3 takeaways from Finfest & some investible ideas for the current market

Candice: [00:00:12] Hello and welcome to Talk Money To Me. This is your need to know financial podcasts. Thanks so much for joining us. I'm Candice Bourke. 

Felicity: [00:00:18] And I'm Felicity Thomas. What a weekend, Candice Equity Mates hosted a festival on finance. And this is no ordinary finance conference. 

Candice: [00:00:28] I know. It was just amazing and in fact, incredible. I heard the final number came in at 1700 keen investors all there on the day, super keen and eager to learn from the industry's leading business people and market participants. So that's just a great effort. Well done again, guys. And the whole Equity Mates team, we had a lot of listeners come up to us throughout the day. It was so great to meet you all. We just love chatting to our listeners. So shout out to Jessie from Sydney and Gareth from Melbourne. 

Felicity: [00:01:00] Yes, and Tony, I didn't actually get where you live, but I did have Milton from Orange, so I am still really coming down from a high of FinFest. I know, Candice, you had an absolute ball at the afterparty. I didn't sadly get to make that one. We're so buzzing now in this episode, we actually want to give you a few of our key takeaways and recap of investable ideas pitched at FinFest, and I guess our thoughts on positioning your portfolio in the current market cycle as we believe we're heading into a commodity supercycle. And we'll tell you why in this episode. 

Candice: [00:01:34] But before we get into all of that and don't worry, guys, my hangover has now subsided, but it was a bad one. Yes, please remember, although for our financial advisors at Show and Partners, as always, our chat today on the pod should not be considered personal financial advice. As always, go out and seek professional advice before you make any of your investment or financial decisions. Now we're recording this on our usual recording day. Being a Tuesday is everything we chatting about is based on the facts known of the time of recording being the 18th of October. 

Felicity: [00:02:06] So Candice, let's get into it, I guess. What were your key? Three takeaways from the FinFest event? Okay. 

Candice: [00:02:13] There was so much to unpack as it was such a big day, but for me when I was thinking about it, you know, I think health care and renewable energy or new energy were really two big key themes that kept coming up from different managers throughout the day. We heard a lot of great high conviction because at least that's with the sessions that I was joining. But for me, one that stood out in the healthcare space was ResMed and that was a by call from the portfolio analysts and the team at fire trial and in the new energy play. You know, solar, wind, rare earths future facing commodities such as lithium that dropped a lot. That was kind of a super star event for me in terms of, you know, a thematic you can play that fundies are really long on at the moment because it's better for the environment and also for the current market that we're in. So they were my two big themes or sectors that were investable ideas. 

Felicity: [00:03:08] Okay, great. And what is your, I guess, second one? 

Candice: [00:03:10] Well, on the second part, right, so the new energy kind of thematic and ESG play, that kind of brings me to another broader theme that I was picking up a lot on the day, which was active ETFs. You know, obviously I didn't hear a lot of passive kind of comments. It was more active, swayed. But I think that just makes sense because in this market, you really need to to be more proactive and active with your tilts, your preferences. And one great way to do that is an ETF. So I was a big believer in that. I was good to hear that as well, particularly if you've got a small balance, you want to get started, right? Felicity It's such a great way because it's so competitive in costs and you get instant diversification. So that's awesome. 

Felicity: [00:03:54] So what were those ETFs then? 

Candice: [00:03:56] One that really stuck out to me being in the new energy thematic was the Battery and Lithium ETF. So AC DC is the ticker there. And my final key takeaway was from Adam Sable Browne, who's involved in the Lido Crypto Tax Calculator coin. So if you've listened to the show before, you'll, you'll know and I've admitted I'm actually yet to still get into this asset class because I don't fully, completely understand it. And that's one of my rules. I need to really understand it before I buy in. But what he said was really interesting, which I think can be applied to both the stock market and the crypto market. It's at times like this when you know we're in a crisis and a massive sell off in a bear market and I guess fears of recession inflationary. Every headline in the media at the moment, he said that often great businesses and ideas are born out of a time of crisis, and when most people are fearful, others will be taking advantage of this. And I just think that's a really great investment quote and. In philosophy, whatever you want to call it, because it's so true. You know, the winners out of the dot com were the ones that stuck to it really hard. Like if you look back at Microsoft and Amazon back then, they weren't profitable and they just kept sticking to their great ideas and conviction and business philosophy. So I think you can apply that with what's going on at the moment in the markets. And one kind of antidote he touched on was that he recently was at a conference, it was a crypto conference, and a dad came up to him saying, look, I have no idea about this asset class, but my nine year old son has just created a massive tax bill. So I need to learn about it so I can help. And I think that's a great little insight into how as investors, we have to always think for the future. What is the next generation passionate about? What are they interested in? What are they keen to learn more about? And that's what we can apply to businesses today, like who's going to survive tomorrow. Right. And five years down the track.

