Today’s topics

• Australia labour force data
• Stocks: SYD, WEB/FLT and GEM
• Cryptocurrencies
• Factor premia (strong balance sheets)

Australia labour force data

The Australian labour market is still trending in the right direction. Under-employment is now below pre-pandemic levels.

The actual employment print however had a modest loss, with a drop of 20K in employment.

The participation rate fractionally lower, which is why you see a headline improvement in the unemployment rate, even though actual employment fell.

Still, having this many people drawn into the labour force, is a very good thing. With the recent budget initiative (affordable childcare) the LFPR should continue to trend higher.

As such it is reasonable to assume unemployment continues to trend lower in the near term.

None of that changes our overarching views, about Australia, namely that we have overly indebted households, an unaffordable and unsustainable housing market, and that with commodities and banks overearning, the outlook for the ASX 200 isn’t great, hence the underweight at the diversified investment portfolio level, and within direct equities, the defensive tilts towards quality companies at (where possible) reasonable prices.

Stocks

SYD

Inline with the QAN update, things are slowly getting better at SYD. The effect of the new Trans-Tasman bubble is just visible, without a microscope, on the international side, for SYD’s monthly passenger volumes (the slight bump up).

Overall, a grinding net positive for our exposure.

We also noted some sensible comments from QAN management regarding progress on the vaccine deployment front. How it is anything short of “war footing” (by way of urgency and import) we don’t understand.

WEB/FLT

Still on Qantas, we note the results update from WEB, in which revenues continue to fall into the abyss. Whilst the result itself was well foreshadowed, the new news, and hence the QAN reference, was the change in payments from QAN to travel agents, specifically, “[QAN] will lower front end commissions paid to travel agents on international tickets from 5% to 1%”.

WEB and FLT are trading notably lower as a result, with the balance of power clearly sitting better with the airline.

Interestingly, because the market cap of WEB has (all else equal) increased due to the size of the cap raises, shown below…

…the required earnings trajectory to generate a market like return, isn’t all that low. That’s why you hear comments like “they aren’t cheap” despite what the share price graph seemingly tells you. Not quite the same as a value trap, just people getting the wrong idea about exactly what value is on offer.

GEM

A quick note on the GEM AGM.

The update was a net positive. Occupancy grinding higher. Rationalisation of underperforming centres, and greenfield expansion, continues.

The basic business model is you open a centre in a region that looks promising/underserved, and, in doing so, you’ll find that some simply prove disappointing, and you close them, whilst others exceed expectation and you keep them going. Over long periods of time you amass a good collection of well-regarded profitable centres in good catchment areas. COVID was a special situation, dramatically impacting earnings, but that impact is steadily fading.

Mgmt flagged a return to paying a dividend, and also noted the strong additional government support with the removal of subsidy caps.

Pleasingly, there were no further gremlins re: wages bills & provisioning and overall we thought it a strong update.

Consensus expectations look very achievable…

…and more importantly, the expectations that are baked into the market cap also look eminently achievable. GEM is cheap and if they execute well the stock price will do very well.

Cyrpto markets

The comments out of China regarding cryptocurrencies (with stern frowning about their use and purpose) caused a material sell-off in most coins.

But the below story on Bloomberg was of interest to us.

The idea of levered crypto, to goose returns, held on wobbly platforms / murky exchanges that are frequently hacked, still blows our mind.

Instead, here we are trying to make money on ideas like Amcor, extracting some modest synergy benefits which combined with a reopening and a little operating leverage should mean EPS growth of ~10-15%.

Factor premia

We calculate our own factor portfolios (it’s about 50% of the direct equities process) across Leverage (which is the factor referred to below) Profit, Quality, Growth, Value and Momentum.

But it is also nice to table alternative providers, and their measures, for congruence. And here you see the strong balance sheet portfolios are in quite a drawdown.

The weak balance sheet portfolio (which is often highly correlated with strong Value scores, that’s why they are in a predicament that causes them to be sold down) is doing great, and the net long short portfolio is doing quite poorly.

Our portfolio, which is long Quality Growth, in which strong balance sheets feature prominently, has experienced the same sort of good absolute weak relative performance. To us, this is fine, the objective of the portfolio is meet or beat the benchmark with less risk and to meet or beat style benchmarks. The portfolio is a product, and it is meant to be full of the sorts of companies that enable you to sleep at night, knowing that their operational performance is likely to be robust no matter what the macroeconomic environment.