Expert Investor: Andrew Brown – Bold Predictions

Bryce Leske: [00:01:27] Welcome to another episode of Equity Mates, our aim is to help you and your investing journey, breaking down the barriers from beginning to dividend. Whether you're an absolute beginner or Warren Buffett, we guarantee Equity Mates. We'll have something for you. My name is Bryce and as always, I'm joined by my Equity Mates Ren. How's it going? [00:01:43][15.7]

Alec Renehan: [00:01:43] I'm very good, Bryce. I would love to ask Warren Buffett to listen to an episode and for him to confirm that it has something for him. [00:01:51][7.8]

Bryce Leske: [00:01:51] Yes, but we have the next best person. If it's not Warren Buffett, [00:01:55][3.9]

Alec Renehan: [00:01:56] Australia's Warren Buffett. [00:01:58][1.3]

Bryce Leske: [00:02:03] No, as is now a tradition for our show. At the beginning of each year, we do our bold predictions for the year and we get Andrew Brown on from 872 Holdings. Andrew, welcome to the show. [00:02:15][12.4]

Andrew Brown: [00:02:16] Thanks very much, guys. Glad to be here. [00:02:17][1.7]

Bryce Leske: [00:02:18] So, as I said, New Year, we've kicked off the Equity Mates season and there's a lot going on, a lot of ground to cover. [00:02:26][8.0]

Andrew Brown: [00:02:28] So let's just have a look at what we did last year, just briefly. So I came on three times last year, 30th of June, 7th of May and 8th of October. But who's counting? 30TH of June was this episode last year. So bold predictions. I said the market would go down and it certainly did. It peaked on the 19th of February. Yeah. And certainly, for Australia, that was the peak. We haven't reclaimed that in the US. Of course, we went down 38 percent and then obviously bounced from the lows of the twenty third of March. So I said to be a correction. I said buy gold. That's worked out reasonably well through obviously period. But we didn't really foresee. I said there would be lots and lots of volatility. Well, it's been above 20 per cent on the VIX, pretty much the whole way through with the odd spike. And I said the Roosters would win the NRL comp and I didn't. On the 7th of May, we talked a lot about election risk and I made gave some stock ideas. There are a couple of still gestating there. Sydney Airport and Treasury Wine Estates. I'm going to return to one of those. I gave you a lake that has nearly doubled, which was on long, short fund ESF, which is on the basis the NCI would grow because of the portfolio and the discount would closed. And that's happened. We continue to reiterate baby bunting for you millennial's with kids. So that's 280 to 530. And also at the other end of the scale, we gave you that perennial dog, Boral, and said things are changing. Well, I have. The stock's gone from 278 to five dollars. Wow. So that was good out of October, whereas I think, you know, from a stock point of view is the most fortunate one of all. If you were listening, if you miss that tough, we said that Biden would be good for the stock market, much better than Trump when that was a very known consensus view. I think that's now right. Softbank had 7000 yen there, 8600 exon, 34, 50 there, 47. So that's a big move. Vicinity Sensis, forty to 154 and a dividend. And the best one of the lot, of course, was unipolarity Westfield, which gave you a short squeeze par excellence, which of course is the topic du 271 to well over five dollars, or about 460 at the moment. So it's 66 per cent and the market's up ten since then. To give you an idea. [00:04:57][149.0]

Bryce Leske: [00:04:58] I remember listening to that episode and then just watching Westfield, just that was my go for it. And that's just me sitting there. [00:05:05][7.5]

Andrew Brown: [00:05:06] And my favorite moment of the year, I think was the 9th of November. I know. To be forgotten. So there you go. [00:05:11][5.6]

Alec Renehan: [00:05:12] There you go. So also this year, we introduced it with Australia's Warren Buffett and Andrew's just delivered. But the guy is still on the table looking for a little bit more short term, the buffet [00:05:23][10.9]

Andrew Brown: [00:05:24] that I have been negative on being pale. So, of course, that's obliterated all of the profits. [00:05:28][4.7]

Alec Renehan: [00:05:32] And historically, you've been negative on Teszler as well. I don't know where you feel. Sit on that now. [00:05:37][5.8]

Andrew Brown: [00:05:38] Oh, it's one of the great bubbles of all time. Still, I did a presentation at a 72 AGM. There's two slides on our presentation there about Tesla. People forget this. Two hundred and fifty six million shares which are not counted in the share count, which restricted stock units options, Musk's package that will get exercised and everything else. So there's actually a trillion dollar valuation on Tesla. OK, you have to wait for the stock to get to things. 2064 is where it would theoretically trigger on the undelete it. So trillion dollar valuation already the enterprise value is over a trillion dollars, as has been proven. And again in the fourth quarter result, they basically make money from selling green credits to other people and of their main buys is now called. The Lantis, it's Fiete and Pergo emerged. The growth in delivery's, it's got to be huge this year and yet is very clear in some key markets. The competition's doing pretty damn well, especially in Europe. So. And how many Eevee manufacturers are there in China? Mm. Nearly as many as people. So I think I mean, you know, it is, it is one of the great bubbles of all time. Does it have a role. Yes. Is the valuation sensible. Not in your life. Crazy. Wow. [00:06:57][79.1]

Bryce Leske: [00:06:58] If you haven't caught the bull versus bear case on the Equity Mates TV show on Hospers Dotcom today, you with Andrew and Aniba and McHattie go and check it out. It'll be on our YouTube channel or on there or in the Ausbiz.com.au. So 2021. Yeah, crazy things going on already. [00:07:19][20.2]

Andrew Brown: [00:07:19] Yes, Last four years of January have been nuts by the way, 2018 in January the S&P 500 is up six per cent. In 2019 it went up eight per cent at one stage before it fell apart. 20-20 last year, you might remember, it went sort of he went mad, then flattened. And then, of course, we felt a bit since starting from the mid February and 2021, we've had just volatility plus not not so much in the overall market. Yes. And plans about flat on the year now. But what you've seen is you've seen all these crazy surges in lunatic things, whether it's Bitcoin and GameStop and obviously some of these short things. Yeah. And that's creating all kinds of all kinds of things. It looks like people go away, you know, come back after Christmas and, you know, sort of injected themselves with some silly things. [00:08:12][52.6]

