Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 1 of our interview, Sage Capital portfolio manager Sean Fenton tells us whether higher inflation will be transitory or here to stay, plus his tips on 4 of the most-searched stocks.
Outlook for shares
The Motley Fool: What's the outlook for markets this year? Especially with all the worries about inflation?
Sean Fenton: What we've seen with COVID and the shutdowns [is] there is really a shift in behavioural patterns and psychology from consumers and businesses.
Through that period, we've seen a lot of supply shortages. Things like chip shortages, auto manufacturers, and used-car prices have gone through the roof. That's played out in a whole range of different areas.
Generally, commodity prices have bounced back very aggressively, but companies we've noted are actually able to pass those price rises through — consumers are more willing to take price rises and pay for scarcity and availability.
That shift in behaviour, I think, does raise a risk that inflation becomes a little bit more embedded and the short-term supply constraints can actually shift some of the psychology there, and that inflation might not be quite as transient as central banks are expecting.
So if it does remain elevated through the back half of this year, depending on how central banks react to that, that could be quite challenging for equity markets. [It could] fire up bond markets and [lead to] potentially higher yields and pressuring valuations.
That's the main area of caution. Economic recovery looks quite solid and we're optimistic there that it might become too good and start driving inflation — and that punchbowl being taken away from the party.
MF: The chip shortage situation feels understated at the moment. But there are computer chips in everything these days, aren't there?
SF: Yeah, definitely. Who knew that cars these days… it's like 50 chips or something that go into controlling the car. Between just capacity [constraints] there and a bit of a drought in Taiwan, suddenly the world comes to a grinding halt.
4 ASX shares: buy or stay away?
MF: I'll put to you 4 of the most searched ASX shares recently, and see what you think. First is AMP Ltd (ASX: AMP).
SF: Look, to say it's had a shocker in the last few years is probably an understatement. It's apparently been one of the worst-performing equities for the last couple of decades. I actually worked in the capital investment side for about 10 years.
They're under a lot of pressure and obviously, things amplified a lot through the Royal Commission with reputational damage and collecting fees from dead people and poor advice.
When you're a little bit wounded, you've got different groups sniffing around, trying to cherry-pick some of their trusts and funds as well, so you're starting to lose control of some of the ecosystem in the fund-management business.
You've had a couple of groups go through the books and look at it and take out the bids and people walk away. Even in this environment of cheap capital and things being bid for, it's hard to see a takeover as well.
But that said, there is some value to the business, but it's not one, despite the under-performance, I'd be rushing out to buy. There's a lot of structural challenges. A heap of them.
MF: How about PointsBet Holdings Ltd (ASX: PBH)?
SF: My only comment is that the whole sector is very hot, with deregulation of sports betting in the US, the points betting and the like, as well as being in fashion.
I get a little bit concerned when concept areas like that run on thematics and deregulation. There's a lot of expectations of growth and not a lot of hard numbers going through.
MF: The favourable conditions needed aren't in their control, are they?
SF: No. And there's also a lot of people looking to take advantage of that, so I do see a lot of competition going into the area. Different people can have advantages and niches and core technology, but the whole space seems a little bit frothy for my liking.
MF: What do you think of National Australia Bank Ltd (ASX: NAB)?
SF: It's sort of the other end of the excitement spectrum from PointsBet.
We did quite well last year out of the banking sector. They were a bit oversold in the tail end of the Royal Commission, [which] clamped down on lending and with slight loan growth and margin compression, it really saw the banks derate. Then with COVID and potential losses, and they were taking large provisions, they got very, very cheap.
We did well as they bounced back… the economy bounced back and it became quite apparent where house prices were going. The banks really didn't have any bad debts on their books, and as soon as the last reporting season, they started to aggressively write those back.
So we have seen all of the banks, NAB included, bounce back. There's still a very attractive dividend deal there, that doesn't look overly expensive within the banks, but it also has a few challenges. Commonwealth Bank of Australia (ASX: CBA)'s pushing a bit more aggressively into business banking, which NAB has tended to dominate historically. So, that competition won't help their interest margins going forward.
There is competition, honestly, coming in with the non-bank lenders now. That'd be interesting just to see how things pan out.
MF: The last one, Coles Group Ltd (ASX: COL), was a COVID winner. What do you think the longer-term prospects are?
SF: People working from home and eating more at home, has been a little bit of a boost for Coles and Woolworths Group Ltd (ASX: WOW). But they also both had to invest in high levels of safety standards, and this introduced a layer of costing as well. As with all the retailers that benefited a bit on the margin side from less competition, they needed to do less promotional work, and that's all started normalising now.
There's always a bit of a tussle between Coles and Woolworths in terms of market share. And Woolworths seems to have the upper hand there in recent times. Coles has started to bounce back with a little bit more promotion and the like, but generally, it's a supermarket, it grows in line with GDP. A lot of the spending pattern shifts around COVID and lockdowns have started to normalise.
MF: Is it attractive in light of rising inflation?
SF: Yeah. They do tend to offer a reasonable inflation hedge, and sometimes they can get a gross margin benefit. And you see that with food prices, when they rise more strongly, it does tend to give supermarkets a bit of margin benefit — it's obviously got a large fixed cost base.
So there's a bit of a natural hedge for them in that place. People don't certainly tend to eat less in times of inflation.
[Coles has] started to bounce back a bit, I think it underperformed Woolworths a bit too dramatically in recent times. So [it's] a bit more compelling valuation at the moment.
Tomorrow in part 2 of our interview, Fenton reveals the insurance stock set to explode and the bank he would run from.
