Expert: James Holt – Finding gems in all the noise | Perpetual

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. [00:00:31][15.8]

Alec: [00:00:31] Going? Oh, I'm very good, Bryce. I'm excited for this interview. We first heard this speaker at ASX Investor Day. We were sitting in the audience and we thought it was such a good presentation that we've asked him to join us on the podcast and we want to have the similar discussion again because we thought it deserved to be shared. [00:00:47][16.7]

Bryce: [00:00:48] That's it. It's our pleasure to welcome to the studio. James Holt. James, welcome. [00:00:52][3.8]

James Holt: [00:00:52] Thank you. Wonderful to be here. Thanks, guys. [00:00:54][1.5]

Bryce: [00:00:54] So James is a director of Investment Solutions at Perpetual. And as we've spoken about on the show before, Perpetual is an Australian fund manager and it's one of Australia's oldest companies founded in 1886. Today we're speaking to James about finding those hidden investment gems amongst all of the noise at the moment. Covered market falls, inflation and war. So much going on. We're going to unpack it all. Thank you to Perpetual for supporting and sponsoring this episode as well. You can head to perpetual dot com dot aew to find plenty of information on what they offer. But as Ryan said, James, your presentation covered a lot at the ASX Investor Day and it was fascinating. So we're going to unpack it all. But first we start with let's start with the investment story. [00:01:40][45.9]

Alec: [00:01:40] Yeah. So James, we always like to start with people, the story of people's first investment. We find there's a good story or a good lesson that often comes out of it. So take us off today. What was your very first investment? [00:01:52][11.5]

James Holt: [00:01:53] Look, I'd say it was Coles Myer back when it was Coles Myer back in the day many, many years ago. And I, I can member if I didn't buy it myself, so to speak. I was either too young or too poor or whatever it was. But I convinced Mum to invest and I says she bought these Coles Myer shares back in the late eighties, early nineties and I thought they're a good price and I really like the, the, the company and you know there are all sorts of things that went on with Coles Myer back then as well. But I just love this idea of owning a conglomerate that had Coles as the core sort of supermarket walk up mum over the line is that you got a shareholder discount consumer discount card as well bought. She, she was a very, very smart person and and sort of could get the investment faces and liked the idea and had the dividend reinvestment plan as well. But that I think it had all the elements of a great investment. Right, because it didn't sort of didn't sort of shoot the lot said year in, year out. It just sort of steadily grew as shares accumulated, the dividends kept on pouring out. It was just a great, great investment. [00:02:57][63.9]

Alec: [00:02:57] Nice. Well, I don't think they give a discount card to shareholders anymore. [00:03:01][3.2]

James Holt: [00:03:01] So maybe they cut it out. They cut it out. [00:03:03][2.4]

Bryce: [00:03:06] So, James, from that moment to to now, you've had plenty of experience in markets. Have you developed an investment philosophy? [00:03:13][7.2]

James Holt: [00:03:14] You look, I'd say I'm pretty value oriented. Having said that, that is not enough in its own right. So you've got to you know, I don't believe in necessarily, you know, using the value index or buying low price to book. You know, you don't want to own the best bargain with manufacture of, you know, just before it goes out a business. It's a bet it was high quality. You know is is that by saying that film other people's money and so you want an element of growth or quality as well you want to have you need to have a lens over it to make sure you're not buying something that's going to go out of business. So, look, I've had a whole lot of learnings. You know, the good times and the bad times never last forever. You know, it's always darkest before the dawn. You know, these these are all critical things I've sort of had. This is my third bubble. If you count COVID bubble as a as a bubble. I've been through tech and I've been through and you read about them in history books. You read about the South bubble and the tulip. Minorities think surely people could not have been that mad. But it's only when you've been through what I think the nineties was a critical one. People with themselves into a frenzy, you know, and that's when you start to pay, you know, growth at any price sort of thing. And and so you I definitely like to have that sort of value orientation, but I'm always wary of the hurdles and those sort of things. And, you know, two or three things really matter that can drive a stock. So I think that's we've also got to got to be focussed, don't get too bogged down in the minutiae. It's important to cover your tracks and read the annual report and all the details. But but often you find within, within a couple of decisions. That's when your thesis is there. But generally, you know, it's always said, you know, invest in what you know, I'd take it a step further. Invest in shop. We love to shop for bargains. We like to get a deal. The people sort of almost invest Selway around. They want to pay for things when they they're most expensive. That's that's the experience of double mania. Right. And instead if you just sort of if your patient is steady, you. A bit of cash on the side. Even the best quality stocks at some point will become bargains or an acceptable rate of return. And that's the time to buy them. I patients always went out. [00:05:21][126.8]

