From left: Jun Bei Liu of Tribeca Investment Management, left, Vince Pezzullo of Perpetual, Chris Kourtis of Ellerston Capital, Mark Landau of L1 Capital, Crispin Murray of Pendal, Emma Fisher of Airlie Funds Management and Rebecca Hill, CEO of Morgan Stanley Wealth Management Australia.
Fund managers have batted away fears of an inflation-led recession, with Qantas, Seven Group and Treasury Wines named among the best investments by Australia’s top stock pickers.
The Australian stockmarket fell for a third straight day on Thursday as it digested the economic response to the 12th interest rate rise in just over a year.
Many market watchers have predicted higher rates will lead to a slump in demand for airfares but L1 Capital chief investment officer Mark Landau made Qantas his top stock pick.
“It’s had a 400 per cent return since 2014, driven by earnings,” said Mr Landau, speaking at the Morgan Stanley Australia Summit. “Its most valuable unit is a high-growth digital business. It’s under-geared and trades on the lowest PE of any industrial stock on the ASX100,” said Mr Landau. “I think what people are missing is the structural change that’s occurred in the past decade.”
Mr Landau pointed to the company’s market share of around 65 per cent and its control of the premium market through its Qantas brand, as well as its strength in the leisure market through Jetstar, which he says a “30 per cent cost advantage over Virgin”.
The most attractive asset was its Frequent Flyer unit, which is the “single best loyalty program by a mile in Australia”, and such a strong earnings profile that “you get the entire aviation business for free”, Mr Landau said.
“It’s got a dominant market position, a great balance sheet, a proven management team and the trade-off is a PE of six times,” he said.
Another stock picker to go with a well-known consumer brand was Tribeca Investment Partners portfolio manager Jun Bei Liu, who chose Treasury Wines as her favourite stock.
Ms Liu applauded the company’s ability to withstand the shutdown of its seemingly critical China export market.
Like Mr Landau, whose predictions for Qantas go against the market views on the threat of increased competition, Ms Liu’s views on Treasury clash with the general market outlook.
Last month analysts downgraded their forecasts for Treasury after a pullback in demand from some markets and a slower than hoped return of the China market.
“It’s expected to grow 15 per cent over the next three years; that’s without China. There’s no buybacks yet but that’s coming,” she said. It was “trading on a multiple of 20 times. Compare that to Woolworths, which is looking at flat to negative earnings, and investors are willing to pay 26 times”.
One investor staying away from the consumer brands was Airlie Funds Management portfolio manager Emma Fisher, who picked Seven Group, controlled by the billionaire Stokes family, as her top pick.
Ms Fisher said she was particularly drawn to companies that were owner-managed.
“When investing in companies that have this one characteristic, we tend to have a pretty good time,” she said.
Seven Group had lifted five times compared to an index that was up two times and, while the company was now run by Kerry Stokes’ son Ryan, Ms Fisher said that rather than being like an episode of “Succession”, Ryan Stokes’ performance spoke for itself.
“He’s been the CEO since 2015 and the stock is up fourfold since then. I think he’s done a really good job,” Ms Fisher said.
Pendal head of equities Crispin Murray also went against the grain with his pick of Suncorp, which has roughly the same share price it had 20 years ago and faces rising natural hazards.
Mr Murray said the insurance industry was starting to price the real cost of its business into its insurance premiums, with Australian insured catastrophe losses having risen from about $2bn a decade earlier to $6bn in 2022.
Suncorp benefited from rising interest rates. “The proxy for their returns is a two to three year bond, that punched through today to 4 per cent,” he said.
“This is the window of opportunity to buy into the insurance sector,” Mr Murray said, citing its predicted “earnings growth of 10 per cent for the next couple of years.”
Only one fund manager at the Morgan Stanley conference picked a miner, Perpetual head of Australian equities Vince Pezzullo said rare earths operator Iluka Resources was not currently being priced as a company with critical minerals.
“There is a structural and strategic reason to own Iluka,” Mr Pezzullo said, pointing to the critical minerals required for making magnets needed for electric vehicles and wind turbines.
“We think there is still significant value in Iluka that isn’t being realised,” Mr Pezzullo said.
While all the other stock pickers backed proven management, Ellerston Capital portfolio manager Chris Kourtis went with a company with a new leader, IRESS, which provides technology to the financial services industry.
Mr Kourtis described the company as a “classic example” of an Australian company that does well in its own backyard and then squanders its capital in far away places where they have no competitive advantage.
As a result, “it’s a growth stock that has not grown,” he said.
The catalyst for a change will be its new CEO Marcus Price, Mr Kourtis believes, who will focus on returning the business IRESS does well, that being the domestic market.
“If the management do not execute they will be shot,” he laughs. They’ve got to deliver. No more excuses.”
This article was originally posted by The Australian here.
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