European Vacation themes

I have to say at times over the last four weeks I did feel like Chevy Chase’s character Clark Griswold in National Lampoon’s European Vacation as I dragged my young family around Europe.

Holidays, particularly somewhat extended international ones, are great for clearing the mind and racking up credit card bills. Thankfully this time around neither the Australian equity market nor the Australian dollar collapsed while I was away, in fact quite the opposite, they remained relatively resilient, with low volatility as did all global markets.

Over the years, all 21 of them writing about equity and investment strategy, many of my best ideas have come from either direct observation, talking to people, clear-minded thinking on holidays or a combination of all three. When I don’t have the daily/hourly dealing desk pressure of where the next ticket is coming from, and the associated “white noise”, it makes it far easier to see the bigger medium-term picture and investment themes.

I strongly believe in the power of observation as an investment tool: in fact it may well be the best tool we all possess. However, I suspect we all under-utilise it in the investment process because we feel if we can see it, it is most likely a “known known” and priced in. In a world of high frequency everything and instant information, as far I can see, the present is discounted accurately, but the future is not.

I thought today I’d start writing again by making a few comments on what trends I observed in Europe over the last month.

1. The euro is overvalued

Europe remains very expensive in US dollar terms and I can’t see how you can get a sustained Eurozone recovery with the euro/US dollar above 1.20. I remain of the view the euro at 1.3462 is great shorting versus the US dollar and will correct as the ECB starts expanding its balance sheet right as the Fed’s balance sheet peaks (October QE end).

2. Cashless society is here

While I was negatively surprised by just how poor value Europe was due to the overvalued euro, I was positively surprised by just how little physical euro cash I required. Remember it wasn’t that long ago that French/Italian shop assistants would decline every card in your wallet just to get cash, but this time around I found not a single service provider tried the old trick of saying “your Amex has been declined” in an attempt to get you to use Visa because of their lower commission rate, or physical cash. It was chip and pin technology everywhere and I could have pretty much existed without any physical euro cash.

The cashless society is a major global theme playing out through VISA, American Express, PayPal, retail banks (less branches/ATMs required) and other financial intermediaries, but I think as Australians we need to realise we are quite a few years behind the rest of the world in terms of the percentage of transactions still using physical cash. This will change and we need further exposure to the cashless society theme. P.S. This is good news for the Australian Taxation Office (ATO) as eventually the vast majority of transactions will have an electronic record.

3. Mobile data addiction (MDA)

One of my big themes remains mobile data addiction (MDA) and in Europe I witnessed a whole new level of MDA. Everywhere you looked there were people on smartphones. I even saw a couple in a three Michelin-starred restaurant spend the vast bulk of their evening on their smartphones!

Similarly, just about everyone sitting on a beach on the Mediterranean was surfing a smartphone, not waves.

Points two and three above are obviously interrelated with the rise of Internet shopping etc. but all I could think was that this MDA theme is a HUGE one. I believe we are ALL underestimating the demand of high-speed mobile data and what incumbent telcos can charge for it. I remain of the view that the P/E arbitrage between telcos and the anti-social media sector, for example, is likely to narrow in favour of the telcos as the world works out they are GROWTH stocks, particularly the telcos with high leverage to mobile data.

Telstra (TLS) remains my number one Australian play on this theme and I note the stock is performing well into the FY14 result and final dividend lift in August. I still think Telstra will be a $6.00 stock over the next 12 months as earnings and dividend upgrades come through and the market pays a higher multiple each day for a stock the increasingly digital economy simply can’t open for business each day without. As I have said before, I can see Telstra moving to a consumer staple multiple over the next few years and it remains an absolutely core high conviction buy in my view.

For investors who can invest internationally, I also like the smartphone makers, but particularly Apple ahead of the iPhone 6 launch. A bigger screen iPhone with better battery life is what we all want and we are about to get it and “Google” more and therefore pay Telstra more each month. I suspect if you hold TLS, AAPL, and GOOG for the next few years, you won’t regret it. You must be exposed to the mobile data addiction theme: it’s becoming a global epidemic.

4. Smoking: so yesterday

On the other side of the “addiction” trade I was pleasantly surprised by a clear fall in smoking rates in Europe. Europe is probably only second to China in the smoking stakes, but this trip I didn’t have smoke blown in my face on any occasion. Not in a lift, not in a restaurant, not at a beach, not even in the street. It was amazing and a sign of the times, as it becomes harder and harder to be a smoker. Short tobacco stocks, long Telcos is the “utility trade” of the 21st century.

5. Chinese tourists

Another of my big macro themes is the rise of the Chinese tourist. They are now everywhere, but particularly in the capital cities of Europe. The Chinese are the Japanese of 20 years ago and I saw this with my own eyes at the Hermes flagship store in Paris. Without incriminating my wife, I may have been in the store for other reasons, but there was a 50-person queue to buy handbags. Now I am not talking about the special super high end Hermes handbags, I am talking about their standard ready-to-wear type bags.

When I asked the shop assistant is this an “unusual queue” she told me it happens every single day from open to close, with some Chinese tourists missing out on buying a bag when the shop shuts, only to return the next morning to be at the front of the queue. It was stunning and anyone who thinks you’ve seen the top in Chinese demand for luxury goods I think is mistaken.

Sure, anti-corruption laws have taken some of the demand out of high end wine, whiskey etc, but to me, to bet against luxury jewellery, fashion, accessory, accommodation, entertainment or lifestyle brands will remain a medium-term mistake. The recent dip in Chinese GDP growth rates to 7.5% has seen P/E indiscriminately take from all China facing stocks. I think that’s a buying opportunity in plays on Chinese outbound tourism and its structural growth. I remain long luxury and my core Australian play on this theme remains Crown Resorts (CWN).

6. Airports

Airports are actually becoming a more pleasant and efficient experience. Even the worst European airports have some sort of retail offering now and, a bit like telcos, I suspect, the absolutely critical nature of airports to today’s economy will lead to further re-rating. Airports are truly irreplaceable assets and with global tourist numbers increasing annually, and airline capacity rising in line with that increase in tourists, it’s hard to see how airports are not GDP+ plays.

Interestingly, all the flights we were on were full, yes including QANTAS ones, and the airline industry is clearly doing better. Airlines are trading stocks and airports are investments: either way I think we all need more “air” exposure in portfolios despite the tragic events of last week.

7. Trophy property prices

Sydney prices are CHEAP compared to London, Paris etc. I remain of the view that Asian money will drive Sydney high-end property prices into the same stratosphere as leading European cities. As we make it easier for high net wealth global money to buy Australian property, you will see a further re-rating of Sydney trophy homes. Sydney, and only Sydney of the Australian capital cities, has the ability to attract that true trophy home/trophy apartment buyer. They are coming and Lend Lease (LLC) is the listed play on that theme.

8. Disney

Let it go, let it go.. the cold never bothered me anyway... Yes, even I now know the songs from Frozen after my four-year-old daughter watched it 6,789 times on our holiday. Walt Disney (DIS.US) are content creation and marketing geniuses as again evidenced by the success of Frozen. On 20x earnings, Disney is cheap.

I will expand more on these themes in the weeks and months ahead, but after a 30hr flight home, that will do for now.

I hope you’re all well.

Go Australia, Charlie

100% of Charlie Aitken’s fees for writing for the Switzer Super Report are donated to The Sydney Children’s Hospital Foundation.

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.