Alec Renehan: [00:08:12] Now there are a few things that we're going to want to talk about. But I think before we get your first bold prediction, we should just ground when we're recording this episode because things like GameStop probably will change so much between when we record and when we released. So Thursday, the 28th of January, is when Andrew is making those predictions. So who knows if he predicts GameStop will half in value, that might have already happened by the time we release this episode. Yes. All right. So shall we get stuck into it? What's your first bold prediction for twenty twenty one? [00:08:46][33.7]

Andrew Brown: [00:08:46] Oh, my real prediction is that usually, politics don't have a role to play in long-term equity returns. OK, unless the politicians change the way that equities are taxed or they change something as Peter Costello did in 2007, which enables you to put a lot more money into equities in an effective way. But I'm sorry to say, I think politics, believe it or not, despite the demise of Trump, politics will play more of a role in 2021 across the board in investing than they did in 2020, which sounds absurd. But let me explain why. I think there are three key reasons why that's going to be the case. The first I am going to flesh out, but not straight away is economic interference. OK, the second is China and the third is covid incompetence. Let's deal with the third first because it does flow into other things. It's abundantly clear that politicians outside of Australasia and Vietnam have been largely incompetent, dealing with covered by it, recognizing it, by taking measures to lock down and stop the damn stuff spreading in a big way and killing people. And now, thirdly, of course, their incompetence is showing in terms of actually vaccinating the population at a rate that they thought they could and at a rate that the stock market thought they could. OK, this ain't happening unless you're in Israel, in which case it's happening in droves. But the vaccination rate is just way below what people were imagining. It's going to take time for that to actually happen. And so all those people who've rushed into things that are going to benefit from a reopening of the economy are going to find that they might be six months too early. That's going to be an issue. The psychological damage of covid, I think, is yet to be seen. The obvious way is we're all talking about how we go to work two days a week and work at home three and all that sort of stuff. What's the psychological damage in terms of travel? OK, if I free up travel and I suggest you can leave Australia. Do you want to go to Britain? do you wanna go US? [00:11:04][137.5]

Alec Renehan: [00:11:04] Got to Vietnam. [00:11:04][0.2]

Andrew Brown: [00:11:05] Yeah, yeah, please. I do. Yeah, because it's largely free of the stuff to, you know, it'll cost 20000 dollars to fly to Auckland, you know, because everybody wants to go. So the psychological thing of that's going to be really big. Let's dig in a bit, guys, into what I call economic interference. And this really comes in in two places. The first is that we have enormous amounts of fiscal stimulus right across the world and Australia is not immune from that. And so what that's done is it's put money in people's pockets that they don't have to pay back, but they haven't really earned and they've gone out. And by and large, they've spent it [00:11:48][43.0]

Alec Renehan: [00:11:49] spent it on retail. Given some of the recent results in [00:11:52][3.2]

Andrew Brown: [00:11:53] Australia job, there's no question it's been spent on retail. OK, I have some cautionary notes there, which we'll do as we get to Australia in a few minutes. Okay. But the economic interference in the US is such that base on the US GDP, US debt is now 120 percent of GDP. That's what now you can DBAs that by printing money. OK, let's make that clear. That's you know, the new monetary theory if you will. I mean, t. Okay, so you can do basically if you do that, you're going to get inflation. OK, so the way the government extracts themselves from you and the economy is going to be really difficult. And of course, it's coming at a time when Joe Biden saying, I don't want to I want to put more money in your pocket and I want, you know, a bit more equality in the economy. And the government's going to play a role here. Now, what's intriguing is everybody says, well, that's going to mean the economy in the US is going to boom. That's not happening right now. I keep seeing all these universally bullish forecasts about the US economy, and I can only say I think they're going to be disappointed because covid lingering longer. There's more. Lockdown's lingering longer. Don't forget, there weren't many lockdown's in the U.S., but there are now. [00:13:11][78.5]

Alec Renehan: [00:13:12] Let me just interrupt there and give the counterargument. If we don't say inflation, which we haven't really, there are some whispers of it coming through. But let's say let's hold inflation constant. The US putting more money in consumers pockets rather than just buying bonds will stimulate consumer demand. And it will that that will have a stimulatory effect. [00:13:36][24.2]

Andrew Brown: [00:13:36] That will have a stimulatory effect. The biggest conundrum I have and the biggest conundrum, every person looking at the stock market from a macro point of view, okay. Rather than just bottom up stocks has at the moment is inflation. If you look at the US bond market, the yield on a 10 year bond roughly is one percent in the U.S. I have something called tips, which are Treasury, Treasury, inflation protected securities. They provide you a coupon plus the inflation rate. OK, so your capital, your coupon is protected against inflation. If you take the yield on a nominal long bond, which is one, and you deduct from that the yield on a TIPS security, which at the moment is minus one. So one minus, minus one is two that gives you the implied inflation rate over the next 10 years per annum. OK, you can find all this stuff on the best economic website in the world, which is the Federal Reserve Board of St. Louise, frayed economic stats. OK, I go to that. Anything you want. The five year, by the way, is about two point one five per cent per annum. So the bond market is telling you we're going to have two percent inflation. To give you an idea, in March, that same indicator was at zero point five. OK, so there's been a massive shift in nine months now. Every time those tips indicate or nominal minus tips indicate two per cent inflation. That's where it ends every time in the last few years that's been about the top of it and everybody stops panicking and they go back and it sort of slips away again to indicating one and a bit. So at the moment, we're sort of at the ceiling, if you will, of where people's expectations on inflation are. If we break through that ceiling and in reality we get real consumer price inflation. And don't forget, the Fed are talking about inflation. They want inflation, the average two per. So that means it can be above two. What if it gets to three? What if the bond market really panics and yields really jump like from one to four? What do you think's going to happen to the stock market? Just remember, in December 2018, in the last quarter of that year, the stock market fell 20 per cent because the bond rate got a two and a half. Okay, the market is so primed with low, low, low interest rates and it can't really cope with even some modest rises in bond rates. So that's why people keep talking about something called yield curve control, which means basically using the Fed to keep the yield on 10 year bonds down. OK, so we're going to have more and more of this interference. Now, if I'm telling you at the moment, you know, it's really balanced. It's a seesaw between does inflation really start to break out or does it subside again? And we can spend all day talking about the pros and cons of that. Keep your eye on that, because that is what's going to determine whether there's a bit of a shakeout in the stock market and then it turns from a shakeout into something really nasty or things to settle down again. And you can you know, you can buy the dip and that's what's going to determine it. There's a lot of very smart people think this time that said, OK, I will give you some thoughts in a minute on why I am far more cautious than I even was at this time last year. And I was pretty cautious last year. And to my Twitter follower who says to me, Andrew, are you ever optimistic? Yes, occasionally. But not in circumstances like this or explain the second bit of politics is China. China must be kicking themselves, OK, because they had four years to work out that Trump was a moron, wouldn't do anything against them whatsoever, and they only used it to get Hong Kong back. And towards the end, use it to get one of Australia's large sorry, China's largest corporations into their spider web Alibaba. OK, the next play is Taiwan. Are they bold enough to make some sort of play? With Taiwan to try and get Taiwan back, you know, create an incident out of nothing. [00:18:24][287.4]

