will be realised in the next six to 12 months. So, we are actually seeing sort of opportunities across every sector, and they just need to be very discerning and be very on top of what's driving the earnings for those businesses.

Hall: OK, and what about dividends? I can't let you escape without talking about dividends, because you did mention that earlier. And people obviously want to know where the dividends are, now that banks have sort of promised that they'll deliver high dividends. Where else do you think?

Liu: Look, I think resources has been the large dividend payer in the last 12 months, but next 12 months, it will continue to be reasonably large as well simply because commodity prices continue to be very strong. So, stay with the commodity names. And the banks, banks are going to surprise on the upside with dividend some of them will announce some of the largest buyback with billions of dollars. So, I think the bank's earnings or dividend is probably underestimated over the next 12 months.

Hall: Let's talk about shorting for a little bit. What are the signals that a company is worth shorting? Is it simply because their cash flow is dwindling, or their balance sheet’s not very strong or the competition's too strong? Can you give us an idea of that and cite a particular example?

Liu: Yeah, of course, when we do look to short a company, yes, you know, when we get an understanding that the business is not going as well. And when things are, you know, about to, come into light some of the bad news flow and the information. And sometimes it's, the company may be going well, it just become very, very, very expensive, because investors can get too excited, with some of those really hot sectors. So, what we do is that we can take short positions, smaller short positions in those companies. But we do hedge that up with a long company that is, in our views much, much better, maybe expensive, too. But, you know, with a long/short hedge, we actually are playing a much, much better pair trade without taking on the risk of, you know, letting that short run away. So, yeah, so there are many ways to play short, tactical or strategic. Sometimes we run, we do run the strategic or longer-term structural shorts for businesses, that's just not going to have a terminal value. For businesses that are just going to be in decline for a very long time.

Hall: OK. Let's talk finally, about inflation, because it's sort of starting to—fears around inflation are sort of starting to grow louder. How will rising inflation, affect share prices and returns?

Liu: Yeah, so what inflation will do is, if inflation escalates really, really fast, within very short period of time, that is a surprise to the market, then it will create problem for the valuation for the equity market, then you'll have this panic sell-off all of that. We've seen a few years ago, when the bond yield, which is the expectations for inflation jumped significantly, then equity market began to worry about interest rate going up too high, they were heading to the recession. Now, this is not going to happen at this point, over the next 12 to 18 months, yes, the expectations of inflation will rise. We've seen that expectation index moving, but we don't see that coming through very, very quickly. Now, important to separate out the transitory inflation as the world is opening up. And as you know, some places still not enough supply, you will see some inflation, but that should ease away, you know, over the next one or two years as we return to normal.

So, with that, in mind, we don't think that inflation is really coming back that quickly, although the short-term read might be a bit of aberration, and then it should ease off. You know, a little bit of inflation, over the next few years is good for the equity market, because companies are best at increasing their earnings, their revenues in line with inflation. So, in a way, it's actually a really, really good inflation hedge equity market is far better compared to the likes of fixed income and other asset classes.

Hall: OK, Jun Bei, thank you very much for your insights. We'll do another video in which we drill down into a few specific companies, but for the time being, thank you very much.

Liu: Thank you very much.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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