Expert: Andrew Brown shares some bold predictions for the year ahead

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:00:31] I'm very good. Bryce. Great to be back for twenty twenty two with our first interview. A returning favourite. Sorry, I should say our first interview for twenty twenty two and also our first interview ever. Back when we had not emerged through that, when I still had it. That's it.

Bryce: [00:00:50] Well, as tradition has it the start of each year, we do bold predictions and it is our pleasure to welcome Andrew Brown back to deliver his bold predictions for 2022. Andrew, welcome. So Andrew is the executive director at East 72 Holdings and has been on the show plenty of times. If you've just joined Equity Mates. Welcome. Can't wait to. Well, thank you for joining the investing journey. It's going to be an awesome year. Make sure you go back and listen to some of Andrew's previous episodes and you understand why we're excited to have him back again, and 

Alec: [00:01:22] you'll really be able to chart the improvement in our microphone quality over the years from the first recording where I think we had one microphone in between the three of us. Yes, and now we have so much technology surrounding us that we can barely see each other 

Andrew Brown: [00:01:39] a microphone on top of a box. Nine square metre room

Bryce: [00:01:45] is good or bad or bad? Absolutely. Yeah, one of our best one. Yeah, that's but look, Andrew, as we said, we're here to hear your bold predictions. Yeah, we would have done. We've done ours last week. So now we're going to hear from you. You've got four sort of big thematic we're going to touch on. 

Andrew Brown: [00:02:02] Absolutely. Let's kind of draw what I'll call the playing field or the pitch. Okay, because I think that's really quite important as we go into what I think Scott are clearly going to be a new era for the time being. So what does the pitch look like to try and do that? Let's go back ten years. Okay? Because remember, we're talking investment here, we're talking equity investments. So ten years is not unreasonable to actually think about putting your money away. I know most people talk five, but 10 is not stupid. 10 years ago, on the 31st of December 2011, the Standard Poor's 500 index was at 12 57. The expectations for earnings in 2012 for the S&P 500 were around about 106. Okay, so the stock market in the United States, for every dollar of earnings, you are having to pay around about sort of just under 12 dollars and at the time, and this is the really interesting bit the 10 year bond rate in the U.S. So the yield on the 10 year bond in the US was two percent. Let's fast forward then 10 years to the end of twenty twenty one and obviously 2022 started with a bit of a bang. But let's just start at the end of 2021. So year 2021, the S&P 500 was forty seven, 66. Sixty six. 

Alec: [00:03:24] All right. 

Andrew Brown: [00:03:25] Adjust your earnings for next year or the current year. 2022 are expected to be two hundred and twenty two. Funnily enough, now that's an expectation it may not be met. And so to move from about one hundred and five hundred and six to one hundred and twenty two is around about seven and a bit percent, 7.4 per cent per annum, compound growth in earnings per share for the US stock market, and that includes a tax cut. Hmm. So that's not abnormal, by the way. Okay. Some of you sort of think every company grows at 15 percent may find that pedestrian, but that's normal. Okay, that's no. But of course, the stock market, I'm way more than that. It's down fourteen point three per cent per annum. Compound capital growth as giving you some dividends as well. They're not huge, but it's giving you dividends as well. So half of the stock market's gain in the last 10 years in the US has come from earnings and earnings growth. But the other half has actually come from what it's just come from rabid enthusiasm. Okay, because the bond rates still pretty much the same, we'll call it was about one and a half percent at the end of twenty twenty one. All right. So it's people's rabid enthusiasm about the future earnings well into the future are going to grow much quicker rates than increase in the past. So it's not what everybody tells you. Their interest rates have reiterated the stock market because over ten years, they actually haven't. Okay. It's just investor enthusiasm, says the first little bit. We've had a lot of enthusiasm and we've got an outcry on Justified, and I asked me really hard. The second thing is, of course. The stock market down 14 per cent plus per annum compound for 10 years. It's had one down year in 10 years, and that was 2018, when it was like minus one and a bit percent. It was barely measurable. So this flat, really 

Alec: [00:05:25] the fact that it wasn't 20 20 when we had a pandemic lockdowns is just mind blowing. Still, it is.

Andrew Brown: [00:05:30] And eight of those 10 years, the stock markets returned over 13 per cent. And remember, half this stuff's coming, not from interest rises just coming from, Oh, we're in a new era of technology and a new era of something. So the other aspect about this, of course, is that a lot of that driver in the stock market has been, you know, a very small number of mega-cap tech stocks over the last 10 years. And in while those mega caps tech stocks with one sort of exception really over the course of the year basically just went to Mars is probably the best way to put it. The average return for the eighth largest mega cap tech stocks in the US was 4.5 per cent last year. Now these are hardly companies that nobody's ever heard of. Okay, what are the I? I never really conceives their own thing. I now call them Ramanand because it's it's oh, 

Alec: [00:06:29] well, we've been calling them and mama. Yeah, and 

Andrew Brown: [00:06:33] it's the same thing. So yeah, just if you if you know, if you have been living under a rock, it's basically Microsoft Apple Meta, which is obviously the all Facebook, Amazon and then Netflix, Alphabet and VIDEO and Tesla. 

Alec: [00:06:49] Yeah, you say we take Netflix out of it because every, every other company does like 800 billion plus Netflix is around 300. Exactly. 