Alec Renehan: [00:18:25] I have strong feelings on this, but this isn't a political podcast, so I'm not going to divulge too far into it. I could just say Price's eyes boring into me or not. [00:18:32][7.9]

Andrew Brown: [00:18:33] It's not this is not you know, it doesn't matter what I think about China and Taiwan. It is a question of what if China made a bit of a more aggressive move on Taiwan? Would that be good for equity markets around the world? I'd be cool. [00:18:46][13.3]

Alec Renehan: [00:18:47] I just don't think I think the US security guarantee over Taiwan will protect them because if they don't guarantee Taiwan security, that puts the question in Japan's mind in South Korea's mind. And Australia absolutely [00:18:57][10.5]

Andrew Brown: [00:18:58] does. I don't disagree with you. You know, we're not here to discuss China, Chinese, Taiwanese politics. But it's pretty likely, I would have thought, given the way that China being relatively belligerent and there's been very little opposition to them, they've just bowled over things. There's been nothing there. So they're going to test out Biden and his administration. Okay. You know, Biden is quite hawkish about China, don't forget. So there will be tension with China again, but in a different way. It's not going to be in 280 characters, okay? It's going to be in a very different way. But that's going to rankle markets from time to time as well. So you got three political things, which is economic interference, which has the capability of mistakes, OK? Has real capability of mistakes, and if you think we're going to end up with zero interest rates for everyone. I think, again, we're not OK and it's got implications, China and covid. So politics is going to play a role and it's going to create volatility. I think the one common factor between 2020 and 2021 is going to be markets are going to stay volatile. OK. Whether, you know, whether it's up or down. And I think the chance of dislocations in markets are very real. So the chance of, you know, 15 to 20 per cent downturn in the market, not necessarily in, you know, a few days like we had in March last year. But the chance of real dislocation in the market is, I think, pretty real. Let me maybe just put that out a little bit, OK? Why? Well, the simple fact is that we've got group think. Everybody's on one side of the seesaw, OK, so everybody's all in already. OK, why how do we know that everybody's all in? What do you think the short position in Apple is? [00:20:47][109.2]

Alec Renehan: [00:20:49] Not a lot, not a lot of points, five [00:20:51][1.8]

Andrew Brown: [00:20:52] point five of one percent, the short position in the CP Y, which is the S&P 500 ETF, it's the lowest it's been in a decade. Wow. It's two percent. And the meet the short position in the median stock in the US is one and a half percent. Wow. Okay, so the shorts, this is don't forget, this is pre-GameStop. OK, I'll explain what GameStop did in a minute because it has actually taken a lot of other short positions out of the market because people have run for protection. Yeah, I have I have one short position that is not particularly big, but I do have a short position. And it's one where about 17 per cent of the stock is short. So it's quite high. I don't usually go into things where it's that portion of the capital are short and yeah, that's that stocks you don't put on sort of 30 per cent in a week. Okay. Even though, you know, it's a company that's got fraudulent disclosure and it's actually got a dodgy product and everything else, which means I can't tell you what it is. [00:21:59][66.7]

Alec Renehan: [00:21:59] I'm just saying let's keep on the broader picture. [00:22:02][3.2]

Andrew Brown: [00:22:04] So not the broader picture is basically the short positions are right down. Okay, so that tells you everybody's all in. How else do you know what is all then? I've got a bit of paper in front of me here, which is the predictions for the S&P 500 for the end of the year from 15 leading Wall Street strategists. [00:22:20][16.7]

Bryce Leske: [00:22:23] All up. [00:22:23][0.3]

Andrew Brown: [00:22:24] All up. Yeah, okay. They've all got EPS growth EPS for the S&P 500 for 2020, which is obviously covid impacted is about 138. They've all got EPS. The lowest EPS here is one six five. And Binkie Chadda from Deutsche Bank has 194 binkie. Whatever you are smoking, I want some of it. You are kidding. All right. [00:22:53][29.0]

Alec Renehan: [00:22:54] I'm here for the Andrew Brown binkie. [00:22:55][1.4]

Andrew Brown: [00:22:56] Absolutely, sir. And it means that you have a p e basically of about 23 for the end of 2021. So we've got massive earnings growth captured by everybody. Okay. The main is about one six nine for the S&P. And and in calendar 22, we're up to 197. Okay. And when the economy was functioning really reasonably in calendar nineteen with a twenty three percent tax rate in the US, the EPS was one-six-three. Does that make sense? No, it does not. It doesn't even with an S&P that he's 25 percent made up of. The big the big six. [00:23:39][43.5]

Alec Renehan: [00:23:40] Yeah, yeah. Now, again, I don't want to just keep being the contrarian guy, but I'm going to be the sum of the earnings that we've seen out of the US so far have been pleasing. Yes. They're beating expectations. Yes. Does that not fly in the face of your criticism of the Wall Street banks? [00:24:01][21.2]