Felicity: [00:06:05] Yeah. Oh, gosh. Nine year old. That's going to be a very hefty tax bill at the top marginal tax rate. I hope he got some structuring advice on where he's holding that. That's so true. And that's a fantastic wrap. I mean, probably even more important than lithium is uranium. So you could look at the ETF, you are in N, which is a Betashares ETF. So that's also very interesting.

Candice: [00:06:27] Yes, good tip, Felicity. Now, okay. So they were my three kinds of big takeaways. What about you? Because you're on a different stage while I was listening to those. So what did you take out of invest? 

Felicity: [00:06:38] So it's hard to bring it down to three, but I think what I want to talk about is number one, Julian McCormack from Platinum Asset Management, he actually did a segment on the Reaper coming, so that really actually shocked the audience as he spoke about the extreme bull run global equities have had and that we're likely living through the implosion of one of the great US equity bubbles of all time. You know, if you weren't thinking along the lines of 1929, 1967 or 2000, he actually thinks you should be. He's not saying it's a crisis, though. He's just saying it's the end of a cycle and that it does happen. However, I asked him a couple of questions at the end whether he thinks this applies for the Aussie market and he actually said no because we haven't had the same kind of bull run that the global markets have had and we're actually not in a bear market technically the Aussie market, because we've not fallen more than 20%.

Candice: [00:07:29] And that seems to be the consensus that Europe and the US and let's not even go to the emerging markets because that's a completely different case study, it's very different to different pockets of the world and we are fortunately the lucky country I guess, in that way. So. All right, what about your second takeaway? 

Felicity: [00:07:46] Yep. So then after Julian's, we luckily had Scott Phillips, the chief investment officer from The Motley Fool, in the same coin spot launchpad. Now, he really calmed the nerves of the audience by providing top tricks to kind of help navigate the current climate. Most importantly, and we've said this time and time again, right? Knowing the companies you're investing in and why, so you can really stick to your conviction in market downturns. It's super important because if you know the business and you know what they're doing, it actually prevents that gut or that reaction to go and sell your companies. Right. Because you really know what they're doing and you know, any future catalysts for the business. So you can really hold through that volatility. He also said, look, I've been a buyer last week. I was a buyer. I last month I was a buyer a few months ago. I've constantly been buying good businesses and this is where dollar cost averaging is your B, F, F and then my third one was actually in the Equity Mates studio, so this was well doubt on his global value for small and mid-caps, which is quite interesting because they focus on this segment companies in their view that they believe are less receive less investor attention potentially and have greater growth prospects, even because they may actually be acquired be acquired by larger companies. I also had Wilson Asset Management analysts, which were awesome. We all know how great the WAM team is with all of their various LIC, so that was also very good in the launch pad. 

Candice: [00:09:18] And on your last point, there is so much M&A happening in certain sectors, particularly tech and software. So I think that's really it's a really kind of topical conversation in the markets at the moment. All right. So that's a wrap on FinFest and I guess our key takeaways from the day because it was just awesome. What we might do now is just pivot towards the current market. And I think it's a timely conversation that we share with you because Sean Partners, we do a quarterly research document and it goes really high level on the macro data that the market's kind of digesting at the moment and obviously give you the portfolio themes and investable ideas that we are bullish on at the moment at. Sure. So it's always a good way to listen to what, you know, other participants in the market are saying and thinking. And it's a bit of a health check right on. Are you on the right page or different page or completely, you know, different worlds apart. Right. So healthy competition never hurts anyone. 

Felicity: [00:10:16] That's it. And we've actually had quite a few people reach out to us for a copy of it, which we're happy to share because knowledge is power. So essentially in this episode we kind of want to highlight a few market sectors which are really keen on at the moment, which have been highlighted in the research monitor. So you have biotech and life sciences. We also have insurances which we haven't actually spoken about on this show, as well as Coal, Energy, New World, which we've spoken about quite a few times already.

