What next for QANTAS, Andrew Page on Reporting Season & the ESG debate continues

Bryce: [00:00:18] Welcome to another episode of Equity Mates, or should I say Greeting Lords and ladies. You've ventured into another chapter of Equity Mates, a chronicle that shadows our quest in the realm of coin and commerce. Be you a green squire or a mr. Akin to Warren Buffett. Our purpose is to shatter the walls that keep you from your first coin to your regular, rightful dividends. If this is your maiden journey with us, I beg you. Welcome. My name is Bryce. And as always, I'm joined by my equity buddy, Ren. Any thoughts? 

Alec: [00:00:50] Another perfectly normal intro for you. Well, it's medieval.

Bryce: [00:00:56] It is the vibe. Yeah. 

Alec: [00:00:58] How specific do I have to be? 

Bryce: [00:00:59] Well, this is person specific, I think all of them from here. But if you get it in the realm like a king or. 

Alec: [00:01:05] Yes. Yes. This is how. 

Bryce: [00:01:08] Fictional King.

Alec: [00:01:09] King Charles still talks today. A fictional king. 

Bryce: [00:01:13] Fictional king. Very popular while we were through university. Very popular TV show. 

Alec: [00:01:19] Like Game of Thrones. 

Bryce: [00:01:20] Yes. Along those lines, I was Ned Stark, if you couldn't tell. 

Alec: [00:01:23] Winter is coming. That's a highly specific list. 

Bryce: [00:01:28] It is. You know, when you look at it one day, you'll get it. Well, we've got a massive show. If you have just joined us for the first time, a huge welcome. We do have a podcast called Get Started Investing. If you're just trying to get up to speed with the basics. So go and check that out. But otherwise, we're ready to jump into a huge episode. We've got a question from a community member, Steve, that carries on from our discussion, from our interview with Kelly Shue on ESG. We're going to continue Alec's mentor journey with his mentor, Andrew Page. But first, Ren, there's plenty going on in markets and the news. So we're going to start there. 

Alec: [00:02:05] Yeah. Yeah. There is so much going on. I mean, let's start in Australia and let's start with, I think, some good news. Well, some better news, the inflation and interest rate stories. So inflation came in. The rate of inflation is slowing. 4.9%. That's good.

Bryce: [00:02:25] It's better. 

Alec: [00:02:26] It's better. True. That's. That's a better way to praise it. And as a result, the RBA held interest rates steady for the third month in a row. So we had 12 increases in 13 months. We went from 0.1% to 4.1%. But since then. So that was between May 2022 and June 2023. And since then, July, August, September, we've had a holding.

Bryce: [00:02:54] Holding pattern. 

Alec: [00:02:54] That's good. 

Bryce: [00:02:55] I mean, yeah, it depends which way you want to look at it. The reason we say it's better is because obviously inflation has been higher, but the Reserve Bank tends to want to try and keep inflation within that band of 2 to 3%. So a bit to go. 

Alec: [00:03:08] Yeah. Andrew and I spoke about this and some central banks are going the other way and they're just saying, oh, well our inflation targets now 4 to 5%. 

Bryce: [00:03:17] So it's all relative. 

Alec: [00:03:22] I think like the 2%, was an arbitrary number. Like there's no scientific or economic basis to it, like so much of economics. But I think it was in New Zealand economists that suggested 2% and everyone said that feels about right. Like I said, some central banks are taking the other option, which is just. 

Alec: [00:03:41] Raise it up to the band and move.

Bryce: [00:03:42] The job done. So yes. Philip Lowe who was the RBA governor, his contract is up. So his last meeting was the Tuesday that we've just had. And yes, he kept rates at 4.2%. Tough job for the new 4.14.1. Tough job for the new governor coming in. Michelle Bullock Because. 

Alec: [00:04:00] I don't feel sorry for her. She's on like a $900,000 pay packet. I know. Well, that's what Phil was on. I assume she got the sign. I would wear the weight of interest rate decisions for $900,000 a year. Yeah, you wouldn't.

Bryce: [00:04:13] He copped it pretty hard over the last sort of 18 months. And now he's out. 

Alec: [00:04:18] I woke up hot on social media. Have you seen the Tik Tok comments? And we certainly don't get $900,000 a year.

Bryce: [00:04:25] This is true. This is true for me, though, it's interesting, Ren, like the current sentiment is I feel like it's mixed. I think there's a general sense of optimism that probably didn't exist 6 to 8 months ago. The markets, you know, this month that they've sort of ended down. But overall, we're still seeing some pretty positive returns. But what I find interesting is that, you know, they say statistically the lag effect of interest rate rises is not generally felt until sort of the 12 month mark. And as you said at the top there, we've gone from 0.1% to 4.1% in 12 months, which is an historical rate rise. The speed of that and so is now the time to start really thinking about what is going to be the effect of this rate rise. 

Alec: [00:05:13] Well, let me answer that for you. With some recent data that came out from the RBA this morning as we're recording the interest that Australians pay on their mortgages has doubled from last year. We will way I say way. I don't have a mortgage to you, but we both hope to have one and feel that pain soon. $83 billion annually in interest. That's double what it was a year ago in the June quarter. From this ABS data, Australian households paid 24.5 billion in interest. 24.5 billion annualised. It's 100 billion. So but 24.5 billion in the quarter compared to 11.9 billion in the same quarter last year. So to answer your question, what are the effects going to be? That's where it's felt first and there's a wealth effect there across the economy. Andrew and I spoke about the retailers and, you know, we've just come through earnings season or reporting season and everyone's numbers were okay, considering they'll be pretty good considering. But the retailers also give investors a view of how they've started the next financial year, because by the time they're reporting, they have, you know, sort of 4 to 8 weeks of data for the new year and a lot of them will like this year has started very soft. 

