Ouch! Is your portfolio hurting in 2022? Ideas, themes and stocks that might benefit

Candice: [00:00:11] Hello and welcome to talk money to me. This is your need to know financial podcasts. Thanks so much for joining us. I'm Candice Bourke. 

Felicity: [00:00:18] And I'm Felicity Thomas. And in this podcast, we draw on our extensive experience managing capital on behalf of our clients in the market and break down exactly what's happening in the world of business. We're also taking our views on the current market and discuss what we're liking and not liking as investments currently. So in this week's episode, we wanted to provide you with a bit of a market update as there's a lot going on at the moment, but probably even more relevant. We're also going to discuss our latest strategy update and how we think investors should position their assets in the current climate scenario. 

Candice: [00:00:52] Reflecting, you know, it is really tough in the markets at the moment and this is when having an advice relationship I think is key because there's a lot to navigate, a lot to get through and just having that sounding board to talk it through. Right. So hopefully, guys, we're going to unpack what's going on and maybe give you some ideas and tips to talk to your financial advisor or stockbroker or accountant or whoever you know, your neighbour just on how to navigate these tough times. The information we chat about in our show is not considered personal advice, even though we are registered financial advisors at Foreign Partners. Please note that the podcast and the content discussed does not constitute as financial advice, nor is this a financial product. So let's take a moment. Let's firstly set the scene on what's going on the markets. At first glance, the mixture of slowing down growth, high inflation and central banks in tightening mode. It's, you know, offering little support for the second half of the year. It's not looking good, guys. It's not looking roses, peaches and sunshine. However, this is where we can be optimistic or in the market. So we try to be optimistic. It's important to also remember other factors when we think about positioning portfolios right. [00:01:59][66.7]

Felicity: [00:01:59] Now, we can't always take such a short term view. So for example, we're already seeing the normalisation of delivery times in shipping and distribution of goods. That's evident in the PMI data, which also helps dampen inflationary pressures. If you look at Asia, the easing of ANTI-COVID measures will support the Chinese economy and flow on to the global economy. With the US. Real estate market is already showing signs of rebalancing, foretelling a slowdown in the rate of price increases. If these factors strengthen over the Northern Hemisphere, summer central banks could soon become less aggressive in their fight against inflation and more attentive to supporting growth. 

Candice: [00:02:39] Again, meaning guys, a lot of economists are predicting that by raising rates aggressively now we can get a handle on inflation. So this will allow easing off on monetary tightening and policy, hopefully winding back, you know, rates where and when appropriate in the near term. So predictions around this occurring, you know, looking at early stages of 2023 with a market recovery, fingers crossed. You can't see me doing that. But that's what we're hoping. Right. So if you're looking at your portfolio lately, you would have noticed that while central banks have been really busy tackling inflation, bonds and equities mainly have fallen in reaction to this. So, for example, looking at a really popular index, the Nasdaq, our year to date is off 25%. In fact, I think this has really been a missed fact with all the other headlines, you know, across the press at the moment. But the fall in equities at the moment in the first half of 22 has been the most fall we've really seen since the end of World War Two era, apart from in 1962 with the Cuban Missile Crisis. So these are really big, dramatic falls. [00:03:42][62.9]

Felicity: [00:03:43] And this is where Candace history buff comes into the mix. [00:03:45][2.6]

Candice: [00:03:46] That's right. You know, when I'm up late at night, can't sleep. That's what I love to do. Look at macro history. Now, the odd thing that's happened here is the exception amongst all the falls in the asset class has actually been commodities, in particular energy. We've talked about that before, Felicity. You know, obviously with the supply chain pressures and dependant with what's going on with Ukraine and Russia right now, it. [00:04:07][20.3]

Felicity: [00:04:07] Has been a really tough 2022. But looking ahead and in this context amongst macro asset classes, the markets have been sold off now to a point that it's kind of presenting an attractive entry point to slowly edge back in. And I do say slowly in our view, it's common in a bear market recessionary backdrop that we'll have mini bear market rallies. So we're really adopting the dollar cost averaging entry strategy for our clients at the moment, in particular clients who started investing at the end of 2021. We need to reduce those cost bases now. After several years of very low yields, bonds once again offer an alternative to equities, and the sweet spot appears to be in high quality corporate bonds. So an exposure to the Australian bank hybrids like we covered in our last episode with Cameron Duncan is also a critical part of the overall asset class exposure in the current. Climate. Now, recent bank earnings have shown that loan losses so far are not as high as expected and regulators are limiting dividend and buybacks. So we're actually overweight in this sector. Plus, they will benefit in a rising rate environment, meaning this asset class is offering investors, you know, about 5% per annum income return, which is pretty good. [00:05:20][73.3]