Andrew Brown: [00:06:58] Well, the the aspect of it that is crucial is those companies make up about 28 per cent of the S&P 500. Okay, now they obviously weren't that 10 years ago, and so they are driven forward. So what it tells you, it tells you that the S&P has returned 14 plus per cent over the tech compound over 10 years. These guys have obviously gone nuts over that period of time. And so there's a whole bunch of other companies out there that haven't returned anywhere close to 14 percent. 

Alec: [00:07:25] The rest of the stock market 

Andrew Brown: [00:07:26] because there is a stock market. So what you have as we've entered into 2022 is we have a situation where interest rates can't really go any lower. They've been there low on a 10 year bond. The low is about one per cent in February of 2021, and they finished the year about one and a half percent and in the first 12 trading days of 2022. Since we're recording this on the 20 January 2022, they've jumped. Yields have jumped 35 basis points or a third of a percent. So rates are going up. Inflation is over seven per cent in the US. Okay. And interest rates clearly don't reflect that. And everybody's talking about inflation now. If everybody's talking about something, it's usually a good idea to talk about something else. Subtle hint. OK? There's a good chance that inflation ain't going to go much higher. Not size page, but it may not go much higher. It might not come down quickly, but this may be the sort of the yet. But interest rates haven't caught up with inflation yet. And so what's going to happen over the course of the year is that long term bond yields will rise, in my opinion and probably have a three in front of them at some stage. Short term interest rates are going to rise because the Federal Reserve is going to push them up anyway. And as the Federal Reserve withdraws from buying government securities, which course pushes their price up and keeps their yields down, then the demand for government securities that yield next to nothing by anyone else on the planet is pretty, pretty small. So that yields are going to rise and they're going to rise a little bit in Europe, they're going to rise in Australia as well, despite what the Reserve Bank think. And so we're going to have a situation where interest rates are not going to normalise, but they're going to start on a pathway to normalising. And so you've got a situation where as we built the pitch, this stock market has risen strongly over a 10 year period. We've only gone down year and interest rates have not been the contributing factor to at least half of that rise is just enthusiasm by investors about whatever recovery can call it tech, or we can call it the cloud. Or you can call it green. We can call it crypto. We can call it a metaphor. Call it whatever you want. Okay, it's just enthusiasm about the future. And when people build in too much enthusiasm about the future, you usually have a problem.

Bryce: [00:09:54] Why do you think that's going to change this, either? 

Andrew Brown: [00:09:57] Because interest rates make it more difficult to sustain or rising interest rates make it more difficult for you to sustain your investment in a long term growth story that doesn't grow well, that has hiccups along the way. If you don't think that investors don't get laid up by these things and they overpriced things too much, let's look at 2020 long for as much as the top eight mega tech stocks, excluding Amazon, were fantastic performers in 2021. I mean, Metta was, you know, Metta was sort of fairly boring, you know, and he did about sort of, yeah, over the course of the year, and he did 23 per cent. It was sort of, you know, one of the other boring ones. But you know, you saw a whole heap. As we discussed back in our December podcast, a whole heap of second line tech stocks got murdered because I didn't live up to their business model. Okay. And interest rate people started to get worried about the business model. So they don't just don't. I just fall little. They get absolutely, you know, they just get massacred. As you know, we most obviously saw, you know, Peloton's the best example. So the issue is going to be for people. As interest rates rise, it becomes more difficult to sustain your investment in these kind of companies. They're long term. You know, if you're correct about the company and you had perfect foresight, there are long term income stream a very long term me. Clearly, as rates interest rates go up, the value of their income stream is going to come down. But one of the reasons I'm so excited about 2022 from an investment standpoint, and particularly from a standpoint of people listening to Equity Mates, you know, a slightly younger population than me is that you cannot just invest on themes. One of the things you may have you've been able to do in the last few years is be a thematic investor. Yeah. So you've invested maybe in green technology, you know, the best investment same has been megacap tech. You know, you just had to put that in your mind, got a sleep, wake up and count your money. You know, it's been simple as that. You're not going to do that in 2022. You're going to have to do some real work and you're going to end up if you buy stocks or even if you buy ETFs with, I think, a really eclectic portfolio of stuff. And I don't mind telling you, my portfolio right now is the most eclectic and strange. It's been in a very, very long time series. 

Alec: [00:12:30] Last. Yeah. Oh yeah, because you had some pretty wacky, wacky stuff anyway, but it wasn't vanilla to begin with. Absolutely. 

Andrew Brown: [00:12:38] So right at the outset, I think it's highly likely the US stock market will not produce a positive return in 2022. 

Alec: [00:12:47] Okay. Well, that web, we're looking for bold predictions here and I think we mark that down as market dance about projections. Actually, we should also mark down that 10 year bond will have a three in front 

Andrew Brown: [00:12:58] of it at some stage during the year. 

Alec: [00:13:00] Yeah, yeah.