Candice: [00:10:44] Well, let me kick us off. So the Australian market, which we look at through the lens of the ASX 200 index that rose by 0.5% during the September 2020 two quarters, just finished off that sector. Or I guess our broader market, the best performing sector was pharmaceuticals, biotech and life sciences. So giant health care companies at the end of the day, and that ended up strongly at 6.4%, including dividends for the sector. One big company which I'm a big buyer of, if it ever sort of hangs around the 252 to 80 levels for the long term like it was said on the day, this is a portfolio stock you just want to buy and hold throughout all the cycles. Is CSL now delivering 5.9% return for the Q3 quarter and then no brainer. The second sector to perform well in the quarter just finished was energy, right? New and old. We loved this thematic. That sector was up 5.77 for the September quarter. 

Felicity: [00:11:46] Also two other themes we like for the portfolio now as we head into 2023 are insurances. So life insurance plays a really crucial role in actually helping people manage unexpected events and protect themselves and their families against financial difficulties. So most life insurance premiums are actually index linked to inflation, meaning that inflation drives nominal increases in life risk in-force premiums. So what that means for the life insurance and insurance industry as a whole, they've shown really great industry trends that inflation rising is really impacting positively on profitability. 

Candice: [00:12:25] Yeah, it's not a sector we've spent a lot of time on Felicity. So I think it's really key that we do highlight that. Now we will deliver the third portfolio theme being energy, new and old. But before we do that, we're just going to take a short break. And we're back. That was a short break. Great. Okay. So the third topic for the portfolio to consider. If you're not in it, do yourself a favour, guys. Stop what you're doing and really pay attention. New and old energy. You've got to add it to the portfolio. So let's just focus on one commodity to start off with. Okay? So within the commodity, coal, something strange is happening at the moment in the coal markets and in particular, with coal prices soaring in the last 12 months, have you seen on your Bloomberg app or wherever you check your markets? Whitehaven Coal the ticker is WHCA on the ASX and it's almost up 300% year to date, soaring from around $2.30 in share prices to recent highs over $11 per share. Now why is that? 

Felicity: [00:13:29] I know that's insane. We've got some lucky clients. We've got some happy clients there.

Candice: [00:13:34] Yeah. In the green. Love it. So the lack of supply and continued demand saw thermal prices lift to over 200 tonne US in 2021 and with coking coal reaching over 400 a tonne, U.S. dollars has been exacerbated in 2022 following the Russian invasion of Ukraine, which has disrupted global supply chain markets and seen sanctions placed, obviously, on Russian coal production to try and help there. 

Felicity: [00:14:01] That's correct. So there is a difference between coking and thermal coal. Right. So I guess the question to ask here is where is all of the new coking coal supply really going to come from? So whilst demand remains really strong, supply is increasingly constrained by political and environmental issues. Governments in the Western jurisdictions are really making it increasingly difficult for companies to build new mines. Banks are limiting their lending, and environmental lobby groups do not appear to understand the difference between coking and thermal coal. The world needs steel to build the infrastructure to enable the energy transition. And although green steel, using non coking coal production sources is being investigated, steel production currently requires coking coal. So you might be thinking I've missed the Whitehaven Coal Steam train, but fear not. We actually do have another great resource stock for you to look up. 

Candice: [00:14:53] That's right, Felicity. So here's your iron. Partners are really great at finding the next best idea in their similar sector that's popped. So on that, we've recently initiated coverage on a company called Boeing Coking Coal. BCB is the ticker on the ASX and we have a valuation or price target of it reaching $0.51 in a 12 month time period. So Boeing is rapidly ramping up production from three producing assets in the Queensland Bowen Basin. That's where it gets its name. The company recently shipped its first coal from the Bluff mine and is expecting to grow to five megatons per annum of output over the next two years from the Bluff Broadmeadows East and Burton complex. That's the small cap higher risk name in this thematic. 

Felicity: [00:15:39] Currently trading at around $0.38 at the moment. 

Candice: [00:15:42] If you are more risk averse and want to go up to the larger cap names, you can also take advantage of the coking coal price strength via BHP and South32. 