Bryce: [00:06:33] Well, yeah, consumer spending is down. We also know that through COVID and and sort of over the last 18 months, household savings were at sort of record high. Everyone is putting cash away that's now back down to to levels pre-COVID and and the saving household saving ratios are going down. People are drawing on their savings for this increase in interest rates. I mean, at the end of the day, what's happening is what is supposed to happen when interest rates go up. So from a I think from a governance point of view and bringing hate out of the economy and whatnot, the effect it's happening, how severe that's going to be going from point 1 to 4.1. That's the question for me. 

Alec: [00:07:19] Yeah. So I think there is a little bit of optimism in the market, but it's important to temper that. Because there's more to play out. But let's talk about someone who is certainly not optimistic, which is the big news of this week, Alan Joyce. He's out.

Bryce: [00:07:32] I reckon you'd be feeling pretty optimistic. He's just gone. See, with 10.8 million bucks.

Alec: [00:07:38] Yeah. Yeah, but for me, like 58. So 15 years in the spotlight. Running one of the most iconic companies in Australia. You leave on this note? You can't help but feel tarnished. 

Bryce: [00:07:54] I mean, it's his undoing. I don't. I don't feel sorry for him. Like he had. He had alternative options. He didn't have to. Like, it's not like he woke up and went, Wow. This. This came out of nowhere. He's just going to leave with a sour taste. Waggoner He's going to leave. Leaving a sour taste in your mouth.

Alec: [00:08:17] Yeah, yeah, yeah. So we eloquently, though. So we did an episode on the Dive, our business news podcast, where we unpacked the three scandals, the three big scandals and some of the minor ones. We don't need to cover that here. Everyone's heard about it on the news, but you can go check out that episode will include a link in the show notes. But looking at the share price return. So Alan Joyce joined in 2008, became CEO in 2008. From January 2008 to today. How much sharing in the Qantas share price is up? 

Bryce: [00:08:50] Nothing less. Less than 5%?

Alec: [00:08:53] Yeah, 4%. Um, Geez. To host an investing podcast and they basically didn't pay dividends in that time. They did in 17, 18, 19, but not a massive shareholder return, we should say, though he actually came in in November 2008 from the depths of the GFC, quantitative share prices up about 120%. But he's universally seen as like a great CEO. I think you and I even had a back and forth on an Equity Mates episode where you called him like a great manager. Does that ring a bell? 

Bryce: [00:09:26] Yeah, it does. 

Alec: [00:09:27] And for me he is the quintessential example of like the classic Milton Freeman, neo liberal Chicago school CEO. And what I mean by that is like the pre the seventies, mainly the eighties, there was this view that like businesses looked after the communities that they were in and the employees and stuff like that. In walks Milton Friedman and says the only obligation a CEO has is to their shareholders, the equity shareholders and everything else is sort of immaterial. And that led to, you know, that the corporate culture that we've had over the last 50 years really exemplified in the eighties and carried on that. It's like shareholders are what matters and your obligation is to your shareholders. And a generation of professional CEOs and executives have come in with that ethos. And I think Alan Joyce sums that up because there's a and there's a list of people that he's fought with Qantas pilots, Qantas baggage handlers. 

Bryce: [00:10:23] Everyone. 

Alec: [00:10:24] Airports, the Government in Australia as a whole. And the he's like for him, the one thing that. He's been laser focussed on in all of the scandals that we're talking about now, how he would defend himself. My only obligation is to the Qantas shareholders and I acted in their best interest. 

Bryce: [00:10:42] It's been his line. And shareholders. Well I don't know if they're happy or not but he's, he's. I actually saw on ABC the other day that he's actually lost more money over his tenure than he's made them. 

Alec: [00:10:57] Like in terms of annual profits. 

Bryce: [00:11:01] He finished on a high, obviously won $1.6 billion profit of No. 

Alec: [00:11:04] Post-tax pre-tax. It was almost two and a half. And he hasn't paid a lot of tax over it.

Bryce: [00:11:11] Hasn't paid a lot. No. Which is also a great thing. What one thing you should do is look up his, look up what he looks like when he started, as I say scruffy, open tie a bit sort of like. And look at what he looks like. Yeah. The progression of him over the last 15 years. Slicked back hair, nice glasses, beautiful suits. It's, um. It's worth having a look. [00:11:36][25.4]

Alec: [00:11:38] Sorry. There's an effect, and I just can't Google it where actors get hotter as they go through the seasons because they get more money. 

Bryce: [00:11:48] That's kind of what I mean. You can see his pay packet coming in. 

Alec: [00:11:52] Yeah, And I think there's a term for it, but I just, I couldn't Google it. So anyway. 

Bryce: [00:11:57] But anyway. Look, speaking of big jobs for the new RBA governor, a huge job ahead for the new Qantas CEO. 

Alec: [00:12:05] Vanessa Hudson. 

Bryce: [00:12:06] Vanessa Hudson.

Alec: [00:12:07] Is she interim or. 

Bryce: [00:12:08] No, she's in. Yeah, yeah, yeah, yeah. 

Bryce: [00:12:11] In sooner than I think she was anticipating.

Alec: [00:12:13] Being with Qantas since 1994. That's a company woman. 

Bryce: [00:12:18] That is. And that's. 

Alec: [00:12:20] What you could have been a bully, if you stuck it out. 

Bryce: [00:12:24] No thank you. A lot of work to do. There is serious brand damage for Qantas at the moment and I mean if you're the competitor, now's the time to seriously strike. 

Alec: [00:12:35] Yeah, well, Qatar Airways orchestrated Alan Joyce his downfall. 