Alec: [00:05:21] Yeah, well, I think that's a great lead in to what we're talking about today because at the ASX day your presentation was about finding those hidden investment gems amongst all the noise. And you know, we talk about stocks being on sale and some stocks are down, you know, 90% plus at the moment. So it's a good time to be looking for those hidden investment gems and the real starting point for you in your presentation. And I think the starting point for most conversations about investing in financial markets these days is inflation. Is it transitory, is it structural? What's going on? Is there a new normal? And that leads into interest rates. So let's let's start there. We've had 2021 where transitory was the word and 2022, that word has sort of dropped out of our lexicon a little bit. Where's your head at? And was Perpetual's head about inflation at the moment? [00:06:15][54.1]

James Holt: [00:06:16] So so right. And I and also remember we did we had transitory for longer as well which is one of the one of the great you know. So we had transitory transitory and I guess look at our journey here and was really begun with the talking to say yeah it's one of the great advantages of having a we do a lot of investments of perpetual with primarily a stock picking house and we talk to hundreds and hundreds of as and CFOs and all the people in the business and it was very clear early on that there was something quite serious on the inflation front coming through. And I think it was Woolworths who sort of said I normally look at ten items that can normally manage the it might be one or two, they're inflationary, but they can sort of spread the inflation through the system and keep prices low and and so forth and sort of manage it that way. But instead they had 80 to 90% of all items going up in price, it was price pressures. And remember there was there's two elements obviously is the demand element. So paper where there was massive stimulus and in hindsight clearly the stimulus is too much. And Larry Summers in the US sort of talked about that. I think we manage it pretty well here, but of course everything emanates from the US. So when the US overstimulated to the extent that it did by sort of that sort of ripple effect came across here as well. And in fact, you know, everything we've had has just been a few months behind the US so we were shocked when the US. So we like to say inflation, it's not going to happen. It did, it has. It's just taken a bit longer to get here. Right. And the other side of it, of course, is supply side driven as well. So at first glance you'd say, well, look, it does seem transitory. And eventually the, you know, they'll sell build enough container ships and the container ships will be better organised. And, you know, the big surge in demand will come back to earth again. So an element of it is transitory, there's no doubt about it. Some things will come back to Earth again and it won't be a problem. However, however, the last three years you've got to ask yourself, I did say economics and economy history, but as well, which I think was was very good to sort of put things into perspective. And that is that is the is elasticities. Is that normal or was that just sort of a lucky benefit of history that we kind of live through because we go back the last two or three years, the last 30 years looks really abnormal. And in fact, we often have inflationary periods and we often have periods where there's a lot of dislocation and whatever. So there's definitely a transitory on the thing we do worry, we do sort of worry about is that, you know, is there sort of this more sustained inflation coming out of it and things like the trade war or did globalisation the last time we had it went on for 30 years, 1914 to 1945. So the best intentions to kind of fix it in in the 1920s, 1930s just didn't occur the next thing. And now you're sort of off to the races and it is of fix it up. We've had actual war. We don't know how long it's going to last in Ukraine. You know, it could people some people want it to end the end of this year and a hope for that. But as we know, you know, three months, six months, war is not that common. They usually go on for a bit longer. That might drag on for two years. That's a problem. Not just energy, but wheat getting grains out at governments. Will they reach for? The one thing about the stimulus was help was effective. Wasn't it meant to how hopeless the post GFC stimulus was. It never took it took years to get traction. So maybe that's more effective. You then get follow on inflation into rents and things like that. That's still yet to occur. And look, one thing I was interested in is that there is data out of the IMF that was published many years ago that showed that ageing can be inflationary or disinflationary. And we've just had, ironically, the last 30 years the deflationary aspect of it. And what they're talking about is the population cohort of baby boomers. They're in exactly the right place at the right time. You know, they entered their twenties and thirties in the seventies. They contributed to low inflation from that era onwards. They're now retiring and they. Pouring down on that titanic amount of savings they built up. And if you model it all up and the IMF model that we should have more inflation for the next couple of decades. So maybe we can't control it. Maybe that's sort of the benefit we got at the last thing is just inflation expectations. That's the big worry. So again, you know, anchor, you talk about anchoring from time to time because people get anchored on things. They get at the last five years, ten years or whatever. That becomes a new normal. That's where you get, you know, house prices never falls because it's haven't fallen for five years. People think that's expected and inflation is the same. If they see inflation for one, two, three years, next thing they it. And that's suddenly what the central banks have said. They worried about that. That's that's that that is something to be to be fearful of that people expect that they get in there, make these massive wage claims. They get this wage spiral coming out of the end. [00:11:03][286.8]