Felicity: [00:15:51] So this leads us into a big question in the resource materials sector, are we heading into a commodity supercycle and how can you really position your portfolio to benefit from this? Why are we asking this question? Well, we believe that there is no realistic prospect of global decarbonisation efforts meeting the Paris GOP objectives, which is very sobering. 

Candice: [00:16:17] Yeah, this is the conversation that a lot of managers have to face, particularly if you're in the ESG space of investing, that you still need old energy to pave the way for new energy. So the Paris Agreement's central aim is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below two degrees Celsius above pre-industrial levels, and is to pursue efforts, obviously, to limit the temperature increase even further to one and a half degrees Celsius.

Felicity: [00:16:48] So Wood Mackenzie actually did a bit of an analysis on this. Right. And even under their base case, the two and a half degree energy transition outlook or ATO demand increases will put a lot of pressure, actually huge pressure on supply. So meeting your requirements will be challenging given market conditions, investment environment and project lead times that are actually stretching 10 to 15 years. They're saying that over 200 billion US is required here. So I guess the question. 

Candice: [00:17:17] Is, is the question that we're kind of tackling at the moment is do market fundamentals support a growth thesis? Right. So recovery, restocking green growth and the Ukraine crisis that has supported markets, but the energy crisis has sparked inflation. It's spooking the market and with a rising interest rate cycle, recessionary looming that Marine. Markets are loosening.

Felicity: [00:17:42] So what I would say here, right, is that miners are really keeping their purse strings tight. So CapEx guidance is rising with decarbonisation investment and sustaining capital spend is still well below levels of the last peak. And commodity markets have grown. So you've got the likes of BHP, Glencore, Rio Tinto. They're all paying around 60% of profits. But really what we're trying to say here is they should be reinvesting. I know you invest in these resource companies for the dividend, but like Fortescue, right has recently reduced their dividend to actually really support the reinvestment behind decarbonisation. These other majors just really do need to catch up.

Candice: [00:18:26] So what we're really saying here is that in order to meet the future supply requirements, it's going to entail a lot of investment across the globe, not just one sector of the global economy to do so. And that's going to exhibit, you know, significant ESG risks with longer lead times like that, ten plus years horizon. Few mining jurisdictions offer low ESG risk opportunities. So resource nationalism is definitely on the rise, in particular in Latin America. But investors are risk averse, giving everything that's going on at the moment. Correct. 

Felicity: [00:18:59] So, I mean, that all doesn't look that positive, right? However, there is a spin. There's a positive spin. What does it take to achieve an accelerated decarbonisation? So there is a solution here. You've got electrification and renewables actually underpinning the reduction, delivering large efficiency gains and restoring carbon balance. So the CCU represents 2520 5% of the carbon reduction budget. 

Candice: [00:19:24] And as we heard from Mary Manning in one of the sessions I emceed, who's the portfolio manager at Affinity on the weekend at FinFest. She said a really great quote that over the long term, so ten plus years as an investor, good businesses, sustainable businesses that have a positive impact on the broader community, on the local indigenous people, for example, or the environment tend to outperform. So this is where she was bullish on renewable energy. This comes into the new energy thematic that we're talking about today. She mentioned, obviously, you know, some no-brainers like wind and solar investments, mainly in the northern hemisphere. And it's a really tough balancing act that portfolio managers have to balance where it's got to meet the fundamentals on investment case, but then also be good for climate change, for example. But what's interesting is that wind and solar generation is more than double in a net zero world generation transmission, storage and use of low carbon energy. And that can't be achieved without metals. So renewable energy is more metal intensive than thermal generation, which I think is missed a lot in the market. 

Felicity: [00:20:32] Correct. So we're really focussing on investing in resources, your base metals. So if we want to look at things like lithium, coal, bay, graphite, nickel, zinc, copper, lead, aluminium, uranium, you know, they've got huge lead times for these mines. So I guess the issue we're trying to get across to our listeners is there's going to be a lot of demand and not enough supply. So what does that mean for the great resource and future facing commodity names? It means we're going to have a commodities supercycle. 

Candice: [00:21:03] Yeah, supercharged supercycle. 

Felicity: [00:21:06] In order to meet the 2030 Paris Agreement goals. 

