My basic approach to investing is “Australia for income, international for growth”. That’s why I started a fund that is Australian domiciled, yet attempts to pick the best of Australian dividend growth stocks and the best of global growth stocks and combine them in a single portfolio. We also have the ability to protect our portfolios via index futures, currency overlay, cash and shorting of weak companies. We can do things the average SMSF investor simply can’t do at all, or not easily.
Regular readers would also know I believe strongly in the power of observation in the investing process. I believe that the best investment ideas are those you can see with your own eyes in everyday life. The products you, your children and grandchildren use will eventually turn up as equity earnings and dividends.
However, the vast bulk of those products are NOT produced by Australian companies. Australian equities only represent a little over 2% of total world equity market capitalisation, while many sectors are grossly underrepresented or not represented in Australian equities.
The chart above compares MSCI World sector weights to MSCI Australia sector weights. You can see that Australia is massively overrepresented by Financials (54.2%) & Materials (15.4%) and heavily underrepresented in Information Technology & Consumer Discretionary. This makes perfect sense and reinforces that many growth opportunities lie outside Australia, but particularly when it comes to technology and consumer spending.
Of course I am not “anti-Australia”. I want to own the best Australia has to offer, yet I also want the best of the rest of the world.
In my view, equity markets simply price the “present” on a daily basis. They price in the news of the day, with high frequency traders (HFT) being the marginal price on a daily basis (50% of daily volumes). To me, by definition, that means the medium to long term is clearly where the investment edge lies. If you can look forward and visualise the future and set a portfolio for that future by taking advantage of the short-term noise, then you should be able to generate strong total returns irrespective of overall market conditions/volatility.
We need to identify structural growth themes and then find the best stock/stocks leverage to those structural growth themes. One thing I do know is it is far easier to grow a company’s earnings and dividends with macroeconomic tailwinds rather than headwinds.
Today, I thought I’d run through the seven structural growth themes I believe in and my fund is invested in. I thought it best to run through the high level themes today. Over the weeks and months ahead, I will continue to explore in detail stocks that we believe have leverage to these structural growth themes in the same way I have run a campaign towards beneficiaries of the Chinese international tourism theme over the last month.
By structural growth, I mean growth themes we hope to be talking about (and invested in) over the next three to five years. This is NOT cyclical growth, this is structural growth driven by a structural shift in demand for a given product/service etc. They are also driven by a structural change in consumer behaviour.
Over 100,000,000 Chinese citizens are forecast to travel internationally by 2020. I believe Sydney Airport (SYD), Star Group (SGR), Crown Resorts (CWN), Treasury Wine Estates (TWE), and Qantas (QAN) are very well positioned in Australia to benefit from the structural rise in Chinese International Tourism. Globally, stocks such as Sands China, Wynn Macau, Disney, Carnival Cruises, Airports of Thailand, Tiffany & Co, and LVMH are also very well positioned. Refer to the recent Switzer Super Reports.
Long Fit, short Fat. The UK introducing a “sugar tax” is another blow to the junk food industry. Indebted governments want a fitter population to take the strain off healthcare budgets. Similarly, the world now wants to know where its food comes from (provenance), which will lead to a price premium being paid for clean and green sourced produce. Australia and New Zealand are superbly positioned to gain from the global food (and drink) market share over the years ahead. What started in vitamins and baby formula will spread to all other forms of agricultural production and food manufacturing value add. Costa Group (CGC) remains my no.1 pick as a fresh food export play and I’ll write more about that one specifically in the weeks ahead. Other stocks with clear leverage to this overall “well being” theme include Nike, Lululemon Athletica, Under Armour, Fitbit, Baby Bunting (BBN), Vitaco (VIT), BWX (BWX), Johnson & Johnson and GoPro to name a few.
When is the last time you used cash? Can you now operate in daily life without cash? Answer those questions then go and buy some shares in Visa, Mastercard, Paypal and American Express in the US. The cashless society is a major structural change that is great for taxation collection as well as just about every movement of cash will have an electronic record. Not so good for the crooks out there!
Obviously the biggest theme not represented in Australia and one that should be part of all modern, forward-looking portfolios. The vast bulk of the worlds most important and influential technology and disruption stocks are based in the US. Alphabet (Google), Microsoft, Apple, Facebook, Amazon, Tesla, Netflix, Zillow etc. etc. etc. One day Uber will be listed too. A portfolio without a smattering of these names is living in the past.
The major Australian specific structural growth theme I believe in is compulsory superannuation. This is legislated growth with contribution and compounding risks to the UPSIDE. One of the reasons I switched from stockbroking to funds management was to “export Australian superannuation”. We have the fourth largest retirement savings pool in the world, yet our share market only represents 2% of the world. That maths doesn’t work and Australia will be forced to export a far greater proportion of its superannuation pool in the years ahead into global growth opportunities. I particularly like “superannuation services” as an investment where I don’t have the short-term market risks or underperformance/outflow risks of listed fund managers. I like companies with direct access to the SMSF army and companies that play a key role in all the “cogs” of superannuation turning each day. The two we own in Australia are both recently listed in Link (LNK) and Class Super (CL1). I will write on both these stocks again shortly.
To quote Warren Buffett, “a monopoly toll bridge is my dream investment”. Too right Mr Buffett, but particularly in a low growth/low inflation/low bond yield environment. Most “monopoly toll bridges” have mandated toll price rises beyond inflation and long concessions. To my way of thinking, that makes them far better investments than any form of government bond. Similarly, the structural change to “cashless tolling” has meant most of us don’t even know what toll we are paying! Transurban (TCL) is Australia’s true “monopoly toll bridge” commanding a stranglehold on key interconnected toll roads around Sydney, Melbourne and Brisbane. Traffic and tolls are increasing, which will continue to drive earnings and distributions.
Now don’t get me wrong, I am not one of those “end of the world” guys who thinks you should be stockpiling gold, baked beans and ammunition. Far from it, I think you can still find plenty of structural growth in the world if you look for it. However, there should be absolutely no doubt the world is in the midst of an ongoing currency war with all major fiat currencies attempting to be devalued relatively and absolutely by their given central bank.
The Fed, BOJ, PBOC, ECB, BOE, RBA and RBNZ are all actively trying to manage their currencies lower, some more effectively than others. Of course, these home-biased currency wars are a zero sum game, but they cause volatility and clearly support the case for gold as a “currency”. We hold Regis Resources (RRL) in Australia feeling A$ gold producers are well placed to deliver leverage way beyond any gold price appreciation.
Those are the seven structural themes I believe in and am invested in. They all require monitoring in the months and years ahead but if they do prove to be genuine structural growth, and only time will decide that, then we should be able to generate strong total, absolute and relative returns by being invested in the right stocks for these themes.
Remember, it’s a market of stocks not a stock market. Whatever the index is doing, there are always stocks locally and globally driving their sales, profits, margins and dividends higher. Those are the ones we are looking for.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