Alec: [00:11:03] There's a lot of factors there that you touched on. And, you know, some that are spoken about a lot, the stimulus and the war in Ukraine. But I think some of those that are not discussed as much. You mentioned demographics and the cost of health care and that, I guess, moving from a saving and investing mindset to a spending mindset in retirement for baby boomers. Another one that you talked about in your presentation was decarbonisation, which I thought was really interesting because, you know, from an investing lens we're all hearing so much about ESG and all of that, but people don't often think about the inflation impacts of some of these new technologies and new changes and stuff like that. So don't just quickly explain the link between decarbonisation and potential inflation. [00:11:49][45.6]

James Holt: [00:11:49] Yeah. And you know, in the in the long term, you know, as kind said in the long term are all dead of course. But in the long term, you know, maybe the inflation sort of comes out of the system again. And I think when you actually go through the process of putting everything in place, it does. But in the short to medium term, it's hard to see how it's not inflationary and the effect that you'll see. It won't take long to find literature out there talking about this as a problem. Right. Because do impose a carbon tax which is instantly inflationary. You know, in Europe, if you applied this sort of carbon pricing to cement, for example, the price of cement goes up by that 70% of thereabouts carbons everywhere, you know, that sort of thing where based on carbon, you know, as humans, so there's carbon out there, how do you do it? Do you impose a tax? Do you do the investment? Germany has spent I think, three $750 billion on renewables and the price of energy is about 50% higher than double of the US. So I should say as well, I think it's I think it's I think it's laudable. It's a laudable goal to decarbonise. I think I think we should. But I think the critical thing is we probably got to accept that it will cost more, certainly in the short to medium term before you get the benefits of it. And also look at the time when we're drawing down on capital, the accumulated savings, the amount to be invested in decarbonisation is is again, it is many, many tens of trillions of dollars. So you think about again, if you think about the long term trickery for interest rates, you know, we've had for this long period, this massive savings pool coming out of Asia and into the world economy. We've had the baby boomers in the market earning. But as those things change, maybe we don't have the same trade relationships. We have the boomers retire, you know, and have interest rates at really low levels. I mean, it seems a bit too good to be true, doesn't it? And so you'd think that that would put some pressure on inflation rates to do it. So I think a laudable goal, but I think also we've probably got to be realistic about the cost certainly in the next few years as it gets implemented. Hmm. And lastly, one thing I think is we're dealing with is that the demand for nickel, you know, we're very heavily invested in green metals because we think they'll benefit from the electrification of cars and things like that. But if you add up the total amounts required to make all the cars, it's just again, it's off the scale and they won't be enough and that'll create its own inflation and so on as well. [00:14:15][145.6]

Bryce: [00:14:15] James I just want to touch on central banks because it's safe to say that they've got it pretty wrong. You would if you would say the RBA here in Australia said they're not going to they weren't going to raise rates until 2024 and they've come out and said, look, I think we got that call wrong. And Jerome Powell over in the States has similarly said the same thing, that they probably have got the call that inflation was transitory and now it certainly feels like it's here to stay at Perpetual. What are your views on the response from central banks at the moment? Do you think they're doing enough? Do you like do you feel that their response is adequate? Do you give much weighting to the commentary that they are sending out at the moment? What's what's the view from Perpetual? [00:14:57][41.8]

