Investment insights

Deciphering the signal from the noise in global shares


September 2019

By Myooran Mahalingam, Portfolio Manager at MLC

Myooran explains the long-term approach that unites his stable of managers, and offers some tips of the global players who are well placed to benefit from coming trends.

A little over 10 years ago the US share market (S&P 500) hit a GFC low of 666, on March 6 2009. On this day few would have been jumping for joy, it was the end of a torturous bear market where many stocks had lost 50 per cent of their value and a number of seemingly impenetrable banks now ceased to exist. From here the turnaround was equally astounding. Unprecedented levels of government stimulus would see the US market experience its longest bull market on record.

In the short term, these major events are unpredictable. The Federal Reserve’s rate moves, North Korean aggression, China’s trade retaliations or even late-night Tweets from the likes of President Trump. They may get plenty of attention on our TV screens, and make plenty of ‘noise’, but their unpredictability makes them poor fodder for traders.

Instead of focussing on the noise, we look for the ‘signal’ in the form of underlying trends that the market has not yet fully appreciated. For a long-term investor this is an opportunity to take positions with conviction, and reap returns that our experience has shown are more predictable.

Going broad & deep

As a multi-manger, MLC focuses on long-term thinking that unites the managers we choose to partner with. We seek balance in a broad range of opinions and investing styles, and this is at the heart of our global shares strategy. We have deep access, with broad conceptual coverage—it’s smart-diversification.

With so much research and analysis at our fingertips we are constantly astounded by both the folly in trying to predict short-term moves, and the huge opportunity in positioning for trends that have been shown to play out time and again throughout history. Here are a few we’re excited about right now.

Trending

Consumer demand in India

Mortgage penetration in India is around 10 per cent currently, and this will continue to rise. It’s a simple calculus, as average wages go up, particularly in emerging economies, people spend their money on things you and I take for granted. From TVs to scooters and on to a house, demand lifts in-line with wage growth. What people choose to buy is a predictable function of human nature, and action by the Fed or sabre-rattling by Russia won’t change that. 

Ecommerce is only just getting started

Ecommerce sales in the US account for only 10 per cent of total retail sales today, with little reason to see why this trend will not continue. Some have suggested the market has already moved on this trend, citing the astounding price-to-earnings ratios of the likes of Amazon. But we add a view on China to show how much further there is to go.

In China, ‘Single’s Day’ is a celebration of those who are single, it’s the opposite of Valentine’s Day. But it’s also one of the biggest shopping days on the calendar. In fact, Alibaba set a Singles Day record with $30.8 billion in sales during the 24-hour period. To put that into perspective, the company sold more in a single day than U.S. retailers T.J. Maxx, Macy’s, and Kohl’s sell in an entire year.

Digital Infrastructure spend

IT infrastructure spending continues to grow at double-digit rates. Businesses across the globe are accelerating their investments not only to reduce costs, but also to clutch at the thin-thread of relevance that is so fleeting in our rapidly-changing world.

It’s clear that 5G, artificial-intelligence, and the internet-of-things will benefit those businesses positioned at key junctures along the value chain, but what’s less clear is where the value will be concentrated.

Previous mobile data infrastructure was rolled-out by telcos that competed fiercely with slim margins. In the wash-up it was a select few companies operating at the application layer, think Netflix and AirBnB, who were able to capture the lion’s share of the value, and they did it without the risk or capital outlay.

Cars are starting to drive themselves, your fridge can order the milk and soon advance diagnostics will detect and cure what ails you far quicker than a doctor… but how do you gain exposure to these trends? Which companies will be the winners?

Watching

The Tesla Paradox

Cars are proving to be a very neat convergence of a group of these themes: battery technology, renewable energy, automation and artificial intelligence. When discussing this field one company is always mentioned, Tesla. But the market for Electric Vehicles (EVs) is heating up, and there are plenty of other contenders, and many with supply chains and manufacturing capabilities already in place.

While Tesla produced 101,000 electric cars in 2017, BMW produced 103,000 electric cars, and that’s on top of their production of petrol cars.

By the end of this year, BMW hopes to produce 500,000 electric cars.

Elon Musk is finding out that you can come up with a concept, but it requires a lot of money to make that concept a reality. Making cars at scale, at a profit, and with a large distribution network and logistics is very hard. Battery technology, like 5G, will have a big impact, but what’s less clear is which companies will grab the most value. You need to look beyond the noise to get a feel for who the long-term winners are likely to be.

An active approach – looking to the future

Our investing style is decidedly active, and it’s focussed squarely on the future.  A passive approach, however, is a scorecard of what has done well in the past. The larger the company, the more successful it would have been. This hides the fact that some of these trends are emerging. If you are willing to take a longer-term perspective, we see a great set of opportunities that offer great value.


Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLC), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230 686) group of companies (NAB Group), 105–153 Miller Street, North Sydney 2060.

This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

An investment in any product referred to in this communication is not a deposit with or liability of, and is not guaranteed by NAB or any of its subsidiaries.

Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. The returns specified in this communication are reported before management fees and taxes.

Any opinions expressed in this communication constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this communication.

This information is directed to and prepared for Australian residents only.

MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.5. ‘Global financial stability report’, IMF, April 2016.

The second recession from March 2001 to November 2001 comes after the “Dot.Com” technology wreck but was intensified by the September 2001 terrorist attacks on New York and Washington.

The last US recession from December 2007 to June 2009 follows the housing collapse and mortgage crisis. Importantly this last NBER “Dating Committee” pronouncement that a recession started in December 2007 was only made on December 1st, 2008. This is essentially a year after the event, so the NBER “Dating Committee” appears more like a cobwebbed collection of aged historians than a spritely group of sharp statisticians.4. ‘The economic transition in China’, Assistant Governor Dr Christopher Kent, RBA, 16 June 2016.

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