Andrew Brown: [00:24:01] Because they are expectations that were dragged down and down and down and then have been refined up slightly because of covid? OK, these guys are looking at a much and girls are looking at a much more normal, although I think a much more normal economy in calendar 21, I'm not sure is going to be quite as normal as they think. And we know over the years, on average, Wall Street strategists are about 10 per cent too optimistic in their earnings. OK, in fact, go back, look at it, look at FactSet, for example. OK, this time they're way too optimistic, in my opinion, at 23 times earnings in my opinion. And we've got interest rates that are extraordinarily low, which would be difficult to get any lower to make equities, you know, more attractive. So it says to me, everybody's Olean, there's not a lot of short positions, forget GameStop. There are no more short positions in the general market and there's even less actually have. Game store strategists are universally bullish. OK, you've seen the turn in the stocks that are basically economically sensitive. You know, they've rebounded quite nicely and everybody says, wow, this is great. You know, we're all going to be traveling. And then over the last little while, all of a sudden the vaccine is not distributed properly. There are not as many doses as people thought we're going to need to do more. Things are. And so I think the group think that we now have is actually going to get placed under much greater pressure, but then if that's the case and if the economy is not as strong as I think, then is inflation going to really be two percent? This is the real conundrum. So you must must must keep an eye on bond rates and in the US and you must must must keep an eye on US inflation indicators. [00:25:52][111.2]

Bryce Leske: [00:25:53] Before we move on, we're just going to take a quick break and hear from our sponsors. When you are all about getting fit, you've bought the garment, you bought the golf membership, you bought the gym membership, and you're on the mind MasterChef. And even in lockdown last year, you bought those resistance bands of Instagram that from memory didn't even come. [00:26:12][18.8]

Alec Renehan: [00:26:13] No, look, they didn't come. But all of that effort really was canceled out by the numerous menu log orders that were a real staple of my lockdown experience. [00:26:23][9.5]

Bryce Leske: [00:26:24] Well, we've just headed into a new financial year, so I think it's time you get money to fit with Virgin Money, our latest sponsor. [00:26:31][7.0]

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Alec Renehan: [00:26:54] Yeah, the FBI. Twenty one gets renfe. It didn't quite work, but if my 20 to get reward money it might be to go [00:27:02][8.4]

Bryce Leske: [00:27:03] back to your own bait. Virgin money terms and conditions and monthly criteria apply. Now let's get back to the show. [00:27:09][5.7]

Alec Renehan: [00:27:11] I mean, the way you could say it playing out is if the market is weak and the economy is weak, as you were saying, and then where does inflation come from? Well, potentially, it goes back to your second point around economic interference, like absolute direct stimulus checks combined with a 15 dollar minimum wage. Yeah, well, could be inflationary. And absolutely. [00:27:29][18.5]

Andrew Brown: [00:27:30] What you don't want to see is the economy not being very strong and inflation that's called stagflation you saw in the 1970s. What's not horrible for stock markets is death. [00:27:42][11.9]

Alec Renehan: [00:27:43] Yeah, well. And then what? Interest rates have to. Yeah. [00:27:46][2.8]

Andrew Brown: [00:27:47] Interest rates go on in the market. Don't forget, if interest rates start moving up in bond markets, you're talking about interest rates moving up in markets with all economies saddled with certain government debt, which I accept you can melt away, and in certain economies with consumer debt, which you can't. So what I'm telling you is the bold prediction is that politics will play a big role. Number one. Number two, that will continue to result in quite high volatility in equity markets. That's not going away. Will have a dislocation. Yeah. At some stage during the year. [00:28:25][38.0]

Alec Renehan: [00:28:25] So that was a big discussion about the US. And there's an obvious reason why we talk about the US because market sort of leads the world in Australia. Do you think a lot of these predictions will hold true, funnily enough? [00:28:39][13.6]

Andrew Brown: [00:28:39] No, we are. I mean, this is a fact of life is I mean, we are seriously in a bubble, you know, I mean, some of the things I've said about, you know, covid incompetence clearly don't reside here [00:28:50][11.1]

Alec Renehan: [00:28:52] In this case when you say we're in a bubble. You mean like a geographic bubble, like a good [00:28:55][3.7]

Andrew Brown: [00:28:57] a good bubble. We do have some of the same issues. Okay, so but my next bold prediction is and I think this is I think you can virtually back this with with 100 percent certainty is there will be a federal election this year. [00:29:11][14.6]

Alec Renehan: [00:29:12] Yeah, I've been thinking the same thing. There will be [00:29:15][3.2]

Andrew Brown: [00:29:16] a federal election this year simply because the longer this government goes towards the May 22 deadline, which is when they have to go, the longer they go, the probability of them winning and winning well, reduces [00:29:31][15.5]

Alec Renehan: [00:29:33] the probability of Albar actually getting in front of a camera and saying something increases. [00:29:37][4.3]

Andrew Brown: [00:29:38] I'm sure the Wiggles are working on a new song, Wake Up Albar, you know, because, look, it's difficult. I mean, you know, it being serious, it's very hard as an opposition leader to land blows when you're looking at, let's call it a wartime. But this ostensibly, that's what it is. So it's very hard to incumbencies huge at the moment, which is why, you know, if the Liberal Party are sensible, they'll go fairly early. So you might be looking at a mid-year election. So that's the bold prediction. Now, the obvious bold prediction from that is that the liberals will win hands down. OK, what if they didn't? Don't forget, the labor will win Western Australia when that election is they won Victoria, they won Queensland in a landslide. They won by one of my favorite place in Australia, the ACTU, with the increased majority. [00:30:36][57.5]

Alec Renehan: [00:30:36] I feel like the ACTU isn't really a battleground territory, though. [00:30:39][3.1]

Andrew Brown: [00:30:41] It's a it's a battle if you're a liberal in the ICC, that's for sure. It's a bit like being Trump in DC. Yeah. Um, so, I mean, the interesting thing will be, will that cause any ructions here? You know, markets don't like elections because they're uncertain. People get uncertain. I think the consensus of Morrison winning with an increased majority is pretty reasonable, to be frank simply. And that's not a political statement by me. It's a simple fact of political analysis that incumbency in a situation like we've had works really well, but it will maybe shake markets around a little bit. So we'll have, you know, a little bit of an issue there. The other issue is economic interference in Australia means job keeper. It's been monstrously successful. I would argue it's been perhaps too successful. I don't oppose it. I think it's brilliant. I think it's been a bit too successful. And as you start to pull it away, you must be so, so careful analyzing earnings, looking backwards. So we're having some super retail retail earnings at the moment, even from companies you thought were dead. You know, all of a sudden and don't forget, they come in two or three bits, job paperworks works on their revenue line because people are spending the money. But Job Keep comes in on their cost line as well. It's taking costs out of their business. And also, obviously, the landlords are taking a hit, which is damn right, too. It's about time they did. So that's really helping. So be careful. Don't pick don't put too big a multiple on those kind of things. The impacts have been spectacular. Yeah. Even to really well managed retail companies. I mean, just have a look at the results. JB Hi-Fi, I think for the first six months and I mean, they're a spectacularly well-run company, you know, let alone the guys who've scrambled a bit beforehand. So I'd be really careful about retail stocks in Australia. Don't look at the numbers now. Don't capitalize the numbers now going forward too far because you'll end up making some mistakes and they'll fall in a hole at some stage. I think our economy's going to go through a tougher period of time, quite frankly. [00:32:47][126.0]

