Marcus Padley: One ASX stock for the new bull market

As a UK native, Marcus Today's Marcus Padley doesn't take royal titles like "King", "Monarch" or "Queen" lightly. But there is one stock, and one stock alone, that can be considered King of the local share market - and its latest quarterly result only strengthens that view. 

Padley believes Macquarie (ASX: MQG) is the first stock investors should buy when a new bull market starts to run - which indeed it seems to have done since October.

"Their performance in the December quarter has confirmed our 'Market up, Buy Macquarie' assumption," he said. 

"You could trade an ASX 200 ETF, but you’d make far more money timing Macquarie than the market. The bottom line is that Macquarie is a fabulous bull market stock."

In its latest quarterly result, Macquarie reported that its net profit after tax had lifted slightly in the nine months to December 31, 2022. In the three months to the end of the year, its group capital surplus surged by $300 million, ending the quarter at a whopping $12.5 billion. This was buoyed by "exceptional" performance from the group's commodities and global markets division, but according to Padley, it's also making strides within its banking and financial services business (think home loans) as well. 

In this wire, you'll learn all about Macquarie's latest quarterly result and why Padley is buying right now. He also discusses the major surprises from the result that investors, like you, need to be aware of.

Note: The interview took place on Wednesday 8 February 2022. 

Macquarie Q3 Key Results

• Net profit after tax (NPAT) up "slightly up on the nine months to 31 December 2021". 
• Group capital surplus of $12.5 billion as of 31 December 2022, up from $12.2 billion as of 30 September 2022.
  
• Bank CET1 ratio of 13.3%.
  
• Macquarie Asset Management: AUM of $797.8 billion. Private Markets AUM rose 3% to $284.3 billion, with now $A193.1 billion in equity under management.
• Banking and Financial Services: Total deposits of $125.7 billion as of 31 December 2022, up 8% from 30 September 2022. Its home loan portfolio of $105.4 billion increased by 4% over the same time period. 
• Commodities and global markets: This segment of the business boasted "exceptionally strong results across the commodities platform, particularly in global Gas & Power and Oil products". 
• Macquarie Capital: Completed 84 transactions globally valued at $92 billion in the third quarter. Fee revenue was "significantly down on the prior corresponding period, however up on the prior period." 

Key company data for Macquarie 

In one sentence, what was the key takeaway from this result?

That when the financial markets turn, Macquarie's fortunes quickly turn with it.

Last year was a very shabby year for financial markets. The markets bottomed in October and immediately Macquarie put in a record quarter. This is what I call a “stock market stock”. It's the king of the stocks that go up when the market goes. It's the first stock you buy when a bull market returns, which it did in October. Their performance in the December quarter has confirmed our “Market up, Buy Macquarie” assumption. Macquarie makes more money in a rising market and because of that will outperform a rising market and underperform a falling market. 

You could trade an ASX 200 ETF, but you’d make far more money timing Macquarie than the market. The bottom line is that Macquarie is a fabulous bull market stock.

What was the market’s reaction to this result? In your view, was it an overreaction, an under-reaction or appropriate?

I think it was an appropriate reaction. Not necessarily because their results were fabulous or their outlook statement was fabulous, but because all results, if they are ok, are a relief. Results season is about avoiding the landmines and every stock that has a good result, immediately de-risks itself. These days the share price reaction to bad news is much more violent than it is when there is good news. So any stock that comes in better than expected is going to see a relief rally. And that's probably what we saw - relief rather than excitement.

Were there any major surprises in this result that you think investors should be aware of?

The comments about their annuities business. Macquarie noted it had substantially lower profits from its annuities division, which highlights that they have quite a transaction-based earning stream. It's sometimes lumpy. But the market understands that.

The other surprise is that there is a less volatile and higher quality earnings stream building at Macquarie. You may have seen it on the ground as well if you have applied for an investment property mortgage recently. Macquarie is eating into the bread and butter earnings streams of the high street banks, generating a secure, reliable, quality earnings base by growing their banking financial services. By 8% in yesterday’s results (that’s high growth for a bank) and their mortgage business grew by 4%. They are quietly just eating into the docile high street competition. They won't knock them over, but they've realised that this is low-hanging fruit up for grabs because the major banks are so unimaginative and unflashy with their marketing. This is long term and as they build a more reliable less volatile earnings base that should drag some of the more nervous investors into Macquarie.

What's the best bit of an investment in Macquarie? That I don’t work there. 

Macquarie has 18,000 employees. They rejected me when I applied for a job there 20 years ago because I failed the personality test. I wasn't a team player. You just have to have faith in the individuals they employ. They are some of the smartest people in Australia, with one purpose in mind, which is to make money. You have to trust them to be able to do that. Just like any investor exploiting financial markets, they know when to sit back and avoid risk, and they're smart enough to know when to get involved, as they have done, making a fortune in the commodities and global capital markets businesses. This is not a shrinking violet of a company. The speed and success of their commodities trading and global capital markets trading tell you that this is a better investment than a benign, annuities-style business run by a high street bank.

Would you buy, hold or sell MQG on the back of these results?

Rating: BUY 

Always a HOLD in a bull market and a BUY now. This result has de-risked the full-year results in May and confirmed that they are making money as the market returns. I would be very happy buying now because the risk-reward equation has become less risky and more rewarding. I have a view that the market is going up for now. And consequently, Macquarie, the king of the stock market stocks, is one of the first stocks you should be buying, in size, to take advantage of that.

What’s your outlook on MQG and its sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

It's a market risk, rather than a Macquarie risk. You go with the tide, and the tide is running. The obvious risk is that the market has some seismic pause, halt or correction. If it did Macquarie is straight away one of the first stocks you sell. It cuts both ways. But there's nothing on the horizon that suggests that there is anything to worry about. Even a global recession is partly priced in, and although that could develop, it wouldn't create a precipitous drop in the market. It would have to be something unexpected and we'd have to react pretty quickly. We watch and wait for that. Until then we’re bulls because obviously, you can't expect anything unexpected.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 4

Australia is a four. The US is a two or three. And that's because our major sectors - the banks and resources - are fairly tightly pumped up. We've got the Commonwealth Bank (ASX: CBA) hitting a record high running into their results, and they usually peak out just before results. And resources have had a fabulous run and are still running. I wouldn't be selling them yet, but there's not a heck of a lot of obvious value in most of our big stocks at the moment. 

Despite that, the market PE is at multi-year lows and the market generally is not expensive. We're certainly not at a five, hoping the momentum continues. I’ve been more interested in and excited about the US recently. From an Australian investor’s perspective, the US after a Tech Wreck last year is going to pay off far better than investing in Australia at its record highs.

Overall I'm bullish and excited for the year ahead compared to last year. We had a horrible year last year for long-term investors. Unsettling. This year I think we're going to see a return to a normal bull market, with a normal level of volatility and we will recover some of what we lost last year. I was forced to make an unmakeable forecast at Christmas that this year the market would go up 14%, based on the Fed going soft, which they did. And that is 9%, plus the 5% we lost last year. We've already done 7% in January, halfway there. Annualise that and we’ll be up 84% this year. Obviously, something is going to come along to calm us down. But until then, onwards and upwards. We’ll deal with it when it happens.

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