TOL - 5th Jun, 2023
Where Jun Bei Liu is investing as markets climb a wall of worry
In this wire, you'll learn how the Tribeca Alpha Plus portfolio manager is looking for opportunities today, as well as her macro base case.
Markets are currently doing what they do best - climbing a wall of worry. And while cashed-up investors may be waiting for another crash or downswing so they can re-position, Tribeca Investment Partners' Jun Bei Liu thinks investors are getting it wrong.
Instead, Liu is bullish on the outlook for the Australian economy, believes that the China reopening theme still has room to run, and believes investors should be taking profit in defensive companies and repositioning into quality stocks to navigate the months ahead.
And while she admits we are likely to see some near-term weakness, particularly in consumer-related companies, Liu believes that by taking a longer-term view, investors portfolio's will come out stronger on the other side.
"In today's world, the market works in three-month cycles. You have the February result, the Macquarie conference and then the August result. The market just can't seem to look out any further," she said.
"So as a strategic investor, we are happy to wear the short-term weakness and take a position. And by the time everyone else has noticed, it's 20% or 30% later."
In this wire, I'll summarise the five key takeaways from Livewire's recent interview with Liu on the Rules of Investing, including some of the unloved stocks she is backing right now.
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Takeaway #1: Three rules for investors to live by
Rule #1: Do your homework
Unfortunately, for us investors, the homework doesn't end when you graduate high school. According to Liu, the most important thing readers can do is to invest as much time and effort as they can into the craft.
"Really understand what the business is, what it does and its value proposition to its customers," she explained.
"Ultimately, there needs to be a reason for the business to be in existence. There needs to be a reason every single day. That is very important."
Rule #2: It's people that make a great business
Sure, it's easy enough to pick out long-term thematics that will move markets, but it's a management team that can really help drive a business's long-term success. And while investors may not have access to company leaders as fund managers do, you can assess an executive's prior track record in building and running similar businesses.
"It is people that make things happen. It is people that come up with a vision, and it's people that can hire the right team to really execute those dreams," Liu said.
Rule #3: Block out the noise
Liu's final rule is about discipline and learning to not be swayed by what the rest of the market is doing.
"This is when you start tapping into behavioural finance. This is when you start thinking about how you can fight against that herd mentality. If you find a great investment and everyone else disagrees, how can you build enough confidence to really position yourself in it?" She said.
These behavioural biases can ultimately determine whether or not investors can generate market-beating returns, she added.
"When people lose money, they feel that they have to hold on to a position," Liu explained.
"Most people will tend to go, 'Oh, I want to hold onto it because the markets are clearly wrong.' But ask yourself, would you put more money into it? Would you buy it fresh today if you didn't have any of this position before?
"When it's a no, it means you should sell it. Every day is a fresh day for an investor."
Takeaway #2: Australia won't have a recession
While Liu admits we may see a slowdown in economic activity down under, she doesn't believe we will witness an outright recession.
"My view is that often a lot of macro specialists or economists tend to assume a lot of variables as current. So if the variables are getting worse, for example, if inflation is getting worse and interest rates are going higher and consumer activity is getting slower, they just put that into modelling as if it will continue," Liu explained.
"But we all know the economy is very dynamic. There are a lot of variables in place. Just look at the RBA two years ago... They said they would not put up interest rates for a very long time. And yet, six months later, they started lifting interest rates every single month.
"So, I don't put too much emphasis on what they say."
Clearly, things will slow, she adds. Inflation may stick around longer than we may like, and the RBA may raise rates another 25 basis points. Consumer spending will likely also slow as mortgages roll from attractive fixed rates to today's not-so-attractive variable rates.
"But are we going to get a recession? I don't think so," Liu said.
"We are already seeing early indications that the consumer is holding reasonably well... We are now beginning to see early projections of what immigration might look like over the next couple of years. There are numbers ranging between 600,000 to 700,000 people over the next two years coming to Australia. Pre-COVID, just as a comparison, that number's 200,000."
In the next 12 to 18 months, Liu predicts we will have a severe shortage of housing - lifting the rental market even higher. With this in mind, she believes we will start to see the property market take off from here.
"That is very positive for the Australian economy - which is a very consumer-oriented economy," Liu added.
Takeaway #3: The China reopening theme is far from over
The China reopening theme was the talk of the town in late 2022. Unfortunately, it hasn't played out as many investors would have hoped.
"When China said they would reopen, they literally just let COVID run through the economy and opened everything up. But since then, of course, there's been a bit of a reality check" Liu said.
"There is a bit of pent-up demand in terms of domestic travel, but a lot of Chinese people are actually trying to find a job. They don't have a labour issue, they won't have the inflation that we have experienced... Consumer spending is still very strong... So, I think it's gathering momentum."
While share prices may have fallen as investors have steered away from China-related stocks, Liu still believes that earnings will lift over the next year or two.
"That reopening thematic is going to continue. In a way, it's almost like a second chance for you to really reposition for some of those names," she said.
This includes travel agents like Webjet (ASX: WEB), which Liu believes will continue to be a very strong beneficiary from travellers globally, and could generate 20% growth over the next few years.
She also believes commodity-related companies and lithium miners could benefit over the next six to 12 months.
