Ask a Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part II of this edition, Kardinia Capital's portfolio manager Kristiaan Rehder highlights which sectors will struggle and which will outperform in the year ahead. Plus 3 ASX shares he believes are poised to benefit.
Motley Fool: Yesterday, we discussed the pros and cons of shorting. We appreciate that you can't share the specifics on your short book but, more broadly, which sectors are you likely to avoid?
KR: We firmly believe that inflation is starting to creep into the system. We particularly see that in the food and energy sectors, but also wage pressure is starting to build.
Central banks are still trying to talk down the inflation issue, but we believe the tone will shift. We're certainly seeing evidence of higher inflation and supply chain disruptions in almost every corner that we look. And we certainly see inflation remaining a hot topic well into 2022 and beyond.
Rate-sensitive sectors which harbour a disproportionate number of loss-making stocks tend to underperform in an inflationary environment where interest rates are rising.
So, we're becoming more cautious about high-price, loss-making technology companies.
MF: What ASX sectors are looking promising to you in the year ahead?
KR: If interest rates do lift in an inflationary environment, history shows that equity returns can beat inflation. Equity markets can move higher in a rising interest rate environment as long as earnings growth continues to grow alongside.
In this sort of environment, the commodity and energy sectors tend to stand out. The banks and sectors which exhibit monopolistic pricing powers, and hard assets such as the property sector, can also perform strongly.
MF: Are there any specific ASX shares that are well placed to outperform?
KR: Commonwealth Bank of Australia (ASX: CBA) has had strong core volumes growth, which is being maintained.
It's really dominating in the home lending and the retail deposit market. It has very strong overall net interest margins, with high asset quality. The capital strength is undeniable. We believe that CBA remains the highest quality name in the banking sector.
In the resource sector, Pilbara Minerals Ltd (ASX: PLS) is a core holding of ours.
Pilbara owns one of the largest hard rock lithium deposits in the world and has a very long mine life of over 20 years. It has strong exposure to the emerging electrification of the global economy thematic. It is a straightforward mining operation, open pit, in a very stable mining jurisdiction of the Pilbara. It has a high-quality partner. And it has cost advantages over the brine operations in South America.
We expect continued margin expansion for that operation and it can even scale up. And with the recent move downstream to high-grade lithium carbonate, we think this story is going to continue to improve.
Finally, to give you a diversity of names, in the property sector is Charter Hall Group (ASX: CHC).
Charter Hall is engaged in managing and investing in office, retail and industrial properties. It has material performance fees to realise on the horizon. Its assets under management continue to grow strongly. Assets under management could reach close to $100 billion over the next 5 years. It's around $54 billion today. The office part is particularly strong and trading well above book value.
Charter Hall recently upgraded guidance and we expect more to come on that front.
MF: If the market closed tomorrow for 5 years, which ASX shares would you want to hold?
KR: It's very hard to go past Macquarie Group Ltd (ASX: MQG). Macquarie's performed very strongly. It's a core holding of ours; we've held it for many years.
Its annuity business now makes up around 60% of group earnings. It's really shifting away from being a business that was largely a market-facing business to one that's much more stable. Its assets under management continue to grow.
It has good exposure to infrastructure and green energy. Around a $1.8 billion investment in these sectors is currently held on its balance sheet. It provides an ongoing pipeline of profits on asset sales over time. Returns across the business remain high. So it wasn't a huge surprise to us that they launched the recent capital raising.
The sort of returns Macquarie is currently making, it certainly has the potential to create significant shareholder value through time.
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If you missed part I of our interview with Kristiaan Rehder, you can find that here.
(For more information on Kardinia Capital's funds, click here.)