Bryce Leske: [00:32:48] But we don't we if you're calling an early election, will that not be a reason for the government to slow down the one back? [00:32:55][7.0]

Andrew Brown: [00:32:56] I don't think it'll slow it down that much because I think they'll be able to rest on their record, if you will. And they need to catch labor while Labor are having a debate about how should labor look going forward and going I mean, you know if I was Morrison, you know, I interrupt this podcast and say, [00:33:15][18.9]

Alec Renehan: [00:33:16] well, if he wants to call the election on this podcast, there's [00:33:19][2.3]

Andrew Brown: [00:33:19] also. So I think that will create some issues. And again, I tend to think what we'll see is I think, you know, our market may struggle a little bit. It's fixed. It's expensive. You know, the industrial side, the market's 30 times earnings. Yeah. You look at, you know, companies like you know it. You know, when Wesfarmers spat out Coles, you know, to envisage that Wesfarmers stock would be back in the mid 50s, [00:33:42][23.6]

Alec Renehan: [00:33:43] it's crazy. [00:33:43][0.2]

Andrew Brown: [00:33:44] I know, it's crazy. I mean, sure, they've got a couple you know, they've got two or three businesses and a massive beneficiaries of what's going on. But, wow, you know, the stock market's capitalizing that well into the future. And that's sort of a bit, you know, to me, that's doesn't make too much sense. So I think we're going to go through a bit of a rocky period here in the stock market for the simple reason the US, I think we'll have a dislocation at some stage. The US may well end up back where it is. You know, it may just dislocate at some stage and then rebound as some of the things I've spoken about maybe start to resolve themselves towards the second half of the year. We might see the same thing in Australia. I'm not that negative about the overall index in Australia. Because you got four banks that are not that expensive and have not been hit as hard as we might have thought. You've got three major mining companies that are dependent on the Chinese economy keeping firing. But the iron ore price is so far above any long term norm that they're just making super profits right now. Then you got Wesfarmers, you know, your sort of Woolies, you know, things, things like that. So the major it's hard to create a ridiculous bear scenario for loss of the top 10 stocks in Australia. So I can see them coming down, you know, 15 percent or so like that in line. But they're all kicking along reasonably well. And so it's hard to see a really nasty scenario for the Aussie market. I can see a worse one for the US market. But don't forget, we didn't go up as much because you're talking about unwinding tech valuations. [00:35:23][99.0]

Alec Renehan: [00:35:24] Yeah. [00:35:24][0.0]

Andrew Brown: [00:35:25] A bit too high, to be blunt, not notwithstanding the great companies. So I'm not as negative about the Australian market as an index level, but I'd be very wary about chasing retailers and things of that nature at this particular stage. The one thing I think the other bold prediction is one of the aspects of 20/20 was it was a stock picking market quite clearly, and I think 20 trading was going over some genuine, positive, bold prediction. I think we're going to have a lot of takeovers. Yeah, yeah. Why think about what we've just said. I've said we're on a knife edge between, you know. Two percent inflation in the US. Does it really come through or does it not come through? OK, if you're going to do a takeover, that's debt funded. Or partly funded. Get on your bike quick, [00:36:21][55.8]

Alec Renehan: [00:36:22] this isn't the other side, if you going to do it, like if you're going to issue shares with these crazy valuations, it's the right time to do that. So on either side of the ledger, it's either [00:36:31][9.7]

Andrew Brown: [00:36:32] side of the ledger. If you've got if you've got stock arbitrage, if I can put it stock valuation arbitrage in your favor, do it. I'll give you a great example that's happened, which I've been a beneficiary of and I'm spewing about. I was lucky shareholder in a company called Explore Wealth. The Stockades EXPL it received a takeover bid from Hobb in November 2014, saw the takeover bid was a 202 per cent premium to the prior close when the stock was seven and a half and and the bids at twenty. Okay, but the biggest part, cash, part scrip. Or you can choose all scrip or all cash, but there's limits on that. Hupp trades at seven and a half per cent of its funds under administration on its platform. Okay, so it's sort of a billion light company. Explore wealth. When the bid came, Explore Wealth was capitalized at 15 million dollars and had 15 billion on its platforms, citing the arithmetic and get the decimal point in the right place. That's zero point one per cent of funds under administration. So that's a 70 times valuation arbitrage on that metric, so if you have a and I'll issue more and more scrip. So you're saying things like that. And in fact, what you've seen is a lot of takeover activity. There are virtually no listed financial platforms that have all been taken over in six months. Parratt, one view. Obviously, explore wealth is gone. There's there's a couple still around premium mainstream, so which you won't find a small cap fund that doesn't own mainstream and they just waiting, waiting, waiting, waiting. [00:38:21][109.7]

Alec Renehan: [00:38:22] So what is the theory that they'll just get taken over by the bigger player? Because then the market values that funds under management, that more [00:38:27][5.5]

Andrew Brown: [00:38:28] funds under administration. [00:38:28][0.6]

Alec Renehan: [00:38:29] Funds under administration. [00:38:29][0.0]

Andrew Brown: [00:38:30] And don't forget a lot of this, not supposedly for mainstream, but a lot of this has been caused by the demise of AMP and the demise to a degree of I life and so directly from the Hayden report. So the new players, the Hub 24, calls the net wealth and others are just gobbling up things so. If there's a lesson from that which you guys have a slightly younger vintage than me know full well, when things move, they move real quick. Even in corporate land, they move really, really quick. And if you don't move, you just get left behind. So, yeah, that's not changing. And the reason that's not changing is because, you know, everything's migrating technologically up into the cloud and everything else. So tech really does work and tech speeds things up into hyperspeed so that he's going to continue, I think, with takeover's ALEC has quite reasonably said if you got cheap debt and for the company, cheap equity for the investor, expensive equity, you know, get out there and print it now while you can, particularly if there are some companies that are struggling in the mud. Hmm. Yeah, I will give you three companies that I think will be under threat of takeover in 2020. [00:39:50][79.3]

