Today the company is generating cash, expanding its capabilities and paying down debt but it has faced many obstacles to get to this point, which resulted in the value of the shares declining more than 90 per cent from peak to trough. The shares were dealt a further blow in 2018 due to a regulatory review by the new Malaysian government but we expect upside to the share price as the government provides clarity on the last few aspects of Lynas’s environmental controls.
Is the recent rotation from growth likely to continue?
If we go back several years, the dominant thematic was “secular stagnation” – the idea that the world was facing an extended period of lower growth (bad) and lower interest rates (good). This resulted in the market chasing shares that benefited from “lower for longer” interest rates – that is, “bond proxy” stocks such as utilities and REITs [real estate investment trusts] – and “long duration” stocks – such as software and healthcare.
With the election of Donald Trump in late 2016, markets shifted into “reflation” mode, with fears of secular stagnation left behind. Cyclical growth was in vogue, led by the miners, financials and consumer names. This thematic of stronger growth (good) but still low interest rates (also good) drove markets until late 2018.
In the third quarter of 2018 the narrative switched to a toxic combination of “trade war fears” dampening growth (bad) and the Fed’s raising of interest rates and tightening of QE (also bad). So markets had an abrupt turn from seeking companies offering cyclical growth or long-dated growth to shunning these stocks. A new expectation that the Fed will “blink” – that is, stop raising rates – has brought us all the way back to secular stagnation, with expectations for low growth and low interest rates. So perhaps 2019 will be a rerun of 2014-2016, where bond proxies and long duration stocks prevail.
What’s your take on bank shares?
If we look back in five or 10 years’ time, I suspect it will be pretty obvious that four factors will have determined whether bank shares were a good investment over that period. First, the conduct and remediation impacts that were crystallised by the Hayne royal commission have to be worked through. There will be the direct costs of rectification, the indirect costs of redesigning operational procedures and the hidden costs of risk aversion.
The second issue is the twilight years of the credit super-cycle. Australian households have some of the highest levels of debt in the world. It is very positive for the financial stability of our economy that growth in mortgage lending is slowing – but this means that a multi-decade tailwind for the banks is now being played out.
The third issue is the risks arising from new government policies. Just when the post-GFC regulatory impacts were abating, new policies expressly designed to take the wind out of the banking sector look set to be implemented – comprehensive credit reporting, open banking, lower CGT [capital gains tax] discounts and reduced franking availability.
As if all that’s not enough to worry about, banking executives also need to work hard to ensure that they have a business model that is relevant in 10 years’ time. Is today’s model going to be the primary way consumers meet their financial needs in the future? Or will fintechs make significant inroads?
What’s been your best investment?
A2 Milk. I bought the shares for the Fidelity Australian Opportunities Fund when it listed on the ASX in May 2015. Back then, the company was just launching a new product – infant formula – and expanding into the US and the UK. These new ventures required so much investment that despite the lucrative fresh milk business in Australia, the business overall was unprofitable. As A2 went on to gain over 5 per cent market share in China, the world’s largest infant formula market, the shares went up over 17-fold!
What’s been your worst investment?
RCR Tomlinson, an engineering firm which went into administration in late 2018. The journey from prosperity to oblivion was incredibly rapid. With hindsight, we paid too much attention to the future prospects of the business, and not enough to the inbuilt fragility of the balance sheet.
What key lessons have you learnt about markets and the economy over your years of experience?
Warren Buffett’s quote that investing is “simple but not easy” is so true. The fundamental tenets are relatively straightforward and come down to some version of buy low, sell high.
The lessons that you learn again and again are more on the behavioural side: know the source of your conviction and your time horizon so that you can separate noise from signal; size your holdings into the portfolio so that if you are wrong on any individual call, the results aren’t catastrophic; be sceptical of your ability to predict the future; and don’t trade when you are emotional – it’s always better to wait and clear your head than to rush into something.
And for those of us doing this professionally: don’t let a great job ruin your personality! Being reactive, cynical and pessimistic might be great for this job but it’s a killer for your personal relationships.
What do you do to relax?
I always say that half the time I think about my portfolio and the other half of the time I think about my kids (Leilani, 13, and Talon, 11), and switching back and forth between the two gives me a break from each! In a family with two professional careers and two kids, it’s always a juggling act to keep it all together. My husband, Dig, and I both travel a fair bit for work. Fortunately our wonder-nanny of 13 years and our terrific assistants are usually able to keep us on track.
So when I’m not travelling or at work, what I treasure is time with the kids, whether it’s walking new puppy Scooby in the park, playing board games on the weekend or spending some time on the beach in January with the extended family. It doesn’t get any better than that! Now that the kids are a bit older, we’ve also done some great family holidays. A recent highlight was air ballooning over the Serengeti – awe-inspiring!
In between times, I’m always trying to fit in some exercise – Dig’s a lot more disciplined on that count than I am. But I need to be a bit more focused this year – my daughter and I will be hiking out of the Grand Canyon next October, so my fitness needs to improve a bit by then!