Andrew Clifford: Investors will no longer speculate on "the shiny future of the unproven"

For over a year, financial markets have been incredibly volatile. In the last year alone, the S&P 500 has had a 1,000 point trading range, the US 2-year yield has nearly doubled, and US-based crude oil futures prices have halved from the recent highs notched in September 2022. 

This presents a strong argument for active stock picking and bottom-up research, but the price action has also offered a strong case for doing nothing. As Andrew Clifford, co-CIO at Platinum Asset Management, noted in his recent address to investors, you can do both when constructing a portfolio. 

"We build our portfolios stock by stock rather than taking pre-determined view on a country or an industry and then finding the companies. If we can't identify attractive investments, we will leave the funds in cash", Clifford said at the recent Platinum Asset Management Investor Roadshow. 

Above all, many long-term investors have been preaching this idea of only buying "quality" stocks. But even with government bonds now paying 4-5% risk-free, some of these companies continue to attract extraordinary valuations. With this thesis in mind, Platinum did something relatively unusual. 

"It makes no sense for a business to trade at a lower earnings yield than the risk-free rate ... We were shorting and betting against many of these quality compounders last year and in most cases we saw them fall 30-50%," Nikola Dvornak, Portfolio Manager for the Platinum European Fund and co-portfolio manager of the Platinum International Fund told the roadshow. 

And that's not all they short-sold.

In this wire, we'll look at where Platinum is finding opportunities in the global equities landscape from both a long and short perspective. 

Note: You can watch the entire presentation below. 

Clifford's big-picture view

In a world where the price you pay matters more than ever, Clifford argues that investors will now become far more discerning. He believes today's investing environment is now fundamentally different from that of the one which investors entered into 15 years ago. Outside of a crisis, he expects near-zero interest rates are unlikely to return without lighting inflation's fire.

"In a world where money has a price and you can earn 3-4% risk-free on government bonds, investors are going to be far more discriminating in what they will buy," Clifford said in his introductory remarks. 

What does 'more discriminating' mean? 

"Investors will look more to underlying returns rather than speculating on the shiny future of the unproven," he added. "What has worked for the last decade is unlikely to work for the years ahead."

But higher interest rates are not all bad...

The consensus view is that higher interest rates and relatively higher inflation are here to stay for the medium term. But that doesn't mean it has to all end in tears.

"I don't think higher rates are in and of themselves are a bad thing," Dvornak said. "It's not so much the level of the interest rate that matters, it's the context."

Dvornak's colleague, Cameron Robertson, who is co-portfolio manager of the Platinum Asia Fund (Quoted Managed Hedge Fund), has been using this 'higher for longer' view to develop ideas for companies worthy of investment. Among them:

• Stocks that have been sold off but have profitable business models
• Incumbents now with less competition

Another area the Platinum team has identified are financial "float" companies, a thematic which requires important distinction. The "float" concept, coined by Warren Buffett of Berkshire Hathaway, is not something found in all financials companies.

"It obviously benefits insurers but it also benefits stock exchange operators and some banks," Dvornak said. The Platinum team hastened to add that it doesn't own any Australian bank, US bank and Credit Suisse. 

For every long idea, there may be a short idea

As has already been noted, the massive rise in interest rates has provided opportunities for the Platinum team to go long and short. One of those, the so-called "quality compounders" has already been alluded to in this piece. Although resilient to most economic shocks and generally displaying earnings leadership, investors kept buying into these stocks until earnings yields fell too low.

Another short position the team undertook was in those unprofitable tech stocks which dominated the conversation during the "free money" era.

"Many of these companies were just ideas in a PowerPoint presentation where people raised capital and used that to buy customers and growth so they could raise more capital and buy more growth," Dvornak said. 

The energy transition also presents shorting ideas

One other short position stems from the team's Platinum Global Transition Fund (Quoted Managed Hedge Fund), run by Jodie Bannan and Liam Farlow. 

The years prior to 2022 saw a massive rush of inflows into energy transition and ESG-centric products. The Inflation Reduction Act in the United States along with global green energy mandates created massive interest among investors. 

And although their work is centered around these climate transition-centric thematics, there was actually one set of companies she was happy to bet against.

"One area we did a lot of work on and were quite skeptical of was green hydrogen. There is a lot of hype around hydrogen but if you talk to the engineers in the field, they will tell you it's going to be quite challenging to invest in this area," Bannan said. 