Bryce Leske: [00:39:50] I've got one that is my bold prediction. [00:39:53][2.9]

Bryce Leske: [00:39:54] Right. I'll tell you. Yeah. So you can't I mean, what are they. [00:39:57][2.8]

Andrew Brown: [00:39:57] What are they. Yeah. Let's let's get this get stock specific now and actually explain in that environment. Okay. So we've captured the environment. Okay. So in a sense it's going to be a bit like 2020, a lot of political interference, some dislocations, a lot of volatility. Okay, so how do you apply in that kind of environment? How am I playing in that kind of environment? Just to preface some of the stocks and talk about the kind of portfolio I have at the moment. I have short positions in fat stocks. OK, I have to I have very small shorts in a large number of FADH stocks. Okay, so some I'm going to get wrong, you know, I don't you know, I'm I get stopped out because the positions are small, but, you know, [00:40:42][44.5]

Alec Renehan: [00:40:42] and so just when you're saying fact stocks just you're not that's not an acronym. That's just like the fact that you didn't stop that slide. [00:40:49][7.1]

Andrew Brown: [00:40:50] Not GameStop, not the one thing I'm very careful about is what is the short interest as a percentage of the outstanding capital. Okay, so, you know, I at the moment, it's come down a fair bit. The short interest, only about seven percent of the capital. But, you know, I can't see my surviving seriously in the long term. But when there was 17 percent of the stock was still small, shorts wouldn't play. And that was absolutely the right thing because, of course, you know, the stock bottomed at twelve and he's, you know, been the fifty. So and that's got yeah. I you know, the guys are doing a better job, but, you know, it still doesn't it's not going to diffuse the long term. So I've got a lot of, you know, a lot of sass stocks in the US, you know, that had just priced at crazy numbers that assume perfection in execution of a business model at hyper growth rates. OK, so it's just it's all about saying, hey, what's the market assuming? And it's assuming 30 to 40 percent growth out till, you know, till I've got great grandkids and, you know, that's not reasonable. Okay. And so it's price for that. So I've got a whole bunch of things that say some of these are going to fall over and not make it others. I've got, you know, fat. I mean, what one I'm happy to discuss. I have a short opinion, which is which is a pet insurer in the US that tries it about 14 times book value. Every other insurer I look at trades at one and a bit. Wow. And it's basically I outlined in our presentation, you know, what the valuation lunacy around this thing really was. So we just got to wait for results to prove the case. So that's one side of my portfolio. On the other side of my portfolio, I have five stocks that are controlled by billionaires. Which try to about a 50 per cent discount to an Ivy. Not 10 or 20, 50. OK, those stocks are XOR, Italy Intel Corporation, based in Toronto and Canada, which is just basically a stock portfolio with an insurer, AXA is is the controller of Atlantis, Ferrari, C and H and has a reinsurance business called Partner Re, which is very valuable in the current environment. The third one is a company in Norway called Treasure, which is controlled by the Villazon family. Bit of a problem with the victims and family and get on with each other at the moment. [00:43:21][150.7]

Alec Renehan: [00:43:23] Is that why it's at a discount? [00:43:24][0.8]

Andrew Brown: [00:43:24] Well, Irania, it's only got one asset enhanced Iran's 11 per cent of founded Glavis, which is the world's largest, largest car carrying boat company. And when you take the high end, like Livas, share price actually discounts more than 50 percent. Well, and a company in the US called Violi, which basically is a four companies interconnecting thing where there's a six per cent free float. And the main asset is Cronos, which is the world's third largest manufacturer of titanium dioxide. That's the white stuff that goes in your paint. OK, and the final one is a company called Hallatt Trust. HGL Trust stands effectively for Holland Australia. Sorry, Holland America Line says the old cruise company that got sold to Carnival. It's the van of ORMs in Holland. They are extraordinarily secretive. They run a whole bunch of companies. They are the main shareholder in Grand Vision, which is an optical business which is being sold to Luxottica, and then they have a major dredging company as well. There are fascinating but extremely secretive family and you have to do a fair bit of homework to get to the numbers. But it's it's fascinating. And they're about to get a five billion dollar injection of cash from the sale of their grand vision stake. Wow. So they monitor all these things are monstrously cheap. If you're a GameStop player, they are also monstrously boring. [00:45:03][98.2]

Alec Renehan: [00:45:04] So you've spent your summer studying a reclusive European billionaires. [00:45:08][4.3]

Andrew Brown: [00:45:10] I guess I have spent part of it studying reclusive European billionaires. Yeah. The others I knew about. So they really so that's that's a barbell. I will give you some more conventional [00:45:18][8.1]

Alec Renehan: [00:45:19] before we move on. I think a lot of people would be interested. You spoke about a Dutch stock, an Italian stock, you know, stocks from around the world, but not markets that we often speak about. That's right. What's your process for discovering that stock, those stocks? Because you obviously have a lot of detail and understand what assets they hold. But at a high level, where do you start that process? [00:45:41][21.8]

Andrew Brown: [00:45:41] I start that process with a lot of reading. You know, people say you've got to do company visits. Well, you know, if I rang, the vendor warms up. You know, they send someone around to make sure I didn't. You've got to just read and read and read and then something picture interest because it's your kind of company. It's your kind of way of looking at things. Mine, obviously, I love deep discount places. That's obvious. And like no one is not everybody does. And so I then have to do the really hard analytical work. And yeah, in the case of Hallah involves quite a bit of accounting work. It involves delving around. It involves getting some other filings. It involves going back in history to discover when they bought various of the private businesses and just going back in and building out some models as to, you know, what these things are happening and what they might really be worth. [00:46:29][48.0]

Alec Renehan: [00:46:30] But if we if we stick at a high level, when you say writing like where are you writing about the history close of your brain billion look everywhere. [00:46:37][7.1]

Andrew Brown: [00:46:38] Basically, you know, market releases, hedge fund letters, obviously, you know, Bloomberg business mags, everything, just just everywhere. I can get information. And it's a matter, as you all know, and you're probably better at it than I am. It's a matter of how do you distill that down. So, I mean, one of the key things, one of the big advice I'd give any of your listeners is you will have an investment process of your own. It might be that you love hypergrowth companies and you're really good at analyzing them. OK, stick to that. Don't come and listen to me talking about 50 per cent discount. Twenty eight, because you go wrong. Okay, likewise, if I go into a hyper growth area, I might go wrong. [00:47:26][48.7]