Andrew Brown: [00:13:01] So and I don't think there's US stock market polls show. Why is that? Well, earnings expectations are for earnings growth of about 10 per cent. I think that's a bit too easy. That's a bit like sort of just sort of pin the tail on the donkey stuff. And I think one of the issues is going to be which you get 10 per cent earnings growth from in such an uncertain world and the uncertainties not just Covid. It's not just supply chains. It's not just inflation. It's not just labour shortages, which is in a sense, one in the same as inflation, but it's also the fact that, you know, the consumer is starting to get kicked around in the US a little bit as well. And consumer confidence is starting to wane event and the consumer in the US is the economy is, you know, you all know so that there is a real chance in a year when you have mid-term elections. So the T word gets put back in the vocabulary, unfortunately. Are you MP? OK? Yeah, this is going to create a lot of uncertainty again, in my opinion. So I think it's really likely that trying to get 10 percentage points out of the US in this type of environment may not be that easy. And its earnings growth, it's got to drive the market because, as I said, there's no interest rates going to drive it and there's not enthusiasm by investors is going to drive it because I've driven that enough already. So it's got to come from earnings growth. So if you're buying an expensive growth stocks, you better make sure they're going to grow this year because if they don't, that they're going to be a little bit troublesome. And that might even include some of the big guy. Yeah, it's 

Bryce: [00:14:38] interesting, though, because time and time again, those big and mammoth stocks continue to surprise the market. Apple every time. Amazon every time. 

Andrew Brown: [00:14:47] Yeah, Amazon, not Amazon. Every time Amazon, Amazon, Amazon and Amazon. Amazon is at a very interesting juncture. Okay? Obviously, without its, you know, not without its founding father has stepped back. Its retail business is under much greater pressure from competitors now. The targets of the world, the Wal-Marts of the world. No, there are. Potentially emerging issues about age, all of us. But, you know, it's not quite the the strong behemoths everybody saw a year to 18 months ago. Now this is reflected in the stock market. The stock returned two and a half percent last year. So, you know, it's not like we're saying anything new. 

Alec: [00:15:29] So are you? Are you making a third bold prediction that Amazon will be the worst performing of those seven? No. Okay. 

Andrew Brown: [00:15:36] Absolutely not trying to

Alec: [00:15:38] be successful impromptu ones. 

Andrew Brown: [00:15:40] The chances are it might be the. It might be one of the better performing of those.

Alec: [00:15:45] That's exactly. 

Andrew Brown: [00:15:47] Yeah. I think, well, it's going to play catch up. But you know, as you're going to find out in a second, I'm not looking at those technology stocks to make money out. Okay, because quite clearly what I've painted is the 10 year picture. I'm looking around for things that are really, really good businesses but have not been led up in price way in excess of valuation by investor enthusiasm. And so I'm looking in, I'm looking in other places where people are reticent, but where the underlying businesses are really, really good. 

Alec: [00:16:19] Okay. I guess one thing some people may say is what we see from these mega cap tech stocks is that they get to they build such operating leverage into this business that as they grow, that it just all falls down to their profit line. Yeah. And so maybe it justifies bigger multiples.

Andrew Brown: [00:16:40] It the bigger, multiple justification is not just there, but in most cases, not all of the bite. Their capital management is pretty amazing. Yeah, Apple is that. Apple is astonishing. Yeah. You raised the issue very, very long term nothing and then just used it to buy back your own stock in drives and their cash flow, you know, drives that as well. So, yeah, Apple Apple can go a long, long way and can actually load up at quite a bit more net debt onto the balance sheet. You know, before they would start to worry. So their capital management's been amazing. I think Google's capital management is amazing as well. Microsoft, obviously, you know, traditionally had done a bit ago. Now they've been a big, big move to try and kill off everybody else in the gaming space. You know, each of these companies has got their own different ways of managing capital and gaining operating leverage. But you know, for investors, it's not always the case that there's plenty of other leverage that operates on in video, which is, you know, obviously what's going on in the chip market for them, every bit of the market, 

Alec: [00:17:50] et cetera, doesn't apply to all of them like you. Just you wouldn't say the same thing about Tesla. 

Andrew Brown: [00:17:54] No, no. And yeah, each of them are market leaders in their own particular way as well. And that brings with it its own, its own capabilities. You know, I mean, don't you get each, you know, each decade in its 15 years market leadership, if stuff changes so we can and you don't necessarily see where it's coming from? 

Bryce: [00:18:13] So, so where does that leave us? 

Andrew Brown: [00:18:15] OK, where do we go? Where do we go looking for things that are really, you know, where there's genuine value and there's still some growth and they're really pretty cheap and nobody wants to know. OK, well, there's there's a myriad of things. 

Bryce: [00:18:32] And before we jump into that, we will just take a really quick break to hear from our sponsors. OK. Andrew, myriad of things. 

Andrew Brown: [00:18:41] Where are we looking? Okay. The most obvious place to look because everybody else has said, we are not playing here anymore. We not want to play on your pitch anymore. We're leaving and we've sold our stock and left. Can, I guess, have a guess? China. China. 

Alec: [00:18:58] Absolutely right. So, Andrew, we do a stock of the year. Every year and every year I managed to lose money. And then the next year that the stock that I pick does really well. Yes, happen with cost. Happened with Adam Moss. Yeah, I think it's about to happen with Tencent this year. Yeah. 

Andrew Brown: [00:19:14] The really critical thing is no. One, I mean, the Chinese market was down around about six per cent last year, and obviously it dragged Hong Kong down with it. Why? Effectively, it was obviously all to do with tougher government policy, common prosperity. The two key words a lot more regulation, and it may be the Chinese government feel they've overregulated because the economy did slow quite strongly as in stages last year, not in the last quarter, because the numbers, they were very good. But what they've done in China, you've actually got looser monetary policy, whereas you got tighter monetary policy elsewhere and 

Alec: [00:19:53] you've got this ageing ping Davos begging the rest of the world to not tighten. Yeah. 