James Holt: [00:14:58] Yeah, we look we certainly it's a tough job. You know, it really is a hard job. And I think we do, you know, the shift, the pivot they've made towards realising that the. I think I think Dr. Wise said the forecasts were pretty poor. They certainly were. And he's trying to wrap around that. He can say that again. But, you know, it is a tough job and it is hard to get these sort of things right. Look, I think I think they really very data dependent as well. And they're also I think the Fed and the Reserve Bank are in very different positions where the Fed clearly is tightening and there's a feeling that the Fed will actually head into recession and they might be ahead of the curve compared to us. That is certainly something I think you may see in the Fed's more active assurance and they'll tend to hike rates very quickly. And then at some point the next six, 12 months, as it's clear, there might be a recession coming. If that starts to show up in jobs data, they've made it pretty clear that they'll start cutting again. That's certainly the expectation. And so you may see this sort of funny position of, we've got it, we've got to hike them before. We have to cut them again. So that's just one of those things. The Reserve Bank, we could be in a different position because everyone's focus on two things, right? This circus and the fact that there's so much accumulated savings. You know, we got 250 to 180 billion of savings accumulated, which is massive firepower, even though consumer confidence is going to get dented. The job situation is very good, but I think the one thing we have here in Australia is the terms of trade, the China story and China has been on a different path. Clearly, they've been doing different things. They're doing they're still pursuing Cope at zero. They're trying to tame their property market. It's a pretty messy thing. But you've got to ask yourself and the reason this is so important is because for the last 20 years, they've been a get out of jail card. You know, we should have had arguably we should have had a couple of recessions in the last 20 years. We we overtook the Netherlands and had the longest track record of never having a recession, 29 years being coban struck. But of course, everyone's in recession. You can't help for the recession then. But if in the situation before that, what we found was we were probably having domestic recessions, but we kept on getting our external position bailed out by China. So you may find and nobody can forecast is for sure. But don't be surprised if, say, the reserve, the Fed's hiking rates, then they're cutting them again. We're hiking rates maybe a little bit behind the Fed to try and keep up. But then, you know what? We aren't forced into cutting because if the Fed, the US has a recession, but if China recovers, there's no guarantee we have a recession as well. That's not you know, that's not baked into the stands, that there's something still to be determined. And I only said it because it's happened so many times before. We know China is in a slump. If it goes endemic by the current end of the pandemic, there's no more COVID zero required and whatever. You know, China could come out of this out of the stocks booming in the latter half of this year or next year. Who knows? But I think the bank and the elevator in very different positions and usually the Reserve Bank sends it raise rates and stay pet for a bit, then raise rates again, stay pat. So we could be doing the rising, but not necessarily cutting, maybe even, you know, who knows a bit more hiking potentially as well, Sir James. [00:18:12][194.5]

Alec: [00:18:13] Inflation was transitory then it was structural. And then inflation expectations start to rise. Bond yields increase. As a result, interest rates get start to get raised. Growth stocks sell off. Crypto sells off. Nfts take. And then that that goes to the broader stock market. And that's sort of where we're at now, I guess. Where does this all go from here? Where where do things settle? I know these are big questions. And the ultimate question that every millennial wants to ask, does this sell off in assets extend to housing? But let's put a pin in housing for now and let's talk about interest rates and the stock market. Where do you think interest rates settles? Where do you think the stock market settles? What's the what what sort of short to medium term outlook? [00:19:04][51.2]