Alec Renehan: [00:47:27] I think you know... [00:47:27][0.5]

Andrew Brown: [00:47:28] when I go into it, when I do occasionally go into it on the long side, it usually works. But so it's stick to something that, you know, that's good. You've got a process for doing it. And if that works for you, stick with it. The key thing is stick with it, have the discipline, don't deviate. Okay, because there's lots and lots of different ways, particularly in markets like this and with the market access you. Globally now through one platform or other to, you know, to to figure things out. All right, let's go to some Aussie stocks then, shall we? Let's do it. Let's do it. Okay. I'm going to repeat two things that I repeated this time that I said this time last year. One is, I think, bold prediction. We will have a bank merger. [00:48:09][41.4]

Alec Renehan: [00:48:10] I did remember that one from last year. [00:48:13][2.9]

Andrew Brown: [00:48:13] It's not going to be in the big four. But the interesting thing that makes it more likely now is that any bank is up for sale from its not-for-profit fund shareholders. So that's going to interest somebody. And of course, AMP is you know, it's had a non-binding non everything approach from Aries at 185. Is it as some of the parts story now? I suspect Terrys will, if it goes ahead, end up taking the hole in the market. Says it's not going ahead. By the way, of course, with the AMP share prices, then at some stage AMP bank will be sold. Unfortunately, I missed the top of the market by Mark as bank price earnings ratios and price to books have been compressed. OK, but that's is potentially available. And you've got the three publicly listed big small player. So Suncorp, which might spin the bank, Bank of Queensland, and Bendigo. And then obviously you've got a couple of smaller players. So I'd be stunned if there's not a bank merger, because I think one of the bigger, smaller players will want to take one of those two. They're available. So bold prediction, domestic equities, number one bank merger. Okay, stocks to stocks, which I think well, three stocks, I think in the domestic arena are obvious takeover targets. And I have a shareholding in all three of these to disclose. The first is CIMIC, which is the old Lighton. CIMIC is farcically cheap and it is in a great area of the economy which is basically clopping down concrete and building stuff because it's government-funded. Why? Because the government's going to keep spending on this stuff. Okay, it may hit a roadblock at some stage because our population, of course, is not growing at the rate it was. A CapEx government won't think like that. It will spend for the future. And I don't disagree with that. The attractions of CIMIC, it's on about 11 times Callander 2021 earnings. It is so badly analyzed by the market. It's not funny. I can't the analysis of Simit is really poor. I'm not critical because it's understandable. Why? Because 77 per cent of CIMIC is owned by Hochtief, which is controlled by AX, the Spanish company. OK, so there's not much of a free-float to write brokerage business with and the chance of being involved in corporate stuff is fairly small. So the reason it's badly analyzed is CIMIC now has to 50 per cent owned businesses, which are massive. It now only owns 50 per cent of taste because it's sold half of it to Elliott management and it has 50 per cent of a company called Ventilla. Ventilla is a five billion dollar turnover company that warrants about three lines in the annual report because it's held off balance sheet, the value in that's huge. You can say in the Financial Review today, the short position in CIMIC is 18 days worth of trade. About seven or eight percent of the free float is short. Why you would short CIMIC? I have no idea, because the stock is backstopped by the fact that they keep buying back shares at a level when they can. The Spaniards don't necessarily want to spend that much of their own money on taking out the rest. So they'll do the Kerry Stokes way of gaining control, which is just to have buy backs and keep your own shareholding. Nothing wrong with that legal. So I think you're underpinned by buyback 11 times next year's earnings. In a good sector, there is a chance of a takeover if the stock were to fall sharply. And there's a short position as well. [00:52:09][235.7]

Alec Renehan: [00:52:09] When you say there's a chance of a takeover, though, wouldn't the Spanish company want to get rid of it? Because if they owned 77 percent, [00:52:16][6.7]

Andrew Brown: [00:52:17] they can't take all the cash flow. That's the issue. And you only own 70 percent. All I can do is get dividends and I haven't had one in 2020. Right. The other thing about CIMIC is all the negatives about Semih, which were pointed out 18 months ago, have all been cleaned up. Okay, so the Gorgon contract has been properly accounted for, written off. Now the issues with factoring in reverse, factoring in the accounts and now basically out up front, there's no hiding them now, which they were doing a bit two years ago. They're not hiding them now. So basically everything's transparent now. So I think that's pretty good. I have an ownership number two. We discussed this time last year and it was a woeful failure. It was Treasury Wine Estates. I think it's pretty obvious now we know the reality of China. Now we know that 30 percent of their earnings won't be there for the foreseeable future. They've got to basically put that premium range in Mercedes range elsewhere. They're targeting America not easy. They can target various other places, but they're about the weakest now. So there is a possibility if the shares were to come down materially, that now's your chance to grab those great brand names. It if you don't think brand names have value. Have a look at Remy Cointreau, which is traded in France. It owns obviously Remy Martin, Brandy Contra Aid also for you, Millennial's. It owns Mount Gatherum, which I know you all drink, and Broon Laddy Whiskey engine that trades at about 60 times earnings. Okay, that's that's ongoing earnings. So TWE I think is a real possibility, particularly if they get the transition wrong and it's risky and you know, they got good management but they got the third one is a new stock is the terror royalties. It's basically a one point two, three, two per cent royalty revenue royalty on BHP. It's only BHP plus two Japanese companies mining area C. I wrote about that in the last quarterly. By 1872, I went back and researched the history of all this. Going back, Australians don't know how to value royalties. Bluntly, Canadians know how to value royalties, [00:54:34][137.9]

Alec Renehan: [00:54:36] which seem strange because if the royalty doesn't end, isn't it just a discounted cash flow? Absolutely, yeah, course it is. [00:54:43][7.1]

