Readings For The Week (3/11)

Posted on By offpisteblog

Reading/content links include Joe Walker’s conversation with Raghuram Rajan, Jim Grant on what persistently higher interest rates could mean for investors, Rest of World on China’s biggest gay dating app wanting to beat Grindr, Kerr Neilson’s market outlook and current portfolio positioning, the World Gold Council’s Q3 gold demand trends for Q3 2023 and Stephen Givens on why the timing for Palliser Capital’s push on Keisei is looking auspicious.

Some highlights from the conversation with Kerr Neilson:

Please note these are for personal reference only and any mistakes in transcription are my own.

Outlook for Asian markets: the real issue is in China. The property market is hugely oversupplied, the exposure of various financial institutions to property is greater than they declare, they are masking what they truly have in terms of exposure etc. So this will be quite a long work out. There have been huge mistakes made by Xi – he is impatient, so he tried his social control game during Covid-19 with these oppressive lockdowns and then he has been more aggressive than he needed to be on all fronts. That hasn’t helped with job creation, so you have got this high unemployment among educated youths and now they are shutting down any communication in terms of collection of statistics, market intelligence – all considered “spying” these days. So he has capped his exposure to China at 10%, won’t go higher. He thinks the risks for Taiwan haven’t diminished, they have probably gone higher. He is much more interested in the rest of Asia even though the deeper value is in China. In China, he owns Baidu and Tencent as his AI plays, a global insurer and Anta Sports.

On inflation and tax regime changes: you are really seeing tax as being a big issue. They have now introduced a differential tax to the banks in different countries in Europe. He thinks the assumptions being made around around packaged goods companies (and others) that they can raise prices with impunity, he thinks they will find themselves having a differentiated tax rate or something like that. The notion that, because they’ve become oligopolistic, they can do what they choose at the cost of the consumer will be frowned upon and maybe taxed. Inflation is not going away because we have got huge problems with supply of labor, high cost of energy and materials. Inflation might come down to lower levels but the idea we will get down to the central bank targeted levels of 2% is dreamworld.

On the broader environment for investors: in some markets, you will have a really strong economic impediment and others less so. In the US and Europe, we are probably in a progressive bear market, if you want to label it like that. But all the time, there are fashionable companies and unfashionable companies. So you have got Nvidia at 34x sales but there are also stocks trading at 30% of sales. So there is always something you can buy, but the macro environment is going to be difficult so you need to set your parameters in a different environment than we are familiar with. We really did blow it when we made money free because we created all these confusions about the pricing of assets. The repricing is gradual but parts of the US market are already repricing quite strongly. The illusion comes from the magnificent 7 stocks, who are continuously coming in with superior earnings vs. what the market expects. They are already quite highly rated, however, but they are under investigation so there will be some risk there.

On where we are in the cycle: we had 35 years of falling rates and now we have a fairly prolonged period of rising rates and that means you have to reprice assets. You don’t feel you need to because we have all been boiled in this cauldron and gradually the temperature has risen and we think that every time we have concerned ourselves with the macro we have missed out. So that starts changing and eroding your confidence in making objective assessments. But the objective assessment is the cost of money has risen and we don’t seem to fully understand this interaction between central banks and government spending, which has given a mad fillip to the activity over the last few years. That is not going to persist. But there are always stocks to buy, so one shouldn’t spend endless time on macro. Get a shape of it and choose your stocks accordingly.

On where he is finding value right now: one area is resources. The capex in metals and minerals was running at ~US$170bn at the peak in 2014, it is now running at half that and for the last 8 years, it has been averaging ~US$62bn. So it is quite low and, at the same time, you know grades keep falling and it is getting more difficult to find resources. So he likes the miners, particularly in copper and gold. He also likes the offshore rigs, some of the ones that went bust have refinanced and come back to the market, some of those are really interesting. He also wants to find companies that can grow naturally. If you look at AI, the facilitation it brings in terms of scientific advancement and discovery is huge and he thinks you will see that in biologics, so with that the tool companies that provide all the lab and production equipment could have reasonable growth rates at a reasonable valuation. So those are some of the areas they are looking at as hiding places in a difficult world.

His views on AI: it is here to stay and it has already been going on for longer than we perhaps realize. But it is dangerous. The trouble is there is such a desire by the scientists to evolve these models and there is such a capitalist drive behind the profiteering that goes with it, it will be well entrenched and at some stage there will be questions about culpability. But in the meantime, the way they are investing in it is via the easy stocks – Microsoft, Google, Amazon. He doesn’t own Apple. When these names sold off, they were quite cheap at that stage and, even now, they are not frightfully expensive. He thinks AI has probably extended their life by about 10 years. His theory is that most companies have a life of about 20 years and it has been shortening. He wouldn’t buy Nvidia simply because so many of these companies now want to build their own chips, so if you want an outsider, you probably buy Intel, who are now looking to create greater decision-making separation between its chip designers and chip-making factories. In terms of Intel, it is not about their capability, but about whether they have the right attitude as they serve external customers.

On his top holdings: Samsung, Microsoft, Booking Holdings, Compagnie de Saint Gobain. He is spread across different types of industries, doesn’t have a massively concentrated portfolio. He still owns some gold shares, which have made no money at all the last few years, but that is how he invests. He believes in adding to the companies that are hibernating in your portfolio, because the winning stocks have meant these positions have become insignificant. Sizing is your problem running money because the idea that was prevalent was you just have very few stocks and you make big bets on them. The trouble is that it can make you myopic about the company and everything gets couched in the same terms – it’s a nail, we better hammer it. He thinks there is a benefit in having more spread, he thinks 60 stocks is probably the sweet spot (he has a little more because he a big tail of more speculative “rubbish” – very small positions, but they are fun).