Bryce: [00:12:42] Yeah, I reckon that'll get overturned? 

Alec: [00:12:44] Definitely. No. The Transport Minister Dan Tehan came, has publicly said Qatar can reapply and the amount of public pressure. You're not going to be the trade Minister. That turns out that. No. Yeah. Which is good for us. Right. I do feel sorry for Australia's airlines competing with the government backed. Airlines from overseas, like the amount of losses that they can absorb, the pricing that they can put in the market. That feeling of sorry is obviously tempered by the fact that Qantas had a record profit this year. So yet, you know. Clear caveat there. But an international paying the CEO of an international airline would be one of the tougher gigs. 

Bryce: [00:13:27] Very tough. 

Alec: [00:13:28] A lot easier to be CEO of a duopoly supermarket. 

Bryce: [00:13:32] Much harder. Anyway, let's keep moving. Red last week we spoke about the IPO window opening. We also put up a post on our Instagram and news continues to flow. There's a huge IPO on the table.

Alec: [00:13:46] A huge IPO that everyone has been affected by, but no one knows. Yeah. 

Bryce: [00:13:51] And that is aam which is one of UK's or if not UK's largest chip designers and not potato chips but microchips. 

Alec: [00:14:01] Important clarification.

Bryce: [00:14:02] Important clarification.

Alec: [00:14:04] They make hardware that's in almost every smartphone. 

Bryce: [00:14:09] So they IPO going at a valuation between $47 and $51 a share which is essentially a $52 billion valuation at IPO. So a huge, huge IPO coming out at a. I think they're timing this incredibly well given what's going on in this space. Like it's hot so they are striking while the iron is hot. Interestingly one of the largest owners currently is SoftBank. Yeah. So maybe they finally going to get something right.

Alec: [00:14:40] I think full owner. 

Bryce: [00:14:42] Um. Oh, I don't know. I thought. 

Alec: [00:14:45] Oh, okay. Um, yeah. So Instacart which we spoke about last week. AAM that you've mentioned they're both profitable. Would you like to say yes to profitable tech companies? 

Bryce: [00:14:56] Yeah. Well I mean the environment there where you know you're not going to get very far if you're not.

Alec: [00:15:02] And there's one other IPO that is coming out Klaviyo better than No I hadn't heard of them either. Also profitable like marketing, tech, email automation, that kind of stuff. But here's why the fascinating for me so Shopify, the e-commerce platform where you want to spin up an ecommerce store. 

Bryce: [00:15:22] I'm doing it. Yeah. Dropshipping. 

Alec: [00:15:23] On get started investing Bryce is starting a Dropshipping Yes, you'll probably use Shopify for that. 

Bryce: [00:15:30] 100%. 

Alec: [00:15:31] There you go. You will use Shopify for that. Shopify invested $100 million into Klaviyo in August 2022, which is a heap of money. 

Alec: [00:15:41] But just, just pause on that for a second because when I read that like the the guts to do that from Shopify was pretty amazing. Shopify is not profitable and it dropped $100 million like that in itself is a massive step for an unprofitable company. 

Bryce: [00:16:01] In 2022 as well. 

Alec: [00:16:02] But that's the more amazing thing. August 2022 Shopify share price had fallen more than 80% in less than a year from November 20, 21 to August 2020 to more than 80% like there would have been like people would have been panicking in HQ that there were layoffs, like things were not good in unprofitable tech land. And in particular, Shopify was like a real example of that. To have the, I guess, long term vision, to have the conviction, to not hoard that $100 million and keep your balance sheet strong, but to invest it like that's a sign of a company that's saying through the cycle. 

Bryce: [00:16:43] It's high conviction, that's for sure. Will it pay off though. 

Alec: [00:16:47] Yeah. And like now to be fair, it's a lot like a $90 billion market cap or something. So like, this is a big cult of cash. They've got a lot of big customers. Yeah. So let's not make this more than it is. But when I read that, I was like, That is pretty amazing respect. 

Bryce: [00:17:00] Yeah. So it's an email marketing company or email company. 

Alec: [00:17:03] Yeah, marketing automation and stuff like that. Also profitable So Instacart Klaviyo number of profitable IPOs coming and they're probably the wedge then. 

Bryce: [00:17:13] Yeah, kick it all off. 

Alec: [00:17:14] kicks the door open and then a number of unprofitable companies come through and kick it off IPO windows open. We're on the bull market again. [00:17:20][5.8]

Bryce: [00:17:26] All right. Well, that's the news for the week, Ren. Let's move on to mentor. Now, if you're just joined us for the first time to quickly get you up to speed at the start of the hour. And I just wanted to pair up with an expert investor to improve our own investing skills. And so Ren chose Andrew Page, and I chose Henry Jennings. Now, Henry is overseas enjoying himself in Italy at the moment, so I'll be catching up with him in the next few weeks. But yeah, Ren touched base with Andrew. 

Alec: [00:17:52] Yeah, and in this I just really wanted to catch up, touch base and get his sense on what's happened over the past few months with earnings season reporting season, he's particularly focussed on smallcaps so also to. Here's what happened on this in the smaller end of the market. Andew, good to see you again. 

Andrew: [00:18:10] Good day, mate. Good to see you. 

Alec: [00:18:11] Well, I've been on holidays for a few weeks and haven't really been thinking about investing too much. And what if I missed? 

Andrew: [00:18:20] Well, I don't know. Maybe it's always been thus, but it feels like the market is really jittery right now. Like, we like as, you know, like I love Smallcaps. You know, it's not that unusual to see double digit percentage moves in a day, mid gut churning kind of stuff. But you see it, right? You don't usually see it for billion dollar plus companies. And there were a whole bunch of examples that we saw this reporting season. Altium alternates both up 25% plus in a single day. Yeah that was new information. It's good information, but it literally added hundreds and hundreds of millions of dollars in the case of Altium, like $1,000,000,000, you know, in a single day. Why is tech went the other direction? You know massive drop down but also accent Whitehaven there was just a bunch of really big moves. 

