Company Interview / Stocks to consider on resilient Chinese sectors

Key points:

The Federal Reserve's rate cut pressures the RBA to follow suit.Robert Swift sees potential in mining companies and Australian market recovery.Chinese economy slowdown unlikely to worsen; focus remains on resilient sectors.

Robert Swift from Delft Partners states the recent rate cut by the Federal Reserve intensifies pressure on the Reserve Bank of Australia (RBA) to lower rates. The RBA already faces pressure from the treasurer to assist financially stressed consumers. A 50-point rate cut reflects concerns about statistical accuracy and US economic strength.

Robert mentions disappointing results from FedEx, suggesting a downturn in the US economy, leading investors to seek higher yields. This situation could benefit mining companies like Schlumberger, which anticipates revenue growth. He sees a potential rebound in the Australian market, with rising house prices and lower credit provisioning.

Despite China's economic slowdown, Robert believes in the resilience of mining and energy sectors. He highlights companies like BHP (ASX: BHP), Sterling Infrastructure (NASDAQ: STRL), and Quanta Services (NYSE: PWR) for their growth potential. He also suggests that the Australian market offers a better alternative to emerging markets, given its strong governance and investor protections.

Full unedited transcript below:

0:00

Return to central banks in the wake of that outsized move by the FOMC. What are the implications for other central banks? And of course, also for investors? Robert Swift joining us from Delphi Partners. Robert, good to catch up with you again. Thanks for speaking to us at Ospi. So what does this mean for other central banks given now the fed has embarked on its easing cycle. And obviously with that, that larger than expected cut by most. Interesting. I looked at the headlines yesterday and they said, well, the pressure's now mounting on our own RBA. Is that true do you think?

0:38

Probably. I think the RBA here has been under pressure already from the treasurer to cut rates, because obviously it would help some of the more, um, financially stretched and stressed, you know, consumers who obviously vote. So, um, you know, this is a move that's bigger than we thought. It's not always pleasant to get it, to get it wrong, but I think the rate cut of 50 points can be seen in the light of, um, some concern about the the accuracy of statistics, particularly the BLS labor stats that have been coming in an extremely volatile way. And it's quite feasible that the US economy is not as strong. We had results from Fedex, for example, which obviously ships packages, consumer packages, business packages, and those results were really quite bad compared to what they indicated a quarter ago, only a quarter ago, which is that, um, you know, things were looking good. So there's been perhaps a significant downturn in the US economy. And this 50 point cut is, is, as I think, going to raise two things. One is

1:38

search for yield, again, because I think it's clear that that, you know, you're not going to get what you need, uh, from, from government bonds. Um, and it's going to lead to concerns about the true strength of economies generally. So I'm waffling here a bit. I think there will be enormous pressure on the RBA to cut for sure. Um, and I think you're going to have to look again at what we think is, is a slam dunk, which is to go back into companies that pay dividend yields that are very sensitive to industrial activity, reassuring the electricity grid, the power grid, etc., as well as mining companies. And your prior guest had it right. I think there are now signs that we should be looking at mining service companies again. Our favorite currently is Schlumberger in the USA. Um, and they guided I'm starting talking too much, too much coffee this morning. They guided up earlier this year for revenue growth in the sort of 12 to 14% range. And the stock hasn't really performed. Its on a respectable

2:38

PE of about 1516 times current earnings. Um, and it's, it's the world leader in terms of proving up and, and securing the extraction of of energy minerals from, from, from the earth. So we think this order book is going to build we think the company is going to be engaged with, um, an inevitable return to, to oil and gas as being ancillary to too, and important for an energy transition. And I think investors are going to be looking for a commodity supercycle because the cuts are going to essentially provide comfort that there is always a free put option, a reflation trade on which you can bank.

3:21

Well, Robert, don't apologize for talking too much. What you say it is all relevant. So further to that point then in terms of a commodity supercycle, I mean locally, where would you be looking for opportunities?