Candice: [00:05:21] The main go for investing, right. Let's come back to the basics is we need to stay ahead of inflation. Right. So you've got to look at other alternative asset classes that are providing income and growth to beat inflation. Inflation is peaking in the US, you know, 8.9. It's worse in Europe. You know, there's big numbers getting thrown out. So you need to think strategically on how to stay ahead. So the other part, though, which we want to address, I think in the in the current market in our clients portfolio is cash. You know, that the common phrase cash is. KING Well, we haven't been making lots of money in cash, but it's a really good tool to use in the portfolio to take advantage. So in a bull market, you know, when earnings are looking positive and everything is looking rosy, GDP growth is going up everywhere. We like to run typically a cash balance between 3 to 5% because you don't need it. Right. You're better off paying in equities. [00:06:11][50.6]

Felicity: [00:06:12] Pending the risk profile. Right of the client. Yeah. [00:06:14][2.3]

Candice: [00:06:15] Speaking generally here guys, however, in the current market, again, depending on your risk profile, but we're being a little bit more prudent with cash. We want to be a little bit more overweight than we usually are, you know, anywhere from 5 to 8%, maybe a bit higher. So we can be active in the markets and pick up discounts and also act really quickly. So I guess when market conditions are tough, speaking of cash, investors tend to rush to safety and what is one of the biggest safe havens? It's the US dollar. The greenback is considered the world's most important currency because when the world really moved off the gold standard again, he has my history. The dollar became the backstop and the underlying support to our global economy today. [00:06:52][37.1]

Felicity: [00:06:52] That's right. So we've actually seen the US stay gaining in recent months as inflation has soared, interest rates have increased and worries over growth have worsened. Yeah, so what was actually really interesting when I was in Europe, there are a lot of Americans travelling because the US day was one for one with the euro. So they're loving life at the moment as not so much. [00:07:11][18.9]

Candice: [00:07:12] Americans in the European to love. [00:07:13][1.3]

Felicity: [00:07:13] It. That's it. [00:07:14][0.3]

Candice: [00:07:14] So in fact the strength of the US dollar has has really kind of devalued. Obviously what happens is devaluing other currencies around the world and more importantly, what's happening really is it's unsettling the outlook for the global economy as it upends everything from the cost of a vacation abroad like Felicity just mentioned. Right. So in fact the dollar is at a 20 year high and it's actually gained about 10% more recently in recent times. [00:07:39][25.1]

Felicity: [00:07:40] So you'd be quite happy. You've got a lot of us stay on the side. So a strong us stay, right. Candace, do you think that is great for US equities? [00:07:47][7.7]

Candice: [00:07:48] Yeah, normally it is the case, but at the end of June just gone. Despite the US having a potential for short term recovery in their stocks, the actual US sector, the equities asset class itself was down 7% in June, being amongst the worst performing equity markets across the developed countries. So this volatility I think was based on the probability that the Fed is unable to engineer a soft landing in their economy. Biden said it. You know, inflation's out of control, let's get a handle on it, although we can't really do much. And also there's a lot of concerns around the US midterm elections that's going to really ruffle the feathers and the outlook for the US. You know, the US dollar is pretty uncertain still. So although growth stocks have slightly outperformed value stocks during the month, they continue to kind of underperform year to date in whole. Right. We're seeing it with the Nasdaq just getting sold off massively. So if you're focussing on US equities, you know, within your portion of the portfolio at the moment, we're preferring a balance of both growth and income sort of, you know, more value companies obviously depending on your risk profile, but and not rushing into these positions. But having that combination seems to be the right sort of mix with what's very uncertain at the moment. [00:08:59][70.6]

Felicity: [00:08:59] And look what we said earlier, dollar cost averaging and sticking to your asset allocation, which is best in line with your investment goals and objectives, is key. Now, we're going to pivot slightly now into a few key themes and sector exposures, which we're really preferring at the moment to help navigate the current macroeconomic conditions. But before we dive into these themes and of course, chat about a few stocks, we're looking we're going to take a short break and hear from our sponsors. [00:09:24][24.7]

