June 2024 | 
7 min read
Interview with Hans Lee of Livewire Markets
While Australian stocks are the easiest and simplest to access, only investing in Australian companies could limit your horizons and returns. For people with a global view, they tend to think of the United States where their stock markets are full of companies that prioritise earnings growth, buybacks, and innovation.
The only problem is that the US is continuing to fight higher-than-target inflation, facing numerous geopolitical headwinds both at home and abroad, and its fiscal deficit is US$1 trillion more than its receipts (a statistic that many people have described as unsustainable).
Meanwhile, other nations are close to or have been cutting interest rates as their inflation issues have been dealt with. Corporate balance sheets are healthier in many of these geographies, and regulations are changing much to the delight of investors. Indeed, while the US is still the dominant destination for investors, other countries are making their move.
In this episode of The Pitch, we will go around the world with Chris Smith, portfolio manager at Intermede Investment Partners. Intermede runs a highly concentrated portfolio of global growth stocks that eye not just the well-known American names but also seek out companies in other jurisdictions that they believe can both generate double-digit earnings growth and keep it that way for many years to come.
Some of the destinations on this trip include Europe, India, Taiwan, and Japan. We'll also discuss China and whether Smith thinks the portfolio will include Chinese investments again at some point.
You can watch the video below or read an edited transcript. This interview took place on 1 May 2024.
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67% of the portfolio is currently in US stocks while your benchmark has 63% in US stocks. Is that just generally where the opportunities are, you think, at this particular point in time?
Yes, that is where we see the most opportunities, where companies are growing at the kind of rates that we're looking for, and the returns are at the level we're looking for. I would say, if you went back 10 years, we would not have anticipated the market would become even more concentrated.
[10 years ago], we were more like 50%. We would have thought that would trend lower over time, as certain other economies became more important parts of the global economy. But it's gone in a different direction than that and technology is a big part of the explanation.
Your second largest region is Europe. Where are you finding opportunities there?
We do have a position in Inditex (BME: ITX), which is the owner of Zara, the fast fashion leader. They continue to generate very strong sales growth, globally. They're actually becoming quite big in the US after not having a lot of presence. They've done a very good job with the omnichannel efforts, e-commerce, and physical, combining them over the last number of years. We see a lot of opportunities for them to keep performing well.
Universal Music Group (AEX: UMG) is the largest record company or music company out there. It's a business that has gone through tremendous change over the past couple of decades, but we're now at a point where pretty much all the revenue comes from streaming. We're seeing some pretty good pricing coming through on the streaming side of things. They have the biggest catalogue. They have the most market power vis-a-vis the streamers. We see a nice growth for them going ahead.
Also, I think streaming music, and music in general, is something where the back catalogue has a lot of value. It's something where people listen to what they know from when they were younger, or when their parents were younger. It continues to generate revenue. It's a great thing to own long-term.
In emerging markets, we often find that these stocks are described as "under-priced and overlooked". Are you finding any tangible opportunities there?
There are a number of companies we have in the portfolio. In the semiconductor space, we have TSMC (TPE: 2330) the company that makes most of the highest-end chips, whether they're for Nvidia or other companies. We have Samsung (KRX: 005930), which is the leader in memory chips, which is listed in South Korea. We have HDFC Bank (NSE: HDFCBANK), which is a leading mortgage firm in India, a country where mortgage penetration is very low but people have the level of income needed to support a mortgage. We are seeing good growth there.
We find a lot of attractive opportunities within emerging markets. We look at them in the same way through the same filters as any other company. But it is a big area to follow, as you pointed out.
Do you include China and Chinese stocks in your emerging market exposure?
We definitely include China. We spend a lot of time looking at Chinese companies. We have had Chinese companies in the portfolio in the past. The environment, regulatory-wise within China has changed quite a lot, impacting our view on some of the consumer technology companies like Alibaba or Tencent, that we historically would've had in the portfolio.
The overall economic environment has also changed recently, where demographics are not as positive. Consumer budgets are under pressure. There's less spending on more premium products that have been occurring for quite a while. A lot of the consumer names are of less interest to us also. It's an area that we follow. Valuations are very low.
We do think we will have names in China in the portfolio again at some point, but not at this moment, is where we currently come out.
Finally, Japan has had a huge surge in interest over the last year. What do you think about Japan and do you have a high conviction holding in that particular market?
We have a couple of holdings in that market now. Keyence (TYO: 6861), which is involved in factory automation, is a key hold in going back many years. We have another company called Shin-Etsu (TYO: 4063). They make silicon wafers which go into making semiconductors. We think both of those are great businesses. They're both leaders in their areas, generating high returns.
We have had some other names in the portfolio, but with the recent move and valuations have sold out of them. Tokyo Electron is a key one, where it is trading far above its historical valuation range. It's a bit of a mix. We would like to have more exposure to Japan. It's hard for us to find the kind of companies that grow at the rates we're looking for, and that are focused on high-quality businesses. That's where we struggle.
Important information
The information in this communication is provided by Chris Smith, an authorised representative of MLC Asset Management Pty Limited ACN 106 427 472, AFSL 308953 (‘MLCAM’). MLCAM is the distributor for units in the Intermede Global Equities Fund (‘Fund’) issued by responsible entity, MLC Investments Limited ABN 30 002 641 661 AFSL 230705 (‘MLC’). Barry is not the holder of an Australian Financial Services (‘AFS’) licence, or an employee of MLCAM or MLC or in partnership or joint venture with MLCAM or MLC. This communication is not an offer, invitation or recommendation to buy, hold or dispose, any assets, undertakings, securities or any other financial products in any jurisdiction or to otherwise participate in any investment opportunity. The communication is of a general nature only and is not advice, it has been prepared without taking into account of the objectives, financial situation or needs of any person. Before making an investment decision, you should consider your objectives, financial situation and needs. Before making any decision about the Fund, you should consider its Product Disclosure Statement (‘PDS’) which is available from mlcam.com.au/igef or by calling 1300 738 355. Opinions are subject to change and the accuracy of the information in this communication is not guaranteed. Past performance is not a reliable indicator of future performance. Whilst formulated on reasonable basis, any projection in this communication may be affected by inaccurate assumptions or may not take into account known or unknown risks and uncertainties. The actual results achieved may differ materially from the projection.