Candice: [00:21:10] So we're here to reiterate it again. Industry underweight investment is stark. An appetite for growth needs to return. CapEx needs to accelerate aggressively for businesses in order to deliver the Paris aligned pathway, which we all want the globe to meet that 2030 target. 

Felicity: [00:21:28] Correct. But this CapEx is really set to fall by over 70% over the next five years.

Candice: [00:21:33] Yeah. And then the other reality we all have to face is China dominates the energy transition commodities. So the West really need to catch up here. We need to get into gear, put the foot on the accelerator in a green way as much as we can into growth mode to reduce reliance and the risk. So for example, at the moment the reality is China accounts for 60% of the lithium and Komatsu supply.

Felicity: [00:21:56] The obvious conclusion here is that there's really an almighty commodity supercycle. We've said it a couple of times in this episode. We just want it to really sink in. The current pullback in commodity prices has actually been driven by short term recessionary fears, right? It's only actually going to make the next cycle even larger. For example, the pullback in copper price is slowing down investment just at the time that it really needs to accelerate. 

Candice: [00:22:20] So this is the big moment. If you're not in new energy, you need to be long energy. Think about batteries, raw materials, base metals, rare earths. Read up about this space. Guys have some really great companies and a lot of them are Australian based. So we are again the lucky country in that sense and the opportunity is right now. We think through dollar cost averaging strategy to build these great quality businesses for the long term. 

Felicity: [00:22:46] That's it. And it's your lucky day. We're going to name quite a few right now. So we've got AIG, our independence group, which is nickel copper, Colbert and lithium. We have Iluka, which is rare earths and mineral sands. We've also got mineral resources, which we've all heard of. This one haven't we can do. Then we've got global lithium resources, which is geo one. We have iron ore, which is a lithium mine in Nevada. So the US has their own lithium mine. They're going to be happy about that. We've got Silex, which we've talked about on the podcast, which is uranium enrichment. We then have Paladin Energy again, uranium, we have Plx, which is Pilbara minerals, which is a lithium intent light. Then we have Sierra Resources, which is graphite adenoid, we have AK, which is alkane, which is a lithium chemical, and we have C.O.D, which is Coda Minerals, your copper play. There's a couple of the Aussie ones, but what about some of the international ones?

Candice: [00:23:40] There's also great ETFs in this space. We've mentioned a couple already, the AC DC one, the Uranium One. There's a whole bunch of them to get into this sector. There's also NexGen Energy on the ASX. It's not very liquid, it's super small. It's a dual listing on the Toronto Stock Exchange over in the Northern Hemisphere. And then there's our favourite which actually has ownership or a stake in NexGen and they've, we've hosted them on the podcast that's Queen's Road Capital Q R C on the Toronto Stock Exchange. And if you haven't yet, listen to the episode with Chairman and CEO Warren Gilman. We really stress that's a great way for you to learn about this new energy, because one of his largest investors, Andrew Forrest, you'd be probably familiar with that name, Twiggy Forrest, also known as he's one of the largest investors and he's very influence when it comes to the commodities they have to invest into. And it has to be green, it has to be ESG. So it's a great, great, great business to look at. 

Felicity: [00:24:41] Up, correct? He's very, very focused on decarbonisation. So I think with Crane Queen's Road Capital, that's a diversified way to get into this theme, just like the ETFs that Candice mentioned. Now we could spend hours and hours and hours on the future facing commodities supply demand issues where we should be investing in playing this theme. So expect a lot more episodes on this supercycle because we don't want to make this one too long. 

Candice: [00:25:07] And don't be surprised if future-facing commodities and companies in that sector do join the order pad in the next, you know, six, 12 months. Alrighty. Well, that's a wrap. Hopefully you enjoy that episode. We definitely enjoyed going to the FinFest. I loved the afterparty way too much and as always, you can reach out to us and talk to us about tequila, coffee or tea or any investable ideas that you do like. And we can be reached at TMT at equitymaes.com. If you've got any questions, we'd love to hear from you. 

Felicity: [00:25:40] And as always, before we sign off, please remember our chat today is not considered personal advice as we've not actually taken into consideration your personal financial objectives, needs or goals. The content discussed is general in nature and you should seek professional advice before making your investment decisions. We really hope you enjoyed the show and got some really good insights. The market's not all doom and gloom. There's places to position yourself until next time.

Candice: [00:26:06] Now be gentle.