Candice: [00:09:26] All right, we're back. So we're turning our attention now to a few sectors and themes that were lacking at the moment. Firstly, Felicity, I think the elephant in the room at the moment is energy and addressing the supply and storage issue that the globe's facing. [00:09:38][11.9]

Felicity: [00:09:39] Right? Yeah, this is definitely not news. And it's everywhere, right? The world is in an energy crisis. The fear of peak demand in old energy and reliance on Russian energy has led to the reality of a lack of supply. [00:09:51][11.5]

Candice: [00:09:51] So, in fact, the supply story that's, you know, all over the headlines will ultimately become a demand story eventually. [00:09:57][5.9]

Felicity: [00:09:58] Interesting. So do you want to give us the high level global energy, state of play, and then we want to hear your best ideas to actually capture this upside, because that's why everyone's listening, to talk money to me, to get some investment ideas. [00:10:10][11.8]

Candice: [00:10:11] Yeah, not for our banter. Right. Just the interesting. I mean, I wish it was more for the stock ideas. Totally. Let's talk big picture. Okay, so why is energy currently 15% of global GDP, you might think or ask? Well, we've had, you know, nearly a decade of underinvestment in this sector. Covid's changed the globe's psychology towards the old energy it's even harder to invest into. Also, we've got the tensions with Russia and Ukraine. Russia is about 21% of energy total export market. So, you know, not a small player. And the amount of gas imports from Russia is about a third of LNG total markets. So big task trying to replace Russian gas is really what that starts saying. [00:10:53][42.1]

Felicity: [00:10:53] You know, obviously everyone's thinking ESG are their key environmental. [00:10:57][3.4]

Candice: [00:10:57] Issues with this. And when you dissect the ESG, I think it pops out the most and that's air quality, particularly so in China and India. So 55% of Chinese and Indian energy use is derived from coal. The global average is about 27%. So they're way above the average, right? And the only term solution to improve air quality in the gas space is import LNG. Gas is about 45 to 50% fewer carbon emissions compared to coal. So that is obviously the way forward for the e factor when it comes to this sector. And Chinese LNG demand has been growing at about 15% per annum for the last 17 years. So China's actually now importing about 20% of global LNG supply and they're the largest player when it comes to this commodity. So the that's continuing to grow at double digits. Kiger, India, they're taking about 10% of the global LNG demand growing also very strongly and Europe's taking about a quarter of LNG demand, trying to source an additional obviously replacement from their reliance with Russia. So he comes the punch line, right? The implication is that 55% of global LNG demand is growing at double digits. Kaga That's an investment opportunity, plus we're looking at cleaner air quality, so win win there, that's really interesting. [00:12:18][81.0]

Felicity: [00:12:19] So double digits growth and a commodity that we all really need. So what is the best stock to capture this issue? [00:12:27][8.0]

Candice: [00:12:27] Okay, so I'm going to do a home bias here. Staying on the Australian focus, I think we can't look any further than Woodside. [00:12:33][5.9]

Felicity: [00:12:34] So the ticker for this one is WTS on the ASX. It's actually changed after the BHP demerger. [00:12:41][6.9]

Candice: [00:12:42] That's right. So Woodside capitalises on everything. I just kind of mentioned all those stats. They have a low cost production and they're really simple to operate. 95% of the productions is in OECD jurisdictions. It produces about 70% gas, which is increasing over time. 80% of reserves are actually gas as well. And if you look across to another bank analyst. So Adam Martin from Morgan Stanley recently released a really interesting report and a lot of people took notice as he's probably one of the top energy analysts in the Australian space right now. And it's really an Australian upgrade for the first time that we've seen a long time. So the company's modelling on a calendar year 22 free cash flow, a dividend yield of 13% and very cheap price to earnings of only seven times. That's pretty fantastic and phenomenal and it's in a sector that's obviously benefiting and what's going on. [00:13:34][52.2]

Felicity: [00:13:34] Yeah, 13% dividend yield is fantastic, right? [00:13:37][2.9]

Candice: [00:13:37] Balance sheet looks good, is pretty much no debt. Lots of upside. We know we need demand for this product and we've obviously got the supply chain. [00:13:45][7.6]

