unintended consequences (draft)
TRANSCRIPT
UNINTENDED CONSEQUENCES
PENGANA INTERNATIONAL EQUITIES RANGE OF FUNDS
MARCH 2021
Agenda
2
Explore distortions
Risks and opportunities
How to manage it
Q&A
The party has gone on for too long
3
Severe distortions to Asset Prices
Pressure onGDP Growth
Breakdown inSocial Cohesion
$
These are real world, relatable implications
Why is the share market going gangbusters while the economy is spluttering along?
Why is there so much social unrest?
Why do official figures report low inflation, life feels like it is getting more expensive?
After so many years of a bull market, where can you invest to make money?
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A bit about us
We Focus on Fundamentals Portfolio of diversified, highly cash flow generative and growing companies with fortress balance sheets
Open Minded ResearchFind opportunities from a variety of industries, geographies and market cap ranges
Portfolio Construction30 – 40 stock portfolio that is complimentary to client’s existing global exposure
Don’t CompromiseWe believe that you don’t have to compromise on quality to achieve returns, nor value to achieve growth
Investor AccessInternational, International Ethical, LIC: PIA
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The intended & unintended impact ofzero interest rates
Asset bubbles & excessive risk taking
Spread of uneconomic firms
Growing wealth divide
6
Ballooning asset prices
Low discount rate
Encourage risk
7
Investors forced to take on more risk to achieve returns
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The zombie apocalypse
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• Uneconomic and geared
• A wet blanket on the economic growth
• There isn’t much growth to be had
• Reducing total market profitability and ability to
reinvest in growth in wages
Walking dead with a 2trn dollar ball and chain
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0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
OBLIGATIONS OF ZOMBIE FIRMS; US$T
Source – Bloomberg, Bloomberg, America’s Zombie Companies Rack Up $2 Trillion of Debt, 17 Nov-20
Growing wealth divide
11Source – The World Bank, OECD
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,000
20 25 30 35 40 45 50 55 60
Inco
me/
Cap
ita;
US$
k
Ginni coefficient
USA
Australia
Return of inflation –Rising inflation expectationsUS ten-year breakeven rate; %
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Jan-
17
Jul-1
7
Jan-
18
Jul-1
8
Jan-
19
Jul-1
9
Jan-
20
Jul-2
0
Source – Federal Reserve 12
-2%
0%
2%
4%
6%
8%
10%
12%
14%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18
CPI
CR
B Sp
ot In
dex
chan
ge
CRB Inflation
CPI tends to follow commodity prices with a 1-2 year lag
Return of inflation –Rising commodity pricesCRB Spot Index vs US CPI
Source – Federal Reserve 13
Where we are finding opportunities
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• Interest rate volatility / inflation spike
• Wealth Divide
• Disruption
• Emerging Markets
• Fiscal Stimulus
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Growing wealth divide
• Owns Dollar Tree and Family Dollar
• USA’s second largest dollar store chain
• Cheap because Family Dollar treated as broken
• Signs Family Dollar improving – SSS and margins
• Revenue growth = 5%
• FCF yield = 4%
• Strong balance sheet
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Interactive games –Disrupting leisure time
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• Dungeon & Fighter lifetime revenue ($15Bn) >
Star Wars series lifetime box office
• Migrating games to mobile – increase TAM by
10x
• 3Q20 mobile revenue grew 140% y/y
• Total revenue growing 15%
• FCF yield = 6%
• Balance sheet is hugely net cash
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0
100
200
300
400
500
600
CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20e
USA Eurozone Japan China India Brazil South Africa
Emerging markets -Underlying economic growth
17
18
• China’s carsales.com
• Dominates local market
• Benefit from growth in used car sales – will
increase its TAM by >60%
• FCF yield >5%
• Revenue growth = 9%
• Fortress balance sheet – net cash
Emerging markets –Strong underlying economic growth
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• USA’s largest aggregates business
• Local monopolies pricing power
• Crushing process rather than thermal process
can turn off production
• FCF yield = 4.3%
• Consensus revenue growth = 2% (misses fiscal stimulus upside)
• FCF yield = >4%
• Gearing = 1.7x EBITDA
Reflation – Fiscal stimulus + Increase inflation
• One of the largest global “market makers” for ETFs
• Provides protection against spikes in market
uncertainty/volatility
• Reason: higher volatility = higher spreads for Flow
Traders (and higher profits for shareholders)
• Share price has risen strongly through the current
crisis
• FCF yield ≈ 7%
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Interest rate volatility
DUTCH MAPPING COMPANY
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A diversified portfolio and very different to the benchmark
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The interest rate environment is concerning and contributed to:
• Inflated asset prices – risk seeking and lower discount rates
• Uneconomic (Zombie) firms - supressed GDP growth and wage growth
• Growing wealth divide
Among all the challenges there are opportunities
You don’t have to compromise
• on quality to achieve returns
• on value to achieve growth
Summary
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