James Holt: [00:19:05] It's worth noting as well, just backing up a little bit that the bond markets. Right. Nine times out of ten, you know, compared to equities. And so there was that signal that bonds were equities were really sanguine and you know, to be very optimistic, focussed on whereas bonds sort of rose up very quickly put that pain into into equities. We did see I think if you look at what's happened, the Smallcap sector has been hit hardest both in the US and Australia. So you think about all those main stocks that Jim Cramer sort of talked about last year. They they're all, they're all down 90% right to Goulburn and the same in Australia, the zips. And that says the world are all down 90, 94% or thereabouts. So they've been hit very hard. We refer to them as concept stocks and you know, again, the concept is fine, you've just got to have cash at some point, especially when the price of money is really, really rocketing through the roof. And I think the bond market really cool at all that stuff because you know, Australian bonds, ten year bonds hit 4.2% or thereabouts, I think a 4.1 source. So that's if you look at the last, that's a. It's a dramatic break with the trend over the last couple of decades. So clearly, the bonds sort of signal, there's something different here about inflation in a system which they kind of wanted to speak about. I think Jim Cramer as even said that equities is always going a great turn of phrase, said equities being held hostage by bond sentiment. So James Carville once said in the US that he wants to come back as the bond market because he can rule the world, because it sort of drives every other bit of activity in the global system. So, look, Giovanni Speed, the small cap sector has been hit. Large caps have been a little bit hit, but not too bad. So, you know, if you think about that meme complex, it serves to send stocks primarily, you know, a little bit. You know, Facebook got hit. Obviously, Netflix got hit, but then the others have sagged, but they're not too bad, you know. So is there more room for them to decline? And again, I think we're going to think about these in a couple of different ways. First of all, a PE of 25, 30, it's not like a pair of 100, but it's a market decides it wants to put everything on a 10 to 15 times. There's still a lot of room to fall. That's number one. Number two, with a lot of these stocks, you got to look at the scale of the earnings. So a $2 trillion stock that's on a PE of 20, it's only $100 billion in per annum. That's and that's in tech where every year there's a new tech company out to gouge that company, grabbed market share and put it in the dustbin of history. Tech companies live shorter lives generally than than other companies right now that they kind of monopolise a lot of things. And that's an argument as well. But, you know, we've seen many of these companies drop from history. You know, Sears Roebuck was invincible once. Now it's bankrupt. You know, a dominant handset device maker ruled the roost. Think a Nokia. Then they gone, BlackBerry gone. So just because you've got a massive market share and appear to have a monopoly doesn't mean it's going to be guaranteed. And if you've got $100 billion impedir company the next ten years, they're going to make $1,000,000,000,000 worth of intent in the face of competition, new technology regulators. That's a big ask, isn't it? So that's where I think, you know, we have seen Netflix and Facebook affected and the others don't seem to be as badly affected, but that could still happen to them. So I think you've got to keep an eye on how big the Internet is and how big a target that is, and therefore that I'll be vulnerable at some point. And then you turn to Australia, the same sort of thing here. So the small caps being hit, the big caps have been unaffected. And if you look through time, what tends to happen is and look, we love CSL, we think CSL, fantastic company, it's a bit too expensive for us and it's on 30, 35, 38 times. That's a big price for a big company that grows pretty slowly no matter how high quality is. And again, if you flip that p e of 35 times around, what is it that's a that's a that's a earnings yield of 3%, but the bond market is paying in four. So what on top of the 3% earnings year, what extra equity risk premium do you put on top of the CSL? Should it be 2%, two and a half, one and a half, whatever? So you've got to say, well, here's a company that's an equity that the people are putting less risk on than the bond market itself. Sovereign bonds. In terms of the equity risk premium, again, it doesn't make sense to say, look, it may never happen, nothing may have happened. That may never correct. Right. But CSL has corrected previously in history a very different company sort of 20 years ago it did for quite significantly and people were very excited. I remember people being very excited about it in 2000, a 1 to 3 that got cut very severely before COVID bought out a competitor and regained its place. But that's not to say it can't happen again. Or the other thing that happens is that you may not collapse, you may not have the 50, 30, 40, 60% straight correction, whatever it is. But you know what, you get stuck in what I call the Woolworths position of many years ago, which is that Woolworths just went away for nearly a decade from 2007 to 20 1314. It just stayed at the same price and it grew into its earnings. And the same thing happened to Microsoft before Microsoft actually fell 75% from 2000 to 2009. So it did actually fall, but then it didn't get back to where it was until 2015 or 16 or 17, back to the 2000 level. And look at Cisco. And Cisco has never traded, I think still above where it was in 2000. So it's not so much the you know, you get really expensive beginning to crash in price. You just go sideways for years and that becomes a problem for investors. So again, you're almost being better off doing this anywhere else. Anything that generates a real return to give you you that this sort of, you know, this sort of real return you need to to get out of there again. [00:24:56][350.6]

Bryce: [00:24:56] So, James, before we take a quick break and then turn our attention to finding gems in this environment, it's a good place to have a quick chat about housing. There's been plenty of discussion that we're now starting to. Say it. Cool. We've seen some of the bubbly as markets around the world start to come off as well. And Australia is always lumped in that heap of one of the hottest property markets in the world. So with with nfts down crypto down growth assets, hit interest rates, rising inflation now at a point where it feels like it's here to stay. What what's your view on housing and where to from here for for that asset class? [00:25:37][40.9]

