"Real chance we've broken the system as it was": Platinum backs regime change

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Lewis Jackson: Hello. We're here on the sidelines of the Morningstar Advisor Conference. I'm joined by Andrew Clifford, Co-Chief Investment Officer, Platinum Asset Management. Now, Andrew, you were just on stage talking about a new era for investors, higher rates, higher inflation. What do you say to those economists and fund managers who say that what we're going through now is temporary and what's going to happen in the next 6 to 12 months is we're going to go back to that world of low inflation, low growth. All the forces that kept things the way they were for the previous two decades are coming back. This is an interlude. What do you say to those people?

Andrew Clifford: Well, look, I think anyone, when you're investing, you should consider all scenarios. So, certainly, that's not a scenario we would dismiss or say could not happen. But I would come back to inflation is a monetary phenomenon. We've had quantitative easing for over a decade. We then printed extraordinary amounts of money to fund all these government programs in the last two years as a result of COVID. And that will unwind, and we will get lower inflation. But to get those very low interest rates you need to keep printing that money, and like, how does that play out?

I think there's a real chance we've broken the system as it was, and that we see it at a company level where in that low inflation environment companies would never think about putting up prices even when faced with costs – their costs going up. They had to find some other way to deal with it, whereas now it's just become this – it is inflationary expectations as sort of economics textbook stuff companies now feel it's very easy to put up rates. And I think it is highly likely, but of course, not 100% certain that the environment has changed.

Jackson: So, in this new environment then, where are you seeing the opportunities you see it? You talked about finance a little bit there, banks. What are some companies, some sectors where you're taking a look now?

Clifford: Yeah. So, I would say where we've been positioned – we've been positioned in what I would call it real-world companies. The auto companies, I think, are really interesting opportunity where you've had suppressed auto sales globally now for three, four years, and you've got all these exciting things coming through with electrification, autonomous features. I think – and the companies trade at extraordinary low valuations, below book value – for a BMW 60% of book value, 4 times peak earnings, earnings will be down this year. That's amazing. European banks, many of them trading below book value, again, there will be dividend yields here in the high single digits. There's a whole range of areas people have been avoiding, and there's some great value there.

Other hand, what we are seeing, of course, is a big setback in some of the favored growth names, and there will be bargains here to be picked up. I just think that though we have to be very discerning because a lot of the great stories will turn out to have just been great stories and not great actual businesses. And there will be many, what I call, secondary effects. So, every startup needs a whole range of software tools. They all need to have an AWS account or an Azure account. I'm not saying it is going to happen, but it wouldn't surprise me if all of a sudden, we see growth rates in a lot of these rock-solid stories actually come back.

Jackson: Now, let's turn to China. So, the Platinum Asia Fund, about 50% of the portfolio is in sort of Chinese equities. Talk us through why you're optimistic about sort of China's future and the future purpose of somebody investing in China, given we've seen this exodus from international investors, JPMorgan calling it although erroneously uninvestable. What's your take?

Clifford: Well, I would say this. So, there are two levels of the story around China, and one is this high-level geopolitical risk, the tensions between the West and China. They're very real, but also, there really is no option other than to coexist. I mean, while we might see companies trying to diversify supply chains and that makes sense, you've got 150 million people in light manufacturing, workers, incredibly efficient systems. We just don't replace that overnight, and even then it's not so clean cut that you can replace much of it at all.

So, the other issue is that the reform process is going on in China, and this is a government, I think, that is very aggressive on reform, they have been for a decade. There's been sequences of these things. They occasionally overstep the mark. In the properties sector, they have clearly in an attempt to try and slow that sector down, they have crushed the property market. It's very important part of the economic system, the construction goes on there. So, we're in one of the biggest slowdowns, probably the biggest slowdown, since the opening up of China. And then, of course, we overlay the more temporary problem of COVID and the lockdown. So, this I think – these things will pass, and the Chinese government are already unwinding some of the things they've done in the property market. They will make changes there. So, to me, this is the classic opportunity where there are some great companies there. They're just trading at very, very attractive price levels.

Jackson: Is there any in particular that you sort got your eye on?

Clifford: Well, like, we've come back to old favorites like Alibaba and Tencent, I'm not sure, they're the best. Our most interesting investments there. I would say that in the financial sector something like (indiscernible) Life Insurance which have been in and off to a greater or lesser extent for a long time. This is an extraordinary financial holding company, some really great underlying businesses. Until the last year or so, the COVID lockdowns impacted their ability to grow in the business; up until then had been a 20% grower. It trades at about the embedded value of a life business on 5 times earnings or 6 times earnings. I mean, I think that's an incredible opportunity to buy what is a very, very fine financial business today?

Jackson: Fantastic. Andrew, thank you for your time.

Clifford: No, thank you.

Jackson: Okay. I'm Lewis reporting for Morningstar.

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

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