3:32

It's a good question. I think that you're talking to a non self-professed non expert on Australian companies, but I don't think you could look much further than BHP to be honest with you as a company that's for five years now essentially move sideways. All you've received is the dividend. I know they've cut the dividend. Um, and they have stated that they're going to be spending more on, on, on reinvesting in the business. And that strikes us as being quite a significant and sensible thing to be doing. Um, you always want to go for the lower cost producer. Um, because they can withstand any prolonged period of weakness in the basic commodity, which is iron ore. But I think that they've got the best portfolio of businesses, and I think that's quite an attractive company at the moment. Um, I'm not qualified to really comment on Twiggy Forrest's business or indeed Rio's, but but to me here, the Australian dollar is going to provide, particularly if the RBA delays any cut. The Australian dollar is going to be looking quite attractive and will attract consequently foreign capital,

4:31

because they'll be comfort that, uh, you're not going to lose on the currency. So the market outlook here, I think is getting better and better. I can sort of see a situation in which, um, the banks, the credit provisioning goes down. I can see a situation in which, you know, house prices, unbelievably, again, look, to be on a, on an upward move. And I think you're going to see quite a significant amount of re interest in an Australian market that has actually underperformed quite significantly against other world markets. So so just with the focus again on resources I mean interesting overnight, in fact, we heard from Morgan Stanley out of the States uh, saying that it seems that mining is now in refocusing on that sector. As a result, we did see US listed shares of BHP and Rio bump significantly. That said, though, how do you rationalize that with that ongoing slowdown in China given the brake on demand?

5:26

Yeah, and despite the slowdown in China, you know, you've not had a big collapse in in the price of in fact, if anything, you've begun to see a bounce in the price of the WTI oil price. Um, and of course iron ore is under pressure, partly driven by sentiment and partly driven by fundamentals. But it's not like we're discovering huge new reserves of the stuff. And at some point the Chinese economy will come back. They've approached their particular housing bubble in a way that's been very different from the rest of the world. They've adopted, if you like, a more of an Austrian school approach, to let the asset prices decline and deal with the mess, uh, not through trying to reflate asset prices. And so I think that at some point the Chinese economy will will grow its. Don't forget it's bigger than it was ten years ago. Even growing at 3 or 4%, it's still going to be a reasonable contributor to demand for everything from oil and gas to iron ore to lithium. Um, all of that stuff is going to have to be found mined, processed and sent overseas. So China

6:25

remains, you know, weak, but at some point will will recover. Um,

6:31

I can't see much downside, to be honest with you, for companies also in, you know, areas like the nuclear power industry, Sterling infrastructure, Sterling um, infrastructure has been a company. We've we've argued that that one should own for a while, quanta services as well in the USA. I mean, these companies are quietly outperforming the big tech stocks.

6:51

Um, and so China remains, if you like, a swing factor, but it's not going to get worse. And that's the important thing I think here to to remember. So we've got nothing in our forecasts for China getting better. But we certainly don't think it's going to get worse. And so I think you're pretty well underpinned by buying a portfolio of stocks that relies on a more of a value tilt. The broadening out of the market would be a good thing, of course, and to be more diversified and more value oriented would, I think, be our recommendation and always from an energy perspective, always try and be fully invested, because it's pretty clear that holding cash is going to be an expensive frictional cost relative to, to to the true rate of inflation. We still have this idea that that central banks can reflate us out of any problem that we're facing. And I think the fed has just proven that fact. And Robert, are you looking at emerging markets at all at this point, given now that that easing cycle is underway and obviously the US dollar is

7:51

coming off?

7:53

Yeah, that's a very interesting question. We wrote a paper which I think nobody read, but we argued that that the emerging market returns, with the exception perhaps, of Taiwan, are very highly correlated to the Australian equity market. And from an Australian perspective, you were kind of getting emerging market exposure anyway, which is the very, very sort of resource heavy. These emerging markets, they're very financial services heavy. Um, you've got a regulatory risk, you know, countries like Brazil that don't exist in Australia. So I think our argument was if you like emerging markets, you should actually like the Australian equity market as much and you've got better governance. Arguably you've got better, um, investor protections. If you like the Asian emerging markets, you really ought to be investing in TSMC and you ought to be investing in some of the, um, the, the more bulk commodity Dram companies that speak to Korea and Taiwan as well. We caution about that. At the moment. I think you're beginning to see evidence that the that the commodities to Dram prices are going to start to come down. So

8:52

emerging markets are not a big part of our portfolio. We very much favor particularly thematics. Japan remains strong, uh, as far as we could see. And we do like, as I say, the broadening of the US market, um, in terms of going into industrials, going into even financials now and going into oil and gas services and pipelines.