Andrew Brown: [00:54:43] But it depends what numbers you put in. Okay. At the moment, iron ore is very high and that's keeping people saying, ah, we think the iron ore price is going to come down. Well, when you look at the terror as not reflecting the kind of iron ore price we're getting, partly because the production does not get to peak level until 2023. So I think the tier royalty, to be frank, if a Franco-Nevada or wheaten precious metals don't gobble it up or somebody else, and if it got so low, what's to stop BHP gobbling it up and actually saying good enough to pay this anymore? Okay, so I think the risk on to terror is the management think they can buy other royalty streams and they waste the money. Okay, this is the best credit rated, best quality royalty in the world. But nothing on bar, nothing. All right, I a credit rating on a royalty than BHP. So I don't think Australians have grasped that I don't think they've done their DCW properly, so I think that, you know, if it's it may still be around at the end of 2021. But, you know, it's sort of I won't bear my bar in Bourke Street, but it won't be by the end of 2022. The fourth interesting thing is, is to return to an old favorite, which I first mentioned on the very first external podcast of anybody other than Bryson. Read on Equity Mates, which I think was 2017. Yes. Yes. Okay. And one stock I mentioned then was PM Global Capital Stock Card. It's Link. Are the stocks about a dollar twenty two at the current time? The charge about a dollar 45. What I love is if you think about what I've said about the environment, it has a portfolio, I think that really fits, that it's got really good resource exposures. It's got a lot of domestic banking exposure, not in Australia, but, you know, globally. So the sort of JP Morgan's of the world, that sort of stuff, it's got a lot of alternative investment managers which suits the takeover thing. So it's trading at a nice discount to NTA. It started to do a few things in terms of being a bit more sensible on capital management. It had a partial tender offer for stock last year. You could tender back 10 percent of your stock. So that's a little bit better than they've been in the past. I do like the manager PM Paul more so. Yeah, he's real different, OK, which is a real benefit in this kind of environment. So I think those kind of discounts that's well worth returning to and it fits the environment. And my final stock I've been in this ever since I opened a seventy two and its predecessor company and last year it's made more money than it's ever made in its life. And the stock price doesn't reflect that and does not reflect the environment going forward. And it's an American company called Virtu Financial. The T is the stock code. It is a market maker. It's about the only listed market maker in the US. It went from making about two million dollars a day market making in the first quarter last year or prior to that to making twelve and three quarter million dollars a day. Well, in market making profits in Q1 last year with high volatility, it's gone five times 20-20 earnings, but they're very high. So on an ongoing basis, I think it's on about eight and a half times, sort of kind of maintainable earnings, which is really cheap. It has technology. Others don't have it superbly run, and it pays a 96 per cent dividend on a ten point forty stock price. Okay, there's a real barrier to entry to what these deeds do. Okay. It's just done the biggest. Automatically generated, Algorithmics tried that it's ever done. In a single trade, and that was actually done in Australia, [00:58:53][250.1]

Alec Renehan: [00:58:54] right. [00:58:54][0.0]

Andrew Brown: [00:58:55] but something positive, which was an 87 million dollar trade, single trade that was, you know, algo matched. So it's a really smart company with great technology and I think, you know, will continue to benefit from this sort of environment we have going forward. So there you go. I do think you know, I do think it's going to be an interesting year. I don't necessarily think, you know, we're going to end with markets up significantly. And I do think we'll have some dislocations. But I suspect we may end up coming in here. And the indices are not too far from where they are now, but they may have been on a pretty big ride one way or the other. And I just advise everybody, just please be cognizant of the fact there's so much groupthink in markets. The consensus is always on why. OK, and on that basis, you have to be very cautionary because of where valuations are and and the consensus being just too obvious. So, yeah, it might be time to just lay a few bets, or if you haven't done already against that or quite clearly have [01:00:05][70.2]

Bryce Leske: [01:00:06] where you have left us a lot to ponder over for 2021. We had you on what, three times last year. Sure. We'll have you on three plus times this year. [01:00:17][10.9]

Andrew Brown: [01:00:18] Please, please note all the stocks I've mentioned. Certainly the last five. I have positions in those. I have long positions in all five of those. So if they go up because of your buying a little bit, [01:00:29][11.0]

Bryce Leske: [01:00:31] we're going to be the Wall Street breadth [01:00:32][0.9]

Alec Renehan: [01:00:32] of Australia. I was thinking we've done a whole bold predictions episode without talking about after a games, so I'm proud of us so well. [01:00:42][10.0]

Andrew Brown: [01:00:42] And I still think I have to pay as little valuations [01:00:44][2.4]

Bryce Leske: [01:00:45] and lets that we will leave it there. Just to kind of recap very quickly, though, you've had politics to play a big part in the equity market dislocation, potentially 15 to 20 percent after high volatility continues. Federal election in Australia, the US economy sorry, the Australian economy to struggle more than we think. Twenty, twenty one to be the year of takeovers. And then you've left us with a bunch of stocks that we will put on our Sociales for everyone to have a look at. But Andrew, a big thank you. My pleasure. [01:01:17][32.1]

Andrew Brown: [01:01:19] Enjoy and please everybody to do the work. OK, I don't just look at a website or a summary. [01:01:26][7.3]

Bryce Leske: [01:01:27] or listen to a podcast and [01:01:28][0.5]

Andrew Brown: [01:01:29] spend yet Stamey on trying to make ten D. [01:01:31][2.6]

Alec Renehan: [01:01:32] Yeah yeah yeah yeah. I sort of. Well anyway, yeah. I think you have a Wall Street bit, you have a credit account and you use Wall Street bets. I think I certainly have read it. And I think if people want to take Andrew's advice and read widely, a good place to start your writing might be the seventy presentation that he referenced a few times. Yes. [01:01:53][20.6]

Bryce Leske: [01:01:53] Yeah. As always, we would love to hear your bold predictions for twenty twenty one and a reminder that Equity Mates doesn't stop. When you finish with this podcast, you can email us at contact@equitymates.com or follow us on all the social channels or visit equitymates.com. If you're stuck for podcast recommendations, we do have to get started investing series as well, which is for all you beginner Buffett's. And our latest podcast is comedian vs Economist, where we hear comedian Adam and his brother Thomas breakdown macroeconomics, which at a time like this is super important to understand. So head over there and have a listen and you might be the next Andrew Brown. So massive. Thanks, Andrew. Looking forward to checking in in a few months time and seeing how it's all going. [01:02:36][43.0]

Andrew Brown: [01:02:36] Thanks, guys, and great to see the success and the branching out of what's a really great concept sucking. Well done. [01:02:36][0.0]

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