Alec: [00:19:17] The unfortunate thing of those three companies, the one that I do own is Wisetech Cyber. 

Andrew: [00:19:24] Yeah it's that's that's always the way I've got I've got too many of these. It's just embarrassing really where I can, I can put my hand up and say oh I bought Altium years ago like a fraction of the current price. But, lest you think I'm a genius, like I sold like, well ages ago at the time, thinking, Oh, look how smart I am. And I look at some of these results and go, Why? Why did I do that? And is there a hindsight bias to that. But at the same time, the rationale for selling was, oh, it's a little bit expensive and I don't know how many times I need to learn this lesson, but really high quality companies, you know, they tend to keep winning. And you not that any price is acceptable, but you don't want to be too fussy on it. And when I look at my biggest losses, it is the altium's end of the world where it's not that I actually lost money, but from an opportunity cost perspective, the loss was tens of thousands, if not more dollars, because I just I was just dumb, frankly.

Alec: [00:20:28] So you say the market was jittery, but a couple of the companies that carry you think negative, but like Altium was back like it. You know, it's had a rough time and it was up a lot. So jittery on both going both ways. What do we take from that? Just like people don't know what to think or.

Andrew: [00:20:47] I don't know, skittish maybe is a better word or just it was altium's a good case in point because for a long time now they've had this very I'm going to forget it off the top of my head. But this very large aspirational goal and it always seems sort of ambitious, but they're more or less sort of tracking towards it. And with some of the commentary, some of the results are like, are they going to not only hit that potentially even exceed it and potentially sustain that momentum for a little bit longer? So I think in the year 2023, do we have more algorithmic traders? Are there more bots involved? Then I can come up with narratives that maybe sound really smart, but I don't know what I don't know what the answer is. Here's the thing, though. It's not bad. It's actually a good thing. I don't think no matter how advanced we get, whatever happens, I think we will always have this reminder that markets are generally not rational. They certainly are not efficient. And as investors, we should be terrified of the prospect that they ever become rational and efficient because as well as stock pickers, we're out of a job, but we want really dumb things to happen short term and long. May that continue. That's not what I'm saying. It was a dumb thing with Altium, but there's a lot of examples out there. I was like, maybe ResMed is worth talking about. So the big sleep apnoea company, like they've dropped massively again. They are $10 Billion company now after these 25 like lost a quarter of their value because of a new weight loss drug. And people I think the market's assuming that obesity is cured and normal snore. You know it's like really okay. 

Alec: [00:22:29] A fascinating story. The other side of that story is fascinating as well. Novo Nordisk, the company that you're mentioning about, to become the most valuable company in Europe, I think it's right now the second most valuable company. And it's ripping. [00:22:40][10.6]

Andrew: [00:22:40] Wow. You know, if they're on to something here like I am, I'm old enough to remember that man when, I mean, gastro branding was becoming a thing and and people were freaking out with ResMed, then it's like, Oh, that's going to cure baseline. Is it, though? Is it really? So maybe. Maybe in this case we saw the valuation was too stretched and maybe things have just come back to normal. So I don't. To suggest I haven't done the work I want to do. So now things are really cheap. But it isn't an example of that's really the only new piece of information the case with RES made. They posted incredibly strong revenue and earnings growth, good outlook and the rest said that's the thing that has changed. And all else being equal, is that in and of itself enough to why literally billions of dollars off this company? I don't know. I don't think so

Alec: [00:23:28] So the one of the big takeaways was that the market is Jerry, there's big movements, good news for stock pickers. What were some of your other big takeaways?

Andrew: [00:23:37] Well, the big takeaway is that for all the companies I hold, I didn't get those 30% free rights. And it's been frustrating because, I mean, you 've talked about this before where, you know, as an investor, you want to have your investment thesis. You know why. Peter Lynch Right now, what you own and why you own it, right? I'm this is why I own it because I'm kind of expecting this to happen. And every reporting season, even if the quarterly update or any time the company releases new information, you sort of get a chance to sort of test that thesis. Like were these assumptions reasonable or at least directionally sort of reasonable and. I don't know. Maybe I'm kidding myself, but I feel as though on a few of the covers, like Tig. That's brilliant. Okay. I mean, not not that there was like, a massive, like, Oh, that's much better than I thought. But I thought, like, everything is going well. Yeah. And in the case of a couple companies that, like, dropped it to lower in the risk group, I think what we've talked about before is something that I'm quite fond of. They had astonishingly good result and shares were down like 7% I think in the wake of the results is like right that's, that's weird. Now again I, I say it sucks if I'm trying to be more level headed it's like well that's an opportunity. I mean what if you ask like on paper what is the best possible set up that I can hope for as an investor? It's a company that is executing well and that the share price continues to fall. That's a good combination. Yeah, but I'd be lying if I said I you know, I'm happy that the shares have gone down. They've gone up. For me. It's a reminder this earnings season and it's not a new observation, but it's a reminder of the fact that returns never come evenly in the sense that it is, it is gradually and then it's suddenly and it's sort of like I tweeted out the other day, Altium was a really good case in point. If you are an investor looking at your three year total annual compound, return the day before the results, you got two and a half percent per year. So they're looking back at you and going, I bought Altium three years ago because I thought it's a really good company. Big, good prospects. Share price was reasonable and I've gotten to less than inflation now. If you did the exact same calculation on the exact same company and you did it one day later, you've now got a 10% compound in your return over the trailing three. So you've just your frame shifted that three year period one day and you've gone from two and a half to 3%. And that's a reminder that returns are not even on this market. And that's what's going to screw with your head because, you know, when you look at a chart, you go, oh, you know, it did nothing. And then all of a sudden it did something and, you know, that's what I should expect. But living through those three years, you can imagine, especially all the markets doing this, is like that is brutally tough. But that's how it goes. 