Andrew Brown: [00:19:58] And so what you've got now is you've got a group of large companies in China that now know what the rules are. Two years ago, they didn't. The rules got changed on them, perhaps quite abruptly. And obviously, it had a massive impact on their stock prices. A delayed impact on their stock price is Alibaba. How is your is your traffic light for that one? Okay. So if you don't want to buy an individual stock because you're a little bit worried because they do operate in different ways and they do operating different things, buy a basket of them. So I've highlighted this before. My favourite basket is the crane shares. China set aside China Internet Cafe Web listed in the US. Of the companies, I think Tencent is probably the most interesting to me. And obviously, Tencent controls Tencent Entertainment, which we discussed the music industry last time I came in here as well. It's got a big stake in Universal Music, so I think to try and buy a basket of Chinese stocks, particularly the cat, the mega-cap tech stocks is the way to go. They're all now trading on basically fairly low teens plays. Yes, that you can throw all the old issues. They've got variable interest structures. Yeah, there's issues about the listings in the U.S. Some of them are a bit impenetrable from an account standpoint, et cetera, et cetera, et cetera. That's been the case even when people were paying 35 times earnings for these things. Yeah, you're now not paying anywhere near that. They come down a lot. I think they're very, very interesting to look at. And as you know, many of the major mega cap tech stocks in the US are effectively shut out of China, so they create their own little local monopolies and oligopolies for second place to look. Okay, so China, you cannot have look on a stock specific basis. I said I'd rather play it on a basket basis. The second place to look is Hong Kong, because Hong Kong got really shredded because Hong Kong was supposed to have some degree of autonomy from China. And obviously, as we saw in 2021, that disappeared by and large. Does that mean Hong Kong stock market has disappeared? No. Does it mean that Hong Kong's economy has disappeared or has slowed? OK. But you know, there are a whole heap of absolutely fantastic companies in Hong Kong. And by and large, their share prices did next to nothing last year, and indeed, obviously as a group went down about 15 per cent.. My favourite play in Hong Kong. And it has the ticker symbol one. Oh, actually our own one dot Hong Kong is by C C K Hutchison, which is the Lee family or Lee Caching Master Company. It's basically got poor assets around the world, but particularly obviously in that part of the world. It has massive telecommunications assets in Europe through the three network. It has retail in Asia and it has a massive infrastructure business, which you would know in Australia, and that's conducted through about a 78 per cent control subsidiary called C K Infrastructure, which is listed in Hong Kong. But when you put together C Hutchison, you can't find any value fund manager. He thinks the stock, which is trading at about 55 Hong Kong dollars, is worth less than about 85 massively undervalued just on a P five. Wow. OK. And and it's giving you things, some of which are long term constraints like infrastructure. You might. Airports are as well, but in ports will continue to do okay as they jam themselves. Telecoms is a long term concern as well, and there's a lot happening in telecoms in Europe. And as you know, one of my themes in talking with you guys consistently over the last five years has been if someone's a billionaire and they've grown it themselves from nothing. Why go against them? Why not park alongside them and hitch a ride? Okay. And so you're doing that with effectively what was the richest family in Hong Kong, the Lee family and 

Alec: [00:24:13] all of you love a family controlled conglomerate? I do actually know this. 

Andrew Brown: [00:24:18] This has been Dollars dishwater for years. I accept that. Okay, every value fund in the world is on this thing and it's been. It's let's call it a dog's insulting, but it's been very, very dull, and it's certainly worth 60 per cent more than the prevailing share price. So I think that's really, really well worth a look in Hong Kong. I wouldn't buy an ETF, I would go stock picking. Okay, okay. Well, the obvious things. If you think capital markets in the region are going to be, you know, going to liven up a little bit. And if you're worried about Chinese companies being shut out from the US market, where are they all going to have better listings? Hong Kong, so you can buy a Hong Kong exchange, for example, you know, as a stock exchange. So really, look in Asia because there's a lot more bargains in Asia and in particular, looking China. Let's use the same theme. Okay. Yeah. There's one other market, which is actually very, very big, has some astonishing companies and particularly just as we speak for reasons which are extremely obvious. Called the Ukraine border, there are a stack of things in Russia that are about as cheap as they ever get. One hint on buying Russian stocks. Number one, you can buy them in London, so you can buy all these things through global depository receipts in London so you don't have to open an account with a stockbroker you'd prefer not to. But the second thing is you always buy Russian stocks when there's a political problem. Okay? Because they can run extremely hard and get not super expensive, but a little expensive. But they fall to pieces whenever there's a risk of some real political upheaval, and the political upheavals usually revolve around the armed forces. Yeah, okay. And they usually revolve around the armed forces sort of poking their nose into a former Soviet republic. OK. And as we speak, of course, that may or may not be happening with Ukraine, which has obviously been the one that you know, has been where the tension has largely been over the last five years. So what that's done is it's taken a lot of these Russian stocks down quite heavily. There are two stocks in Russia I think are absolutely spectacular. OK? The first is Russia's biggest bank, which will spur Bank SBI Bank. It trades in London as well. It is 50 per cent plus one share owned by the Russian Ministry of Finance. That sounds tricky. It's actually not because Spur Bank has roughly 43 44 per cent market share of loans and deposits in Russia. So the Russian Ministry of Finance needs spur bank to be strong, highly profitable, pay very attractive, returns back to it and make sure the locals don't lose confidence. And Spur Bank has just been going to have their money sucked up. They've just reported some preliminary numbers for 2020 was the very preliminary. The bank made a profit of one point seventy three trillion rubles. 