Felicity: [00:13:45] So what's the price target we're looking at? [00:13:47][1.8]

Candice: [00:13:47] So they're actually kind of one of the more balls out there, their $40 per share price target. So gearing very low, like I said, less than 10%, pretty much the companies self-funded for growth. [00:13:57][9.7]

Felicity: [00:13:58] All right. So that's your first one WDC on the ASX. Now we're going to pivot to a future facing commodity, one that you've all heard of and that's constantly in the news. Lithium. Now the demand for lithium has actually grown at 20% K gas, so your compound annual growth rate through 2017 to 2022 and we forecast 20% K-Cup demand to continue through to 2030. So that equates to a four times increase. From 550 kiloton lithium carbonate equivalent. So your LCA demand in 2022. So the rapid increase is largely driven by our electric vehicle penetration forecast. So I know you've recently put a deposit down for an RV car Candace. Am I. [00:14:42][44.5]

Candice: [00:14:42] Right? I can't wait. [00:14:43][0.5]

Felicity: [00:14:44] So the RV car sales reaching over 50% by 2030. I think I need to do that because I just filled my car up and it was $130 from $70. [00:14:54][9.2]

Candice: [00:14:54] When I get mine, I'll take you on a ride and give you like, alright, let's do it now. [00:14:58][3.5]

Felicity: [00:14:58] Whilst lithium is a relatively abundant metallic element, deposits that are technically and economically viable to exploit are rare. So the growth in 2021 was nothing short of staggering, with sales of 6.6 million units, more than doubling from 2020 sales. Now this implies a penetration rate of 9% of total car sales. So major automakers are actually accelerating their electrification plans. As much as we expect ever to represent 50 to 70% of total lithium demand in 2020 to 2030. Automakers are progressively fleshing out business strategies that consider electrification not only as a way to comply with policy regulations or respond to government incentives, but also as an opportunity to capture market share and maintain a competitive edge. [00:15:44][45.8]

Candice: [00:15:44] That's a no brainer, right? So what is the best pick, do you think, in this space to capture lithium? [00:15:48][3.8]

Felicity: [00:15:49] So focussing on the Australian market, our top picks in the lithium supply chain are actually developers in this space. So we have global lithium resources and the code is JL one with their exposure. In W.A. we have Lipitor CO and the code is LP Day. Then if you want to actually look at producers, one of my favourite is Aygo. So independent group Aygo is the code on the ASX and then we've also got Pilbara minerals and the code is place on the ASX. Now I don't want to give too much away here as we're actually going to have on the show very soon. One of our show analysts, Michael Clarke, who covers this space. So keeping with the suspense, we can all hear about it directly from the expert as to why lithium is a sector that we can't ignore. [00:16:31][42.4]

Candice: [00:16:32] Oh, I cannot wait for that. It's going to be good. Yeah, it's going to be fantastic. And that's a good reminder, guys, if you've got any questions on the topics that we've covered, either in today's episode or any ones in the past, you know, feel free to email us. Don't be shy. You can reach us at TMT at Equity Mates dot com. Love to hear from you. [00:16:49][17.0]

Felicity: [00:16:49] Especially in relation to commodities because we can get him to answer all of your burning questions. Now we've got time for one last investment theme and a sector which we're really liking at the moment for its defensive characteristics. That's kind of been out of favour, oddly, over the last couple of years when it shouldn't have been, and it will tend to do well in a downturn market. [00:17:09][20.1]

Candice: [00:17:10] Drum roll, please. If you haven't guessed it, we're talking about Bitcoin. No, we're not. We're talking about health care. Again, sticking to this show in context, COVID has dramatically impacted lifestyles and attendances, which has resulted in, you know, 50 million missed apparently GP visits since March 2020. So yeah, big number. And the larger I guess amount of lockdowns across all the different states and globally. But focussing on the Australian context, particularly in Victoria and New South Wales, you know, we've collectively accounted for about 60% of all total GP visits, missed according to an analysis. [00:17:46][35.8]

Felicity: [00:17:47] So they wouldn't let us say them. [00:17:48][1.7]