Alec: [00:26:34] Yeah, yeah, yeah. So you mentioned there that most of the companies in your portfolio you sort of looked at and you were like, take whether it would be great if there was an example of a company where you looked at it and you were like, Oh, the thesis has broken just so we could talk through it. I don't know if there is one. 

Andrew: [00:26:50] I don't, I don't think so too much, actually. It's sort of the reason perhaps is that a lot of the ones that I'm rather fond of have got some hairs on them. And I think they did, they just had their fall from grace. And so if I'm being honest with myself and hopefully I am and I'm being objective, the mistake I made was already revealed like 6 to 12 months ago where there were some companies and we've talked about Catapult before, we've talked about virus sweep before. This was about point terrible for which really there's just some brilliant businesses there but things got a little bit carried away. The execution wasn't perfect. Like a lot of companies, they sort of were not focusing on cash flows and were only focusing on the top line them. And so the market came down and we sort of had this sort of sell off in growth and tech and and hopefully what I did was reformulate the thesis to go, okay, so, so the worst thing to do is go, okay, I made a mistake. That's it. I'm never going to look at them again. But I've invested a lot of time in understanding those businesses. So if I've done it right, I feel as though, okay, the mistake has been made, it has been revealed. But if I dust myself off, look at these. Again, acknowledging some of those shortcomings and now looking at where the company is positioned and putting that in the context of the current price, where it's sort of like, gosh, there's a much lower bar to jump over at seven and a half cents a bar. So, for example, minute $0.30, right? So if two things maybe aren't as good as you initially formulated, but then again, you're paying a third of the price. So, you know, things can sort of work out. There are some scenarios, I think, where the signs are encouraging, yet still tentative. So where they have seemed to have pulled back on costs as a lot of companies have, but without taking the foot off the pedal in terms of necessary and reasonable long term growth investments and without having a detrimental impact on the top line. You mean it's very easy for any business to sort of just strip all their costs away and their profits kind of look a lot better, but you're probably just hobbling yourself for the future. So I think there's sort of these green shoots that are there and maybe the market's waiting for sort of maybe another quarter or half a year down the track is like, Oh yeah, it's encouraging, but I'm I'm sceptical, I'm nervous. And then when you see a bit more evidence, maybe then the rewrite will come. 

Alec: [00:29:17] So speaking of the rewrite and, you know. People's sentiment and all of that stuff. I know you don't really think about the macro too much, but I know a lot of people will be interested in your thoughts on it. So inflation came in this week, 4.9%, and there's hope of no more rate rises. There I even read some economists talking about rate cuts next year. So, you know, there may be some green shoots. We won't get you started on housing because we'll blow through our time and what's to come there. 

Alec: [00:29:49] But do you get a sense of maybe sentiments turning, maybe some of these companies are starting to invest a little bit more for growth and sort of, you know, return to maybe not the crazy days of 2021, maybe return to like 2019 days.

Andrew: [00:30:04] Yeah, right, Right. I mean, you're right. I don't I don't take the macro too much into the investing. I'm very much bottom up. But I do think about macro a lot because it's what's just interesting. It's not just from an economic lens. I think it's from a societal lens. Like, you know, things tend to go get pretty real when people are poor and desperate. So it's sort of interesting to sort of track in geopolitically as well. So, I mean, we've seen what's happened with Evergrande in China, the property developer there. And then more recently, of course, we've had country gardens that's basically losing billions and probably going to default on all of its bonds. A lot of lenders there are going to be out of pocket. And why is that relevant from the macro saying, well, China is the second largest economy in the world and they're our biggest trading partner and they tend to buy a lot of iron ore and they've historically bought a lot of iron ore to build apartments and roads and railways and stuff. And they're just overbuilt. It just go cities. I mean, this is not a new theme, but I think we are now starting to see evidence of these things blowing out. You know, the word Ponzi gets thrown around too much these days, but literally the business models of these lenders were sort of taking deposits and sort of use that to build the next project, pre-sell them. I know it's just sort of like it worked wonderfully well until it didn't. And I know that people like to go, oh, it's a command economy, so it doesn't like the rules of economics don't apply. But there is always going. Someone has to pay the piper eventually and the government might print money and save them all. But that just means that everyone's going to suffer through dilution and what we call inflation. So on your point, with inflation, I'm very much of the view that we are going to have higher for longer. I think we've definitely passed the peak, but I don't think we're getting back to two or 3% any time soon. The RBA was recently talking about climate change and the impacts that's going to have on inflation. Right. So that's pretty real. And there's just been a lot of trillions pumped into the system. So I'm a little bit of an Austrian when it comes to the economics schools of thought, and I think inflation is a monetary phenomenon. And there's just in the same way that we would understand that a company issuing a lot more shares is bad for existing shareholders. Any economy where choose a lot more money is bad for existing currency holders. And I think that that's probably going to be a phenomenon. But but at the same time I feel as though the new RBA governor I think is making noises around trying to prepare us to just accept higher inflation. We're going to have to in the US they're talking about changing the 2% target. Oh that's too low need. Oh my gosh. Yeah. That's like, you know, Krugman and others are saying, oh we need to, we need to increase the target. It's like, oh, by the way, it's a completely made up time. 

Alec: [00:32:55] Yeah, it's it's, it's arbitrary. 