James Holt: [00:25:38] Yeah, look, it's a good question. I think we will have a reasonable correction in house prices, so that'll that'll decline sort of. I think the forecasts are at this sort of ten, 15, 20% pretty on the money get out might be a case of 10%, 25%, the next five and ten or whatever we want up in that 16 to 20% correction zone. They've had a very good run. Same thing is going on in the US, so maybe the US housing bubble at 3 to 7, they've had the same thing again, but it took one year to get there. So it's a global phenomenon. It's hit us pretty hard here as well in terms of rising valuations. It'll come down the other side. Look, I think the actual quantum of correction is less important. The impact it'll have, it'll definitely have an impact on on consumption. I mean, most people don't have their money in the stock market. Most average people, punters have their money in the housing market. So the impact of a correction passed prices with it. In lots of studies, it has sort of 2 to 3 times the impact of a correction in the stock market. So that will certainly hit things. The question will be, does the you know, the 280 billion in cash, which is roughly 10% of GDP, 15% of GDP, does that offset the kind of negative housing correction? Does the super strong jobs market, does that offset it as well? To a degree. Does it occur in one year or two years? If it occurred in one year? I think we'd be in trouble, right? That if it could spread over two years, it may be more observable. And I think again, if you look back at a few rough periods like 20 1213, the GFC period itself, we had stimulus during the GFC, but the real thing that got us out of trouble was again the China recovery. So again, so much swings on that. So is that sort of external environment, which is why I think people are quite ready to call the likelihood of the US recession and people are talking 70, 80% probability. I put that much lower in Australia. I think it'll be a painful period. Consumers will feel it, but we may have one of those periods again where GDP actually stays positive, that consumers feel a pretty nasty sort of run, but they don't necessarily it doesn't translate into negative GDP. Worth noting as well. But in the tech wreck in 2000, the US market still I think 43% if you include September 11 as well. We didn't even have a correction, you actually didn't have a correction. So I think in fact it only fell by single digits in total. And you look at earlier this year, remember the the US stock market fulfilled quite dramatically. Nasdaq was down, market nearly didn't fall nearly as much. We had a bit of a fall in recent weeks. It's sort of caught up with us a little bit. But but again, because that takes it is not 25, 27% that the US is only about 3% it's pretty small and we're like a giant the is like a giant hedge fund in a way like sort of in a good way think. Because you know if you think about how well balanced the market is, if, if the global economy booms or China booms, iron ore takes off and that leaves the BHP in the Rio sky if the world goes to hell. We've got huge gold stocks here in Australia that also have been up and we've got a decent share of financials and consumer stocks to balance that out as well. Whereas I think the challenge in the US has been that tech sector has become bigger and bigger and bigger over time and it is prone to these periods of overvaluation as well as as well as correction. So I think that's on crypto and I didn't mention that before. Sorry, I did mention it. But look, I understand what they're trying to do. I can actually even understand the whole attraction of deregulated currency and digital currency and so on and so forth. What I've never really got to know is that if you can make 20,000 currencies or 50,000 currencies or 100,000 currencies, how can they all be really valuable? And secondly, why would governments ever want them to succeed? Because most of these currencies, of course, 70 or 80% retained by their originators fraud and they can be owners. So I mean, I think the central banks have got problems. The alternative to handing over, you know, multi-trillion dollar worth to all these crypto people around the world who are not in the purview of government or regulators or any of that, that just doesn't seem at all sane. So I think that was kind of I think that was a logic. And even a tech told me, you know, look at capitalism, which I'm a strong believer in. The great thing about it is it's a bad. Necessities in search for invention. Right. That's what drives capitalism. We need something. Someone goes out and makes it and then happy dies. Crypto feels like an invention in search of a necessity. And it's almost the reverse way around. And that's that's usually a problem. So you don't see I think we've got other digital currencies and other digital forms of transaction we were kind of around was kind of scratching our heads as to what was the what was the new special need being solved. You didn't seem to be one. [00:30:40][302.2]