Alec: [00:27:28] What's that in US dollars? Yeah, well, so in real 

Andrew Brown: [00:27:31] money, it's it's about 16 billion US dollars. 

Alec: [00:27:35] Not it's not. Not bad. 

Andrew Brown: [00:27:36] It's a twenty four and a half percent return on equity, and the stock market cap is 73 billion year as it trades on a P four and a half. 

Alec: [00:27:45] And the Russian finance minister owns a controlling interest in it. Yeah, 50 percent. So it would be like in Australia if Simon Birmingham, who's our finance minister or Frydenberg, is outrageous. 

Andrew Brown: [00:27:55] Some Ministry of Finance, but oh, 

Alec: [00:27:58] not the me, not the Ministry of Finance, right? So the Ministry of 

Andrew Brown: [00:28:02] Finance, I'm not going to mess about. 

Alec: [00:28:05] Oh, that makes more sense. But that is a that's just just an unbelievable conflict, which what happened? 

Andrew Brown: [00:28:10] First Minister ordered about 25 percent of it is owned by global investors through the London traders as well. The great thing about Spur Bank is, can you imagine a much bigger Commonwealth Bank, you know, a much bigger market share and it has twice the market share. It has also having an e-commerce platform. Interesting like that spur bank. Sperm banks got

Alec: [00:28:39] like an Amazon ride, like selling a bit of everything or soya. 

Andrew Brown: [00:28:45] So I mean, the best thing I can suggest to you is Sperm Bank has lots of English language presentations, including an investor day in back in November. If you want to meet the person you do not want to find on the other end of the now Microsoft owned World of Warcraft, just have a look at the sperm bank thing, the Russian rocket scientist. OK, this bank is so smart. It's not funny. It's got great technology and it's backed down at a level which is just under $13 for the depository receipts, which are four to one on the underlying Russian ruble stock. So and it's been brought back down there by just general Russian fees and everything else. Don't forget the Russian economy quite enjoying things at the moment. Why look at the old price? So why not buy Russia's biggest oil producer? Yeah.

Alec: [00:29:38] Gazprom. 

Andrew Brown: [00:29:39] Yeah, you can buy Gazprom. Gazprom is on pay freight. Well, Gazprom is lower in share price terms in US dollars through its London listing again than it was in June. OK. And they also 

Alec: [00:29:54] be like, Are they the big gas producer? Oh, very good. Yes. How are they going to pay off the rate? 

Andrew Brown: [00:30:00] Well, have you seen the gas price of those lovely German consumers in the last six months? Yeah, no. I think, you know, I think villian Hildegarde are just basically buying a few extra blankets because they can't afford the gas. OK. So basically, Gazprom's on a pay of about three and a bit. I'm going to suggest and you can find this stuff okay. It's really easy to find this is somebody I've never mentioned in these podcasts before. This is a wonderful guy in Perth called Willi Packer. He's been analyst for a couple of brokers a long, long time ago and in 1993 set up his own business school packer and co. No relation to some more famous packers, and he runs a thing called the investigative trust. He runs it out of Perth and you've never heard of it, and it's got a mega two and a quarter billion dollars under management. Wow. He writes. Very quirky, really commonsense letters twice a year and then you bet six or seven pages. And it's so simple. Your grandmother could understand them. And I love reading them because they are so simple. There's nothing, you know, they're not remembering any academic awards, but they're just common sense beyond belief. This gentleman has 35 per cent of his fund in cash, and he's got 35 per cent in Russian and Chinese stocks. Wow. Can I base Chinese start to China Telecom? He's also got to sign up okay and his Russian stocks. He doesn't have the may have sperm bank, but it's not disclosed if he does. But his Russian stocks are pretty much all oil and gas stocks. Gazprom is his biggest position is about eight nine per cent of his fund. OK, I think he's in. I wouldn't make it eight or nine per cent of my fund. He's on the right lines, so it's one of the cheapest oil stocks in the world. So, yeah, I remember. I mean, you know, if you, you know, if you were listening to October 2020, I told you to buy Exxon at 34, it's 72. You know, it's sort of doubled. And you know, each of the US companies have got their own little quirks and everything else. But you know this one, despite the oil price being at a high so dug for 20 per cent of your portfolio into it. But it might be us who look and it is viable through these things. If you like the Russian story generally, then obviously there are Russian ETFs that you can have a look at. Okay, but only looking at those kind of things. What else am I looking at? You know, with the stock market like last year, it's now so bifurcated, you know, in other words, in two directions, it's not funny. So you've got these expensive but high quality mega tech stocks, but we've still got stacks of cheap value stocks, and they're now getting more attention from people. They're either in a cyclical part of the economy that's now going to grow and benefit from price rises. You know, a lot of things for them have been made better by what's gone on. So to give you an idea. Let's look at two or three very special things that might be interesting. One is bio the chemical business in Germany, based on a paper about seven or eight. Just remember when German companies make big acquisitions run for the hills? Yeah, except are worst acquisitions in Europe. In top 10 worst of all time. Yeah, we're Bryce made by German companies. Daimler's merger with Chrysler, which obviously they then unravelled, thankfully later on. And of course, Bayer spent $62 billion on Monsanto and bought itself, you know, bought itself a little thing called Roundup 

Alec: [00:33:35] bought herself a little. 

Andrew Brown: [00:33:38] So it's, you know, it's basically getting it together, it's obviously in an area where basically it does have some pricing power. Okay. And you know, the stock's done nothing much over the past six to nine months. So I think there is well, well, well worth a look. You know, it's again know it's in that sort of, you know, value area, speciality area. I'm looking at some fallen angels in tech 

Alec: [00:34:03] that got Afterpay and Zip. 