Andrew: [00:32:58] I think they literally when 2% feels about right. And okay so so I think we're going into a period of higher inflation. We're past the seven 8/% sort of mark hopefully. But the reality is in Australia and I can't avoid it entirely, I'm sorry, but I won't get too deep into it. But the reality is, is that so much property is the linchpin of so much of the Australian economy and so many of us have put all of our wealth into it in a very highly levered sort of way. So you get to the point where I think the central authorities have this devil's decision to make, which is like, well, do we just all suffer some higher inflation for longer or do we crush the property market and thereby crash the entire economy? Now both suck, but which one sucks list? 

Alec: [00:33:44] And does any hope of being re-elected like the political party that knocks this house of cards down? They're out.

Andrew: [00:33:51] 100% like. It's just it seems like it seems like too basic a take, but obviously it is. Can you imagine a politician getting up there saying that no way where we're going to we're going to make you poorer. And let's not forget that two thirds of the country has exposure to housing in a very real way. 

Alec: [00:34:09] We often joke that two thirds of Australians might have exposure to housing, but more and more, every Australian has exposure to the stock market through their superannuation. They just don't really think. About it in the same way. But imagine if the integrity of our super balances was such a political issue as the, you know, our housing market. And every politician was like, we cannot say the stock market for how that would change incentives, how that would change policies. You know, first stock home buyers grants, you would have first stock buyers grants, all of that tax benefits. 

Andrew: [00:34:43] It's such a great point. You know it is come a religion in this country and it like with property and we we have seen how many times do we have to try and put in policies in place to add extra stimulus whether it lets people to deduct money from their super to put into property, whatever, it never works, right, because this lifts everything up to the same degree, kicks the can down the road.

Alec: [00:35:05] The latest is this shared equity scheme where the government now would just ship money in. It's the most direct way.

Andrew: [00:35:12] And it's crazy. It's crazy. But I mean, the reality is, is it's just I mean, this is we I said I was going to talk. 

Alec: [00:35:20] That's all right. Let's go.

Andrew: [00:35:22] Very briefly is that. We all talk about are we have to improve affordability. Now I've got a 13 year old son. Right. And so he he's me ranting all the time. He goes, doesn't that just mean prices go down? That is like, you'd think so, son. You, as a 13 year old and alone say he's particularly bright, right? You know, he's but he's just like, that's the thing. We have this bizarre concept that we can make things more affordable without prices coming down and you can't let prices come down. I because of the leverage in the system, because of the knock on consequences that it's going to have. So it's a really difficult scenario. I'm not calling for a house price crash, but I just think it come back to earnings season for a second. So here's another thing I should have mentioned before. When you look at all the retailers, whether it's Dust Group or even Nick's like a really good ones like JB Hi-Fi and Nick Scali in the red, they're all not I mean, some of held up much better than others but but out of the commentary was, look, the first eight weeks of the current financial year, we have seen sales fall substantially. And that is a very strong indicator of what is happening. So we're not seeing it in terms of defaults or anything like that. On housing and the banks results came out pretty healthy, right? There's nothing wrong there. But of course housing is the last thing to go. You will do what I can. I can live without my another iPhone or a drone toy or something like that, or I don't need another scented candle from dust group, you know. But I do need to pay the mortgage. And and I feel as though that is a really interesting indicator of just how tough people are doing it. 

Alec: [00:37:06] Yeah, it is. And yeah, it's going to be one to watch. So final question. Any last takeaways that we haven't covered? Did anything that I should be aware of as you bring me up to speed? 

Andrew: [00:37:19] I actually made this comment elsewhere. I think it's a good one. I'm saying it aloud more for myself. I think as investors, we feel as though during reporting season that we need to read, synthesise, digest and react really quickly. Results are out. I've got to read it. I've got what is good or bad? And let's face it, we look at the share market. Is it up? We must have ignored it was that dumb kind of stuff. And more and more I've actually got a lot of I think the work starts now after reporting season. The reality is you're never going to be fast enough to read all of that, interpret it, digest it, and then make a sensible, calculated, calm decision that quickly. Well, you can front run an immediate market reaction. That's it. Whatever reaction is going to be, whoever, it's a 30% pop in the case of Altium or a wise take, 25%. Well, the horse has bolted. Right. So. So take your time. Things are going to get we go from feast or famine. Things are going to get really quiet in the next few weeks. This is, I think, the time to in the away from the chaos of earnings season, to read things in a calm manner, make an informed decision and, you know, go forward from there making decisions. It's true in life and it's true in investing. Whenever you make a rushed decision, it's usually a bad decision and you're away for a reporting season. I actually think it's a good thing. I don't think it's you know, unless you're some short term trader, which I know you're not, I actually think you've avoided a lot of that distraction and that sound and fury. And now you can and it's still very fresh. These are very fresh numbers that you can spend the next coming weeks at your leisure without a requirement. It feels like to react, to just digest, to contemplate, to think. And then and then if you need to to react. And in many cases, you won't need to it. So I would. I would approach it like that. And I'm certainly trying to approach you like that. 

Alec: [00:39:22] Yeah, I love that. Well, I think that's a good sentiment to leave it on. The work starts now. I look forward to working with you and, you know, I'll look at my portfolio and start looking at opportunities and next time we chat, maybe I'll have a few companies that I want to pick your brain on because I'm excited to get into the work back from holidays refreshed and ready to go.

Andrew: [00:39:44] Roll that. Roll the sleeves up. I'm here for a man. I'm looking forward to it.

Alec: [00:39:47] Nice one. All right, Bryce. Well, that was my conversation with Andrew Page. Always inspiring. Always leave those conversations motivated to get stuck in and go and research more companies and then the world and commitments here at equity mates catch up. So. 