Alec: [00:30:40] Well, James, there's a whole other podcast we could do on crypto, but let's let's stick with stocks today. We've really covered the macro, you know, the inflation and the interest rate environment and what we've sort of living through at the moment. We're going to take a quick break. And then on the other side of it, we really want to get into the stocks specific stuff. We want to talk about how we can find those hidden investment gems. So we're going to take a quick break and then we'll be back to talk about that. So, James, before the break, we spoke a lot about what's going on in the macro environment. We have inflation. We have rising interest rates, except in Japan, they're holding out. But the majority of the world is is rising rates and the majority of markets are down in 2022. But that creates an opportunity for investors, for those that are willing to be greedy when others are fearful there might be some opportunities. And so that's that's what we really want to pick your brain about in the second half of this episode. And I guess the starting point for us in your ASX day presentation, you shared a number of categories which are perpetual I guess a finding interesting at the moment. We can you sort of use them as signposts to talk about a few stocks that you think might be some of those hidden gems. So the first was a stocks that are going to benefit because food and energy inflation are likely to persist. And there was one company that you called out in your presentation, Santos, you to talk about why you think that's an interesting category and then why Santos over, you know, Woodside or some of the other resource or energy plays that that are available? [00:32:17][96.8]

James Holt: [00:32:17] Yeah, look, it's a good question. So look, I mean the theme itself so food and energy, you know, with clearly there there were sort of clear targets for inflation. We've held a lot of things over the years. The GrainCorp's the world. We've held Incitec Pivot as well which which is more or less we saw most of recently people, you know, during during dry periods, a lot of their stocks go begging and that's a good time to buy. And then the wit comes and the people make fertiliser. They want to plant crops to grow, the crops go to harvest, fantastic and whatever. So you tend to get a great sort of list on that. Santos is pretty one with we're most excited about now and is a very big position in a lot of our portfolios. So I think there's probably a couple of things here. Obviously there's there's been a merger with with Osage. It's primarily a gas producer with with big assets in Papua New Guinea. Gas is a key transition to energy. You know, it has less emissions in oil and over time, as we do see this sort of shift, we can't make the shift overnight to renewables even if you get the, you know, the windmills and the solar panels. Right. And the cane there, you've also got to store the energy. So gas will always be a kind of a transitional energy for a long period of time. It always be some gas around. Gas can also be switched on and off to unlock coal. We got to keep the coal sort of churning out all the time, which is one thing that the people point to as well. Having said that as well, they do they do have carbon capture and storage facilities as well, which which helps to get to reduce their carbon footprint as well. So strong balance sheet gearing ratio that about 26%. So clearly benefiting from that. The tightness in energy markets. Europe wants to import more gas. We think the benefits of that are going disruptions obviously and also critically for us asset sell down. So look, one thing that's sort of held the stock back a bit is that had they got this is a nice problem to have had they got too many projects, have they got so many assets they got to exploit? Are they going to struggle to kind of develop them also? Do they so one of them, do they sell down? You know, they've got a 42%, 42% stake in PNG, LNG. Do they sell part of that? They've got a stake in other projects in any way. Do they sell a bit of that? They got they got another project in Alaska. Do they sell a bit of that? So look, our expectation is they would sell roughly 2 to $3 billion worth of assets and that would reduce the gearing. Again, that would give them cash would see more cash flow, the ability to to pay higher dividends and things like that, and also reduce the burden of their of their CapEx expenditure. So I think the assets go do you think about the two or three things that drove a stock? Right. The assets are good. The company's in a very good position. They've got options as far as what they can do. And it's it's it's there is a catalyst. You can see they have all the assets. So they have to kind of rewrite the stock up with smart is. [00:35:28][190.1]

Bryce: [00:35:28] Another I guess area of thematic way we're able to find some gems. James is in green metals, so zinc, copper, cobalt, I guess maybe one sinking copper. Yeah. Why? Why is this area still attractive for you? [00:35:42][13.7]

James Holt: [00:35:42] The demand ongoing is going to be absolutely enormous. So you think about the electrification of vehicles. We're still I think only 2% of cars are electrified. So there's that's a good growth market for you right there. It it's going to go away for a long, long, long period of time. And all the forecasts we see that that that basically the market will struggle to keep up with the demand required for those commodities. So one. For example, is WA, which is listed in Australia and we first started buying that in 2021. It's been entered into the Footsie World Index earlier this year and also into the ASX 200 index as well. So it does get a bit more coverage now than it did before. You know, Cobalt, Nickel, a key assets there. One thing obviously that is that they've got a cobalt mine in the US. They've also got one a refinery in Finland. So, you know, I think about one one issue with cobalt is that people don't like where cobalt is mined currently and in some unsavoury parts of the world. So this provides an option. But outside of it, it's it's mined in more in a more sustainable part of the world. And and I think that looks very attractive to us long term. Also, Iluka, I think, has got a one that's that's very attractive in that in that space. So look, they've got they spun off. They did Toronto, which we also have owns as well. So that which is an iron ore royalty and didn't didn't quite fit as well with them retail on second biggest produce in the world. But also the other big thing with with Iluka is that it's expanding into rare earths. And again, this is one of those things along with those other commodities you mentioned that we need. And at the moment, China has the vast majority of rare earths in the world, which is obviously been raised eyebrows in in the sort of post code era there actually $21.2 billion on a refinery near Perth. It's got Federal Government support as well. Clearly there's a desire to have these sort of critical assets, these sort of critical green metals being manufactured in in other parts of the world. And so there's these sort of stocks, beneficiaries of that trend. [00:37:56][133.6]

