The Point

How to assess company management: four tales from Asia

For all the focus on macro-economics, the actions of management are a major factor in a company’s success.

There’s a reason why active investment managers spend so much time meeting with company execs.

Understanding a company’s leadership – and how well they are executing an appropriate strategy – is critical to successful long-term investing, says Samir Mehta, a senior Pendal PM who focuses on Asian equities.

When facing similar challenges, company managers often take different approaches – with very different results.

Samir points to Chinese restaurant chain Haidilao and camera lens maker Sunny Opticals. When both faced challenges, Haidilao successfully bunkered down and cut costs, while Sunny persisted in an expensive search for growth.

India’s Asian Paints leveraged an iconic brand, healthy cash flows and strong balance to fend off a potentially irrational new rival, while ASEAN-focused fintech SEA was drawn into a costly fight for market share.

Aussie equities outlook: two questions hold the key

THE fate of markets over the rest of 2023 largely depends on two questions: the outlook for rates and inflation, and the resilience of the Chinese economy.

That’s the view of Pendal PM Brenton Saunders, who manages Pendal MidCap Fund.

On inflation, markedly different outlooks in Australia and the US are leaving investors unsure where to turn, Brenton notes.

Australia is at least three-to-six months behind the US inflation cycle, he believes.

“In the US it feels like inflation has peaked and is making its way down – albeit more slowly than many had expected.

“But in Australia, we’re still seeing some fairly aggressive inflation in certain parts of the economy – mostly labour-related.”

Compounding that is a softer approach from the RBA compared to other OECD economies.

“We can realistically expect to see rates go higher and inflation remain an issue in Australia for a while.”

Global equities: The more AI grows, the smaller the market could be

Not surprisingly, artificial intelligence was one of the big themes in the latest US quarterly reporting.

In Asia there’s a similar level of market excitement, with Taiwanese chipmaker TSMC up 20 per cent this year for example.

But it’s divorced from reality, reckons Pendal Asian Shares PM Samir Mehta.

At TSMC, AI accounts for just 6 per cent of revenue, with the balance of sales coming from stagnant laptop and phone markets, he says.

And the technology’s very success could curtail demand, he cautions.

Enthusiastic long-term AI industry revenue forecasts are often based on growing uptake of per-user licences.

But if AI succeeds in its promise of making business more productive, companies will reduce staffing.

“The effect of raising productivity is going to mean fewer people will need that software because fewer people are employed,” Samir says.

ASX midcaps: Unearthing the potential of mineral sands

Whether rubbing sunscreen on your face, reloading your printer ink or painting a wall at home, you’re probably consuming mineral sands.

Mineral sands are old beach, river or dune sands that contain concentrations of rutile, ilmenite, zircon and monazite.

They have a variety of uses from paint and paper through to toothpaste, sun cream and ceramics – and the biggest mineral sands producer in Australia is ASX-listed Iluka Resources.

Iluka is a holding in Pendal Midcaps Fund, which focuses on the 100 biggest companies outside the ASX50 – a good hunting ground for fast-growing sectors such mineral sands and rare earths.

“Mineral sands is a steady business that Iluka has grown up doing, says Pendal equities analyst Jack Gabb.

Iluka is now building a rare earths refinery in Western Australia which would process minerals such as neodymium and dysprosium for use in electric vehicles and clean-energy generation.

There’s opportunity in China stocks if you know where to look

China’s uncertain economic outlook presents an opportunity for discerning equities investors, argues Pendal’s Asian Share Fund manager, Samir Mehta.

“The Chinese stock markets were doing quite well until about January-February but have now handed back almost all of their returns this year,” says Samir.

“Over the next few years, maybe even a decade or more, we should expect China’s GDP growth to be significantly lower than in the past.

Still, Samir believes it’s a good time to look for Chinese companies with robust market positions and strong cash flows.

“Companies in sectors with concentrated market share positions, or where they possess pricing power and – better still – where there is a focus on cutting costs and generating cash flows without affecting growth.”

Samir names Tencent Music (the Spotify of China) and gaming giant Netease as standouts among others.

Mid-caps: Re-energised lithium price could power up ASX producers

Lithium prices made a sharp comeback in May after steep falls this year.

That could be good news for battery metal stocks, which are commonly found among ASX midcaps.

The price rebound – about 80% in May – should persist in coming months as an oversupply in key Chinese markets dissipates, believes Pendal’s Brenton Saunders.

“The falling lithium price was largely due to quite a significant de-stocking in China – principally in the battery part of the lithium value chain, which seems pretty close to clearing now,” says Brenton,  who manages Pendal  MidCaps Fund.

“That’s being driven by a step-up in demand for electric vehicles again, partly due to extended subsidies and incentive support from China’s government.”

The result is a more balanced supply chain of batteries and battery precursor materials, which has allowed prices for lithium to start to rise again.

“We expected this to happen, but it’s possibly coming through a little bit earlier than expected.”

Midcap case study: Lithium producer Allkem is well positioned for a rebound in lithium prices

Among Australian mid-cap stocks, few companies get more media attention than lithium producers.

And as last week’s announced merger of ASX-listed Allkem and New York-listed Livent shows, they’re getting plenty of corporate attention as well.

What does the mooted $16 billion merger tell us about the lithium market, particularly in the wake of a price fall since late last year?

“Our view is that there is a rebound coming in lithium prices,” argues Pendal investment analyst Jack Gabb, citing higher demand for electric cars and an end to destocking in China.

Pendal holds Allkem shares in Pendal Midcap Fund and Pendal Horizon Fund.

One of Allkem’s advantages is its diversification of products, says Jack.

“It’s majority lithium carbonate but also has exposure to spodumene and lithium hydroxide. That’s all three lithium products while other producers are picking one or two.”