Andrew Brown: [00:34:07] No, no, no, no, no, no, no. One of my interesting ideas I've gotten I do have a holding in is Dropbox. Oh, interesting. Dropbox is $9 billion of business market cap Scott Net Cash. Scott Elliott associates on the register, which is generally a good thing. Hello, BHP.

Alec: [00:34:26] Well, Twitter had them tweet us nothing saying

Andrew Brown: [00:34:29] nothing's going to happen. Dropbox is interesting because they've definitely changed tack. Okay. I will acknowledge we can argue all morning long as to whether Dropbox is a viable long term business, and you will both say no and I won't disagree with you. 

Alec: [00:34:42] Yeah. Well, as a business that runs on the free Google Drive, yeah, absolutely. Yeah. 

Andrew Brown: [00:34:47] Yeah. Okay. Dropbox business.

Alec: [00:34:50] But yeah, it can be frightening. Right? Yeah, this is expanding. It's all those video files look like. 

Andrew Brown: [00:34:57] Dropbox has got really expensive over the past couple of years. They've really been hiking prices without pay for, well, people like me, Ren laws because on no longer a customer, Dropbox is one area of my business. I'm in another, but not in the mine area. It's gone elsewhere. Okay, but Dropbox works really well. Is by far and away the best for small and medium business for, you know, these kind of cloud storage archives, your mega business? No, it's not. But what Dropbox start to do and please bear in mind, is about $250 million worth of stock issuance every year to employees. Okay? But the free cash flow is going to go is going to get to around a billion dollars in 2022, including that stock issuance. I think this is a bit of a cheat there, but it's starting to buy back stock at a rate of knots, with Elliot's finger strategically positioned between their shoulder blades to make sure they don't go by. What it means is, you know, the stock is actually relatively cheap. She got a billion dollars, potentially free cash flow on a sort of $9 billion equity company. Yeah, well, that's pretty interesting in that kind of tech space. It is still growing customers, but I will acknowledge it's not the best of the bunch by any means, but well worth a look because they're the kind of things that you start to get when you get a fall out in tech, you actually do get some value. My cookie is stock because I want to. I want to explain that there is such a thing as the best business in the world. Okay. OK. You will think the best business in the world is Apple, Microsoft and Google and things like that. Okay. The best business in the world is none of that is the best business in the world has very few employees, but the best business in the world is a 180 kilometre long toll concession that runs around the city of Toronto. Okay. And it's called it's called ETR for 07. OK, I used to call Highway 407, but then our government business called Highway for us seven. It's the other 50, not 40 odd kilometres of 150 kilometres a link. Okay. Okay. Yeah, I've been to Toronto. There are two things about Toronto. Three Sorry, number one, it shouldn't be in Canada, it should be in the United States. It's just it's an American city that happens to be over the border. Number two, it's got shit. Tons of traffic congestion. And number three, people's obsession with property makes people in Sydney's obsession with property look like a mere interest. 

Alec: [00:37:44] Really? Absolutely.

Andrew Brown: [00:37:45] Okay. Now 84 I seven is owned by three companies or three people. One is Canadian Canada's Public CP IP that's made a number of investments here. They own 50 percent of it. Secondly, a company called Sintra, which Macquarie's have an interest in going back 20 odd years and Macquarie sold part of for 07 to CP IP through the takeover of Intel, which was listed in Australia very fully Ferrovial in Spain and Cintra, and owns 43 percent roughly of the road. So that leaves seven who owns the seven? The seven is owned by a company in Canada called SNC, let alone. If you Google SNC level at all, you will see the five letter word fraud OK because. They were indicted for basically fraudulent contracts by the Canadian government, and the share price got absolutely cratered as a consequence of that in 2019. And these guys used to own 17 percent of each year for 07, and that's sell 10 per cent for $3.2 billion in 2019. Why is ETR for 07 the best business? 

Alec: [00:39:01] This was the question that I wanted to get so simple.

Andrew Brown: [00:39:04] Yes, it's full electronic tolling. It is full variable tolling. So it's variable tolls. So if you go in, there's nobody on it. You don't pay very much. If you go in, there's a lot of people on it. You pay a ton. OK, the average toll is about 50 cents a kilometre and in peak hour between 7:30 and 9:30 in the morning, 

Alec: [00:39:25] 50 cents a kilometre. And it's a 50 km. No, it's 

Andrew Brown: [00:39:29] a hundred and eight long kilometre stretch. Nobody's going to do 108 kilometres on it, I can assure you. Okay. But what it means is it's based in flight and it's inflation proofed. So it's electronic variable tolling that's inflationary is the first electronic variable tolling highway in the world you go. And Macquarie sold it. Sorry, big mistake. Boy, it's big mistake. OK. So SNC Lavallade has got a market cap of five billion Canadian. I think that asset is worth two. They are one of the biggest engineers in nuclear anywhere in North America. And whatever your views on nuclear, I think the fact is it's coming back whether you want it to or not coming back as part of the green move. They are working off some what are called long term lump sum turnkey projects, which in contracting language is a licence to lose money. In other words, it's a fixed, fixed project that's complex. I'm sorry. Fixed price projects complex. They've got three left. They're working guys off. And what they've also got is a really, really good engineering business in the UK. So it's a fascinating it's another one of this sector of companies around the world where the stock market hates construction companies and it hates engineering companies that build stuff. So, you know, we've discussed in the past so we can't hear Lendlease. I'm an owner of on and it's not infrastructure and we don't want to lend lease and engineering. Thank you very much because they're no good at it. OK. But Simic, I'm good at it, and Simic is not half as cheap as its parent, which I do. I mean, she's hot chief in Germany. You know, imagine in this sort of world of dross, you know, there's a Canadian company owns $2 billion worth of the best asset in the world, OK? The shares have jumped from their lows. But you know, they're still ridiculously cheap elsewhere, obviously. I think if you don't have some gold in this environment and not just as a hedge and the best way for me to value coal mining ETF, which I own. 