"The other issue with hydrogen is that it's actually nothing like LNG. You need specialised tanks, pipes, and trailers. It's going to be very difficult and expensive to distribute," she added. 

"That provided us with opportunities to short companies that we saw taking big investment risks really early on ahead of the market developing, and pushing balance sheets to the brink."

But not all green-themed stocks are bad...

...especially in China where renewable energy installations have dwarfed the amount installed in the West over the last five years. China also plans to accelerate its role in the energy transition across wind, solar, and nuclear options. 

The world's second-largest economy has also been an early adopter of electric vehicles. Despite Tesla (NASDAQ: TSLA)'s heavy presence in China, it's actually local player BYD (SHE: 002594) that sells more electric vehicles and they have plans to sell more outside of the tiger economy. 

Elsewhere in the battery technology thematic, the fund owns large stakes in Korean giants Samsung SDI (KRX: 006400) and LG Chem (KRX: 051910). It also recently bought CATL (SHE: 300750), a Chinese-listed play that Western companies like Ford (NYSE: F) are using in the development of their own electric vehicles. 

A litany of other opportunities in China

While no one could tell at the time, buying Chinese equities in October would have been the trade of the year as it turned out to be just weeks short of the decision to reopen the economy. Although it wasn't a full reopening, the announcement by Beijing was just enough to spark an almighty rally.

"I'm not saying this was a 180-degree about-face by the Chinese Communist Party but it was a 10 to 20-degree course correction - and that's all it took," Dvornak noted.

And if you needed any proof of that, take a look at the performance of some of the Platinum International Fund (Quoted Managed Hedge Fund)'s flagship holdings in the months since China's reopening.

 

Other opportunities in China

China continues to be one of the team's top conviction trades. They believe that economy represents true mispricing (out of favour, underappreciated, and receptive to change). 

"Change can take a while for market participants to appreciate," Robertson said. "China very much feels like it fits in the [out of favour] category. Even now, although sentiment has improved compared to late last year, it's still not a market people are rushing to put their money into."

But being uncomfortable with your investment choices can sometimes be a good thing. Now, the focus turns squarely to the consumer and whether sentiment will improve among locals as well as those wary foreign investors. If those headwinds alleviate, Robertson argues some consumer and property-oriented stocks could be in for a strong showing.

"There's a number of areas where I think we are seeing more positive signs and that's really helped our travel holdings like Trip.com (HKG: 9961) and Huazhu Hotels Group (HKG: 1179)," Robertson said. 

Robertson also noted the Platinum Asia Fund (Quoted Managed Hedge Fund) holds a couple of Chinese property companies including China Resources Land Ltd (HKG: 1109). With the banks getting on board the government's initiatives to restore confidence, Robertson is more bullish on the space than many other international investors are.

"The property sector looks like it's stabilising. The government is providing liquidity again and telling banks to lend out to developers. You are seeing the activity picking up again and prices are stabilising," he added.

ETF

Platinum Asia Fund (Quoted Managed Hedge Fund)

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ETF

Platinum Global Transition Fund (Quoted Managed Hedge Fund)

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ETF

Platinum International Fund (Quoted Managed Hedge Fund)

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Platinum Investment Management Limited ABN 25 063 565 006 AFSL 221935, trading as Platinum Asset Management ("Platinum") is the responsible entity of the Platinum Global Transition Fund (Quoted Managed Hedge Fund) (“PGTX”), the Platinum International Fund ARSN 089 528 307, Platinum Global Fund (Long Only) ARSN 123 939 471, Platinum Asia Fund ARSN 104 043 110, Platinum European Fund ARSN 089 528 594, Platinum Japan Fund ARSN 089 528 825, Platinum International Brands Fund ARSN 092 429 813, Platinum International Health Care Fund ARSN 107 023 530 and Platinum International Technology Fund ARSN 092 429 555 (altogether the “Funds”, each a “Fund”). The Funds latest Product Disclosure Statements ("PDS") provide details about the Funds, you should read the relevant PDS before making any investment decisions. You can obtain a copy of the PDS from Platinum’s website (VIEW LINK), or by contacting Investor Services on 1300 726 700 (Australian investors only), or 0800 700 726 (New Zealand investors only), or 02 9255 7500, or via invest@platinum.com.au. The Funds target market determination is available at (VIEW LINK).

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