Alec: [00:37:56] It is a fascinating space. James, we are running out of time. And I do want to ask about a couple of stocks that are of less interest, including one that definitely gets tongues wagging in the Equity Mates community. So I'll just quickly list the other categories that you spoke about in your presentation. Business models with interest rates as tailwinds and IAG was an example. They're spending on experiences as everything sort of reopens Qantas and event hospitality and entertainment, which are companies mentioned there and then founder led stocks Premier Investments was an example there. But let's get to stocks of less interest and you mentioned concept stocks earlier than not of interest. Now according to your presentation, even though some are down 80 to 90% and you mentioned zip there and zip is the company that probably gets the most discussion in the Equity Mates community. Do they ever become interesting again? Like is there a point where you start to look at maybe not zip or sezzle but some of those concept stocks and start to say it makes sense? [00:39:04][68.3]

James Holt: [00:39:05] It's a great question. It's a great question. I think that particular place, because they make a lot of money if you get it right, let's face it, alongside all the the the Enrons and the and the and the world comes, Amazon was down 90% at one point, maybe even more, and recovered and made a fortune for people. And there were plenty of stocks in that space. But I think if you look at but then again, we've also had the one Telstra out as well in Australia and the and you know went to go along with them along with Deb and a few others. So look I would say I'd say yeah, look, there's not we really require kind of proof of earnings for it to become interesting to us. So we do have and it's pretty been mentioned before. Bye bye, Vincent. Nice. And we do have full quality filters. So debt has got to be fairly low or it's got to be to cover it to a reasonable degree, recurring earnings quality, a business quality of industry and most of those stocks. So almost all of those. Right. That they may have they may have a wonderful entrepreneur at the head, but where's the recurring earnings? Where's the cash to cover debt? And about inequality industry? Or are they in a good position in an industry, a quality business in a good industry? And that's the number one problem you've got. And then in the buy now pay later space, I think the big challenge will not be return on your money, it will be return of your money because if we do have consumers going to struggle in the next couple of years, you think about I said we will avoid a recession. I think I hope. But that doesn't mean we don't have a domestic recession and consumers might really, really struggle. And then if you have massive, massive defaults and we're talking about non-performing loans, you know, about half of them potentially because some of those bond stocks, where do they go from there? Because also the trap that often occurs is that in the last five years, can you raise money for an equity market? Yep. So easy. Just go to the market. People have. Can I throw money at it? Can I go to the bank? Maybe not. So now. Once the bank closes and the equity market closes to them, there's nowhere to go. And that's why they tend it. They tend to fail. So I'm not making predictions there, obviously, but the that's the struggle. That is the real struggle with all of these companies. And in the US, the one thing going on, the one place where jobs aren't being created, if you if you go back, the number of people being laid off at tech firms is skyrocketing because they've all been told if we don't make money in the next 12 months, we're done. And so that will be the struggle for any surviving stocks here in Australia as well. [00:41:44][159.5]

Bryce: [00:41:44] And that's fascinating times, James, but unfortunately we have run out of time. We'll definitely have to get you back on the show, though, to continue the discussion as things change in markets over the next few months. If our community have enjoyed listening, if you have enjoyed listening to James, he will be speaking at our Fine Fest event in October with Perpetual There as well, so we're incredibly excited for that. But James, thank you so much. It's been an absolute pleasure. We thoroughly enjoyed your presentation at the ASX Investor Day as much as we. I really took a lot out of this conversation with you today, as I'm sure a lot of our community did as well. So thank you so much. [00:42:20][35.6]

James Holt: [00:42:20] Absolutely. Love the guys. Wonderful. Thanks. [00:42:22][1.7]