Bryce: [00:40:05] So we've got four months until the end of the year. Not that there is any race or rush on anything, but do you reckon you make an investment based on anything you've spoken about with Andrew? 

Alec: [00:40:15] I've already made investments based on things which. 

Bryce: [00:40:18] Tell us about it. 

Alec: [00:40:19] I'm constantly investing.

Bryce: [00:40:20] Well, simply investing, You just said. 

Alec: [00:40:22] Call me Alan Collar. I'm a constant Investor. Topping up. I'm opening positions. And if I'm willing to do it, we just don't have time On equity mates to talk about. 

Bryce: [00:40:35] Tell us about it.

Alec: [00:40:36] That's why we need more. So let's take a break and then after we're going to talk about investing, equity mate Steve set us a message to follow up on an interview we did a couple of weeks ago about, I guess, maybe the pitfalls of ESG and socially conscious investing. So we'll get to that after this. All right, Bryce, we are talking all things ethical investing. It's clearly a big conversation in the Equity Mates community in, I guess the broader community. There's a sense that not enough is being done, particularly around climate change. And if we as investors can use our dollars to drive change, it's something we should do. Billions of dollars have flown into space. Tens of billions of dollars have flown into space. Every fund manager now.

Bryce: [00:41:26] Trillions are required.

Alec: [00:41:29] Thank you. 

Bryce: [00:41:30] No worries 

Alec: [00:41:32] Every fund manager now has an ethical fund or talks about their ESG policy, which was why, when we came across Professor Kelly Shue from the Yale School of Business, who had a contrarian take on ethical investing, we really were interested in speaking to her. Her view is that ESG investing is actually a net negative in terms of driving good environmental outcomes. Surprising opinion. 

Bryce: [00:42:01] And I think specifically when we talk about it, it's the approach of divesting from brown companies or divesting away from companies that are high sort of carbon emitters. That's the lens that she's looking at it from. 

Alec: [00:42:16] Yeah, And the reason is if you don't invest in companies that need to change, it increases the cost of capital, their cost to borrow money or raise money from shareholders, and that they need that money to change their operations. So instead, because the cost of capital increases, they can't change. They become more short term and they just sweat their polluting assets as hard as they can and make as much profit. Now, that is Kelly's theory. That's not a universally accepted view, but that's Kelly's theory, and it prompted this question from Steve.

EM Community: [00:42:52] Good day, equity mates, Steve her. As a committed investor in ESG ETFs. Your recent interview with Professor, she got me wondering, should I stress or should I just invest? So I contacted one of my ETF providers, Betashares, to ask for their take and received a pretty detailed response from the Responsible Investment Committee. In general, they said, I agree with the professor's analysis. They disagree with her conclusions as they relate to the real world. So as investors in the real world, I thought Equity Mates might be interested in looking into some other perspectives on this topic. Thanks. 

Alec: [00:43:34] So I think it's great to say that we're generating discussion and forcing the Responsible Investment committee of one of the biggest ETF providers in Australia to, I mean. 

Bryce: [00:43:44] Shout out to them for funding. Yeah, I'd love to actually know what they said. Steve, can you send the response through. 

Alec: [00:43:49] Yeah. Email us contact@equitymates.com would be interested in writing it or forward it to Kelly. Hmm. 

Bryce: [00:43:56] She wanted to know as well what the feedback from her conversation was within the equity mates community.

Alec: [00:44:01] So we have featured a number of different views on ESG investing over time. Two interviews that will be included in the show notes that come to mind for me. Emily O'Neill we spoke to and then Adam Vella as well from Future Super. So a couple of other ESG interviews if you want to listen. But if you don't, let's sort of, I guess, unpack our view. 

Bryce: [00:44:25] So my view has been that if I'm to put my money into an ESG investment, it has to be in one where I'm confident that there is what's the word, not petitioning. But like that there is Engagement being done. Activism, Yeah. You know, activism being done by the fund or by whoever is in control of that money to the extent that you're actively forcing change. I don't think that by investing in funds that sort of do a negative screen. 

Alec: [00:44:56] So you so in essence you agree with Kelly. 

Bryce: [00:44:59] Well, I'd never kind of I had never thought of articulating it in that way. But I had always held the opinion that it doesn't feel like the right way to invest with an ESG focus. Yeah. 

Alec: [00:45:12] Yeah. And like, you just think about, like, put yourself in the boardroom. Forget that you're an investor for a second and you're Rex Tillerson, the CEO of Exxon. I mean, the former CEO, but I don't know who the current CEO is. You have an incredibly profitable oil business. You get paid incredibly well. And sure, maybe your share based compensation will not be as high if your share price isn't as high. But like, you don't need capital markets that much. Like you will be able to sweat the current assets. There will always be a lender, maybe not in the US or definitely in the US, but like, you know, there are lenders overseas that you could get capital from like Saudi Arabian Public investment fund would be happy to to lend a be a lender of last resort to you. You're just like your incentives because an ASG fund doesn't get to invest in you like, you know, going to China. On the other hand, the question is like, if you're Rex Tillerson and this fund tries to engage with you, like, are you going to listen to what they're doing? Probably not. But where we've actually seen change and I chose Exxon for a reason is shareholder activism. So engine number one, this is this tiny little hedge fund, I assume based in the States, they had a major coup where they challenged a number of board seats and actually, I think got a couple of activists on Exxon's board at the shareholder meeting by just going hard around their company's efforts to combat climate change. Right. And so, like, that's an example where it's like a step beyond engagement. It's like adversarial activism. But there's an getting enough shareholders on your side to drive, you know, at least some engagement, some change. Yeah, have a voice with one of the biggest oil companies in the world.