Alec: [00:41:42] What about digital gold? 

Andrew Brown: [00:41:45] I do believe one of the things I think is really going to happen over the course of 2022 is I believe the crypto world is going to go through some fairly significant upheaval. I think it that is you can hit that as a prediction, and the upheaval is going to mean that bitcoin answer Degrassi or am I going to get moved out of fashion? Okay. Because Bitcoin does nothing. It does zero. 

Alec: [00:42:15] It has not even just a great take it up with and it does. 

Andrew Brown: [00:42:19] Nothing is here and does some things. We know Solana does some more things. And then there's a whole lot of other coins which you can ring me up and tell me about, which do lots and lots of things and will play a role in the metaverse. And they will play a role in distributed ledger technology. They may play a minor role in fintech. I think what's going to happen is in the crypto world. The regulators are starting to come in a world where interest rates are going up, so your speculation is no longer free where too many of the old coins are controlled by whales. These things are oligopolies. You don't come and tell me you love crypto because you rebelling against the world and know you want a new world. That's a nonsense. You know you're not. You're making the rich people even richer. Okay. I urge you to read a piece by Scott Galloway, which is published recently, which called Web3. Yeah, okay. And it's about how many of you think Web3 is wonderful, but it's the same all oligopolies. It's just a new bunch of oligopolies trying to, you know, get rid of the all bunch of oligopolies. Well, if you want to do that, you might as well reinvest in. Russian equities. Think about it. OK. So I think there's going to be a lot of upheaval in crypto, which, you know, will start to play a bit of havoc with speculation. I do think there's going to be a lot more volatility because these moves, this bifurcation in markets is going to create vol. Okay. And so everyone knows I mentioned it 108 times. So he's the 109, which is virtue in America, the only listed liquidity supplier in the world other than flow traders in Amsterdam. It benefits from vol. It's got great tech. It's sort of seen to be doing about six to seven percent of U.S. equity volumes, and it's got nothing in options. And I forget you all know the options with a driver. Last year, which was Citadel, made so much money and citadel, I've just sold a stake in themselves.

Bryce: [00:44:29] Well, Andrew, a few minutes left. 

Alec: [00:44:31] Yeah. Let's come home. 

Bryce: [00:44:32] Yeah, yeah. What do you want to close it out with White Australia? 

Andrew Brown: [00:44:35] I mean, to be quite honest with you, if if I think China is going to be a more interesting environment than certain things in Australia, you're probably going to be okay. So I think, you know, you should have some commodity exposure. Obviously, that's going to be commodity by commodity. So copper, there's very few plays, unfortunately. Iron ore is interesting. I think it's come off the bottom and the stock price is unfortunately very active really aggressively to that. I mean, you could have bought Fortescue at 14 bucks three months ago is now 23, you know, and that's a big rise. My favourite is to Terra. It's a long term income stream, which is the royalty over BHP and I see mining area and their south flank and the growth that comes from that. It's pure royalty is pure price and volume play on iron ore. I think that's the safest way to go, but they'll be trading opportunities. And the other things, obviously, if what I said about gold is right, well, you know, you put your own gold stocks. Banks are interesting as I think the Australian economy is going to be a lot more difficult and people imagine. Don't forget, we've got an election. The election is going to be close. I think there will be a change of government, but they're not going to a majority in the upper house. You know, there's there's lots of people postulating, who do I put last in the Queensland Senate? Because there's going to be there's a whole lot of extreme right wingers that are standing for those Queensland Senate places, and some of them will get in. And so they're going to make life difficult for a labour government. You know, they're going to have to deal with, you know, personalities, you know, and don't love it. There's a chance they might be a few independent MPs in the lower house. I don't think there'll be Hakes. And, you know, people are getting very enthusiastic about it in the wake of Zali Steggall and others. So yeah, it could be. It could be tricky that, you know, Labour win, but the majority in the lower house isn't even that great, and they don't get enough of a House majority. That's not good for the economy. OK. Because we know the Liberal Party are much better at destroying things and building things. Unfortunately, they've demonstrated that it's not a political comment on fact. So Australia could be interesting. And if the economy is is a lot slower and property prices start to come off and they will, 

Alec: [00:46:48] that is a bold prediction. 

Andrew Brown: [00:46:49] The property is 96 per cent of GDP. 

Alec: [00:46:52] Are you saying property prices will be lower? Yes. Right. That that's a bold prediction. 