"We like names like Iluka Resources (ASX: ILU). It's a very cheap way of playing that reopening, very leveraged to the China housing market which went through a horrible crisis in the last few years... I think that is a good place to be," Liu said.
With this year's surprisingly positive Macquarie conference behind us - which Liu describes as "normally the downgrade conference, the conference where we get a reality check" - the August reporting season could potentially disappoint.
"Perhaps, in the next three months, things will fall off quite quickly. The consumer is going through high mortgage pressure and headlines will be more negative. The consumer, in that sort of environment, tends to spend less," she said.
"Potentially, the top line might disappoint a little bit more on the cost front... I think that for 2022, margins might potentially be upgraded while the top line might be downgraded. So net-net, profits might be more muted."
So which companies could face the crunch?
"In terms of the margin front, we do think that some of the lower-end consumer names will be going through a challenging period," Liu said.
"We have a short position in Super Retail Group (ASX: SUL), simply because it's over trading, it's done very well relative to some of the other retailers, and its earnings are just a little bit too high at this point."
On the other side of that, Liu is backing Lovisa (ASX: LOV), which she says is better placed given its youth market and growing storefronts.
"It's a little bit more expensive, but we just tend to like to stick with the growth, quality end of retailers in this sort of environment," she said.
Takeaway #5: Continue to look for opportunities to add to your favourites
At first glance, many of the companies with places in Liu's top 10 are businesses that would have benefited in a low-rate environment. However, Liu argues investors should use market volatility and noise to top up positions in their favourite businesses.
"We tend to buy them when other people worry. The reason that they're sitting in the top positions today is because 12 months ago, no one wanted to buy them," she said.
"For example, we increased our holding in Xero (ASX: XRO) significantly in the last eight months or so, as our buy price was $80. Clearly, it went a lot lower than that. You are waiting for a stock's share price to come to you so you can build a decent position."
The Tribeca Alpha Plus Fund's top 10 active weights are currently the below:
| COMPANY NAME | ACTIVE POSITION |
| A2 Milk (ASX: A2M) | 2.6% |
| Treasury Wine Estates (ASX: TWE) | 2.5% |
| Wesfarmers (ASX: WES) | -2.5% |
| NEXTDC (ASX: NXT) | 2.2% |
| Macquarie Group (ASX: MQG) | 2.2% |
| REA Group (ASX: REA) | 2.2% |
| Xero (ASX: XRO) | 2.1% |
| TechnologyOne (ASX: TNE) | 1.9% |
| Pilbara Minerals (ASX: PLS) | 1.7% |
| Star Entertainment Group (ASX: SGR) | 1.7% |
"We have found that if we take a slightly longer-term view, i.e. six months when we know in 2024 or even the back end of 2024, this company will have more than 20% growth and is one of the top quality companies in the Australian market, we can position in them - we don't need a catalyst," Liu says.
"I would say 20% to 30% of our portfolio will be positioned in companies a little bit ahead of the market - maybe three months ahead. But that's how we can ensure our consistent outperformance."
As a contrarian investor, Liu likes to identify heavily sold-off stocks where the fundamentals still remain attractive.
"There's a lot of blood in a lot of stocks at the moment, A2 Milk (ASX: A2M) is one we mentioned earlier. Every fundamental is suggesting it's doing really well," she said.
"It's got a strong balance sheet, with almost $900 million in cash on its balance sheet. That's very rare. It's got a strong brand, it's doing well. In the next 12 to 24 months it will be one of the top growth companies (on the ASX), and yet, no one wants to look at it because there could be some near-term softness."
But, as Liu explained, the market can turn very quickly.
"In today's world, the market works in three-month cycles. You have the February result, the Macquarie conference and then the August result. The market just can't seem to look out any further," she said.
"So as a strategic investor, we are happy to wear the short-term weakness and take a position. And by the time everyone else has noticed, it's 20% or 30% later."
She also named Jumbo Interactive (ASX: JIN) as a recent contrarian buy.
"Over the last few months, it's gone through a pretty tough time as the lottery is not doing great. But the company is not expensive. And if you compare its performance to The Lottery Corporation (ASX: TLC), it's a stark difference," Liu said.
"So that to us is a very interesting opportunity. When the lottery starts turning the other side, this company not only will grow at around 14-15%, but it will also be able to lift its prices - as they have recently started initiating price increases. It's quite incredible."
For readers asking...
As part of our Outlook Series, Liu pitched Ramsay Health Care (ASX: RHC) as her top stock for 2022.
At the time, she said it was "one of the very few companies that is still yet to recover to pre-COVID levels...This company will double its earnings and grow phenomenally just recovering from COVID."
Since then, Ramsay's share price has fallen around 10.3%. So, as many readers asked following our recent podcast, is Liu still backing the stock?
"I think RHC represents a significant deep value opportunity at the moment," she said.
"It has been sold off on a slower ramp-up of the private hospital volumes and its debt levels. We know they are heading into a stronger period based on early indicators, and over the next 12 months, this company will offer the highest growth in the healthcare sector (across large to mid-cap), with a below average valuation."
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Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your Money, Sky Business and Sky News.
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Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...
Expertise
Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...
Expertise
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