Candice: [00:17:49] Yeah, that's right. In Victoria what quickly went out the window was elective surgery because we were just dealing with the COVID crisis and they have a backlog apparently of 80,000 plus dating back to December 2021 and 25% year on year really because of Omni Crown. Right. So in our view this represents about 5.6 billion lost in GDP revenue alone because of this backlog. [00:18:14][24.9]

Felicity: [00:18:15] Wow, that's massive. So I guess on this basis, we're positive that the healthcare sector, given our view that GP visits will be back above pre-COVID levels towards the beginning of Fy23 for the first time nationally since the start of 2020. So if we look at FY 23, just mentioning a few healthcare segments, we expect IVF actually to be up 5% nationally and allied health to be up 8% from current levels. The backlog of all industries is likely to extend for two years in length, with potential margins to rise sector wide by over 200 bips. So there's another long term driver feeding into our positive view on healthcare, which is actually Australia's ageing population and again global ageing population which will place a greater reliance on our health care system given inherently higher volumes across the ageing demographic. So I've got a little fact for you, Candace. Did you know that the proportion of Australian persons aged over 71 has actually risen from 4.9% in 1971 to 11.2% in 2021. [00:19:18][62.7]

Candice: [00:19:18] I knew it was growing, I didn't know how fast and to that extent, right, this is the baby boomers population and in essence isn't it? And so how does. He's the question, right, that we're all thinking. So how does an ageing population directly impact the sector? [00:19:32][13.3]

Felicity: [00:19:32] Well, that's it. And how can we get exposure to this in a in a beneficial way? So with an above average ageing population and a slower growth of the younger demographic, this dynamic will really help benefit health care players across the likes of Allied Health. And dare I? If you want to play this space, look at capital health. The code is C, a J with a buy and price target of $0.46. So capital health management are actually delivering a turnaround with margin and market share growth accelerating for the first time in company history. Now, this company has no debt and remains undervalued. [00:20:08][35.5]

Candice: [00:20:09] And if you're not into capital health, another idea is healthier. HLA is the code and join partners. We have coverage on this one as well. Price target 2.73 and it's in the allied health space. So HLA is one of Australia's leading allied health care providers and number one in the physio group. Now we expect like for like revenue to be tracking ahead of market expectations as we see this COVID post recovery world continue and the stock offers at the moment 5.5 times to EBITDA. So pretty good and a likely strategic asset over time and just I guess a really defensive business to own long term. [00:20:46][36.7]

Felicity: [00:20:46] So our final idea for today is actually Monash IVF. So the code is M V F on the ASX and like its name in the IVF space. So and V.F. is a leading IVF company in Australia. The group is actually taking market share with 17 bips year on year growing profit of 17% year on year domestically. And everyone likes to hear it. It is net cash. Now I want to leave you with one quote from the famous Warren Buffet. When evaluating your portfolio at the moment, the single most important decision in evaluating a business is pricing power. So if you've got the power to raise prices without losing businesses to a competitor, you've got a good business. [00:21:28][41.6]

Candice: [00:21:28] Yeah, well said. And that's so right. And we need to keep it in the forefront of our minds, right when we're, I guess, panicking and worrying about what's going on in the market. Also important to do your own research or have a team that you can rely on, you know, to ask their truthful opinion on what's going on. Because it's so important at the moment to know what you're investing in, how the business is going to benefit or not. You know, in the current climate and also important, remember your risk profile. Remember your goals and objectives, why you first set out to invest. Don't get caught up in the short term perspective. Stick to your guns, stick to your long term perspective. And we're going to have these bumps in the roads. Right. But be long term like Mr. Buffett. [00:22:08][40.0]

Felicity: [00:22:09] Don't lose conviction and understand what you're investing in because it makes it a lot easier to hold on to these companies. Please remember that although Candice and I are financial advisors at Shaw and Partners, please note our discussion today does not constitute his personal financial advice. As always, you should seek professional financial advice before making any financial or investment decisions. 

Candice: [00:22:29] So guys, stay tuned. Stick with us. If you're enjoying our show, please do us a favour. Share it with a friend, give us a review and a like on wherever you listen to your podcasts. Now we've kind of alluded to it. We're going to go into another couple of short analyst series to deep dive into these sectors we've kind of touched on today and of course give you those hot stock tips that we're looking at the moment. So stay tuned.

Felicity: [00:22:52] Follow us on at Talk Money to Me podcast for daily market updates. Until next time.