Bryce: [00:47:08] So. Well, that that's how I think about it. It feels like you're all the same. 

Alec: [00:47:13] Yeah. I think divestment works to an extent. Like, you know, the Rex Tillerson example, your personal incentives are like, you're going to be okay either way. But I think on the margins and I think with companies where they are, it's less it's not an oil company, but it's a company that is polluting a lot but has the capacity to change its operations. Take like a Coles, for example, you know, high emitter, just because of the scale of the business and the footprint of the business, but can do a lot like there's a lot of levers to pull. I think their divestment works because of the personal incentives of executives. And what I mean by that is most executives are paid most of their remuneration in shares. And so the higher the share price, the better. But also their long term incentive plans often have triggers where if the share price reaches a certain point, they get paid more. And so like as an executive, your personal incentive is to drive the share price up. And my view is that personal incentive drives a lot of executive behaviour both in this ESG realm and just generally as well. And so if your executive team's personal incentive is to drive the share price up and you know that by engaging with ASG funds, by changing your operations, does. Massive pools of capital that you can access and that can drive the share price up, then that's a personal incentive to do the work and make the change. And I think that has an effect. So I think to that extent, divestment works as long as it's married upward, like you are investing in companies that are doing it, doing the work and making the change. And like Brad Banducci will say, you would probably disagree with me. Actually, I think he said it publicly, like selling the pubs business and because I would want the biggest operators pokie machines in Australia, clubs and pokies. Yeah Woollies split that business half and now Endeavour Group is separately listed. And part of the reason for doing that was because there was massive pools of global capital that couldn't invest in Woolworths because of that gambling exposure like big Canadian pension funds, trillions of dollars that were sitting on the sidelines. But once Worley split their business, they then could invest. So like that is an example of where divestment has affected the personal incentives and driven an outcome. The the flip side and I know I'm a bit of a rant here, but the flip side is predatory splitting of Endeavour group did actually nothing to change the business of Endeavour group it just changed the ownership like there's not one less pokie in Australia because Brad Banducci made that change.

Bryce: [00:49:52] Yeah, but let's be clear, that wasn't the intention. 

Alec: [00:49:54] So, so then it's like, you know, if you're a big diversified conglomerate and you say, Well, we want this ESG money, we'll just split off our high polluting business and make it separate. Doesn't actually change anything. 

Bryce: [00:50:08] No, it's a challenging one because I think if you want to do the route of activism and whatnot as a, as a, you know, in our shoes, it's not like there's just ETFs out there that are as easy to access as the divestment or the negative screen. 

Alec: [00:50:22] It would be an epic ETF, highly active ESG ETF. It would attract a lot of funds. 

Bryce: [00:50:30] Yeah, I think to Steve's question, the real world application, the what's available for us at the moment is very much on the divestment side. 

Alec: [00:50:39] I should be clear, when I said highly active ESG fund, I don't mean like lots of trading like it. I mean like an activist, highly active. I mean it is a view that we've spoken about this off, Mike, a lot, that the ETF providers could do so much more in letting underlying unit holders like us, people that have invested in their ETFs vote their shares. Vanguard says hey, where the biggest shareholder in every company almost around the world. Now we're going to put this out to a Democratic vote. Whatever our unit holders believe we should do, we will then drive outcomes hard. So rather than being a passive shareholder, it's like, Hey, 80% have said we want to challenge Exxon's board nominations and put more climate activists on there. We got to listen to our unit holders. We're going to do it. 

Bryce: [00:51:28] Or they go the other way. 

Alec: [00:51:30] True. Put more coal more oil.

Alec: [00:51:32] There's plenty of reasons why Vanguard wouldn't do that, but it would just be like an interesting thing for an ETF provider to try. 

Bryce: [00:51:38] Nice. Well, there you go, Steve, thank you for the question. Keep them coming in. You can hit us up at contact at equity mates dot com. You can shoot us through the response from Betashares as well That would be awesome. We'll make sure Kelly gets feedback from her conversation with us because it is no doubt resonating with the equity mates community. And on that, a big thanks to Mark Hesketh, who listens to our pitch episode with equities. Last Thursday. We had Vitable and Farmer'sPick. If you haven't listen to that, make sure you do. We had two founders come in and pitch their start ups, which was awesome and we did a call out for the title of the session. Ren wanted to do Fish Tank. I wasn't so hot on that. So he has said that he loves the shows and his suggestions are here we go. Pitch Torque. Pitches plus generating talk through your audience. TORQUE. Nice. Pitch Talk. Pitch Fork. Scratch that itch. Scratch that call like, scratch that. It's nice. Not bad. Mark will take them to the team.

Alec: [00:52:45] I don't mind the mark, but I still prefer Fish Tank. It's perfect because it's like we're not sharks, you know? 

Bryce: [00:52:52] I get it, but still no. no, it's not good branding. Thanks for that. Mark Will will sleep on that. If anyone has any other ideas, please send them in. And if you haven't listened to the episode, tune in. 

Alec: [00:53:04] And if you agree with Fish Tank, I need a groundswell of support here. So back me up.

Bryce: [00:53:09] Anyway, contact@equitymates.com. We're still open for suggestions and questions, but Ren, next episode we will be speaking with Brent Beshore, who's made 14 investments in 16 years. 

Alec: [00:53:21] Yeah. I'm sure a lot of Aussie retail investors have also just made 14 investments in 16 years. But Brent Beshre, he runs a private equity fund, permanent equity. But it is true. Long term investing 30 year funds. How that changes your investment decisions and your pace of investing. A fascinating conversation. 

Bryce: [00:53:42] We loved it. Can't wait to bring it to you and we'll pick it up next episode.