Andrew Brown: [00:46:58] Yeah, nobody expects it. Should not. If interest rates go and we've got to, you got to say, I mean, the one institution, I mean, you can criticise a lot of institutions in Australia, but the one the the yeah, in all seriousness, you really should criticise the Reserve Bank of Australia. You know, they have lost the plot. You know, they live in a world of their own. And yeah, this this this property debt, this crying out to be equivalent to the size of the economy. That's a problem with rates where they are and prices of property where it is. So there's only really one way that can go. And I think that might, might, might make life difficult for the banks, even though they will get a bit of a respite from interest rates going up. They're going to be other sides of things that are difficult for them. They're going to have to take costs out of their business. The biggest issue for any business in the world is costs. Labour costs are going up, other costs are going up as well on its labour costs, the sticky. And remember the big thing about inflation where I might be wrong. What you don't want to see in inflation and it's starting to happen is inflation expectations rise. People are starting to say, Oh, I want a pay rise. Why are customer bus fares more? You know, this is more that cost more something else, cost more. You know, staff cost more temporarily because of supply chains, but it is still costing a lot more. Two thirds of the way through 2022, then we've got a problem. OK, and Australia is not immune from that. You read the Financial Review, it's it's they're thinking we're immune from all this stuff. Get out of here. We're not. Absolutely not. And Australia's banks, they have to restructure themselves. It's quite clear they're way behind the eight ball. Fintech, apart from CommBank, not too many people are going to have to restructure. So when you look at the top 10 stocks, you've got the three big iron ore miners BHP Rio Fortescue, you've got the five big banks, Napa's Macquarie people. People love valuing Macquarie's trading income at six times earnings, but they only value Virtus Trading Income at 11. Interesting dichotomy. Then you've got Wesfarmers, which is the economy and in CSL with the new acquisition in Woollies after that. So I don't think the Aussie market will be that bad. I just don't see it being that good. And there's a lot of there's a lot of overpriced mid-caps in the middle may be good companies, but they just way too expensive and in a rising interest rate environment, they're really going to have to move. And yeah, their cost base is not going to make it easy. So to be quite frank, you've got to stop picking Australia. I'd rather be on the racial side. Plus selection micro caps. 

Alec: [00:49:33] No, and we've only got two minutes. But there's one thing in your notes that you didn't touch on that were 60 seconds or less. Let's get you two cents. You've got Magellan down. 

Andrew Brown: [00:49:42] Yeah, Magellan is fascinating. You know, with the stock having come back, first thing fund managers going nowhere, I tried on pays between seven and 10. OK. You can go back and look at things like Franklin in the US. A few years ago, they were down up is seven. Okay, so they're an active manager. Okay. So they've got to add value. And obviously they scramble to do that for a variety of reasons. And now they've lost their biggest client. If you go on my Twitter feed, Avalon investor, if you look back and use the search function and put, you know, dollar sign MF Jadot Acts, which is a stock code, I did quite a long spread where I said I get interested about $18. They're not there yet. And sort of 15, I get really interested. I think the people are great. Mm-Hmm. Everybody loves to cut the tall poppy down. And then you know that that's pretty ordinary to see what goes on there. You know, I mean, she's, you know, she's extremely talented. And don't forget he's got Chris. Charisma doesn't work at Magellan, but he's clearly one of the founding people there. He's on the board and he's, you know, he's a mentor. So the reason for picking at 18 to say 15 to 18 Dollars is basically to take the funds under management down to a level, basically a roundabout or below $100 million. Okay. So it's sort of $90 billion at 60 basis points. That's a question mark and their fixed cost base, and you end up basically with about a dollar idea a share banks. Okay. Okay. So ten times the dollar is hiding parks. It's as simple as that. Obviously, there's some calculations and workings to get to the to get to a sustaining earnings number. And these guys do better in bear markets. Yeah, yeah, OK. So when the dust settles and there'll be some more outflows, of course, just fund managers like Dominos when one client goes, is 10 behind them. But once that settles, it could get very, very interesting. 

Bryce: [00:51:46] Well, hopefully they do do better in a bear market, otherwise they're in a lot of trouble. 

Alec: [00:51:49] Well, that's the implicit in that is that you're hoping for a bear market so well, it 

Andrew Brown: [00:51:55] would be interesting to see if they do just finally other other chaps. I actually I Herbalife. It's like, I suggest all of you read John Hampton's letters, which are up on his website in Bronte Capital. I think John, in his own way, is effectively paid the environment the same as me, which is John, a short what he calls crap. And he's long, good companies. 

Alec: [00:52:22] John's always short crap. Yeah, he's always short crap. Well, just one of our whales here at Equity Mates. He said no to us a few times, but one, 

Andrew Brown: [00:52:29] you'll get it, you'll get him on. And he's you know this. This is the kind of environment he does really, really well. And his December numbers show that so whoever lost one of his longs, he's been adding the stock's been been pretty dull for the last couple of years. But you know, again, it's on, you know, p a 10 and it means cash. And I think he's got pricing power. 

Bryce: [00:52:49] There you go. Nice one will, Andrew. We will have to leave it there. But as always, thanks for kicking off the year with us. I've seen plenty of stocks for the audience to go through and have a think about it. 

Andrew Brown: [00:53:00] Please, please, everybody. The big lesson is don't sink narrowly in 2022. You might have been able to in 2020, part of it at least, and certainly in 2021. Do not think narrowly in 2022 because if you do, you'll you'll come a cropper. But the good news is by not sinking narrowly, you're going to learn a lot. 

Alec: [00:53:20] Hmm. Yeah. Some good, bold predictions there will. We've made a note of them and we'll be watching and we'll get you back on and we'll see how we go.

Andrew Brown: [00:53:30] I will look forward to it whenever that may be. Yeah, so that's great. Thanks. Thanks, guys.