Our Director of Trading, Trent Primmer, was live on Ausbiz today discussing his stock specific insights on where the smart money is headed as inflation continues to spike.

The smart money is in energy & resources

As quantitative tightening is also expected to impact equity markets, Trent looks towards energy and resources like iron ore, oil, gas and especially gold, as gold markets continue to perform well despite the current geopolitical tensions between Ukraine and Russia.

Trent suggests looking at companies that beat on NPAT and also recommend some Australian-listed companies like Aristocrat Leisure (ASX:ALL), James Hardie (ASX:JHX), Cochlear (ASX:COH) and CSL Limited(ASX:CSL).

Other companies on Trent’s stocks-to-watch list are Insurance Australia Group (ASX:IAG), Arena Reit (ASX:ARF), and some of the larger commercial property businesses like Charter Hall (ASX:CHC), Goodman Group (ASX:GHG).

Read the conversation:

Nadine Blayney:

“So we are really in the thick of earnings season. Quotes everywhere on everything from inflation to supply chain, freight costs, the pandemic I dare say. So let's get some stock specific insights on where the smart money is headed. Trent Primmer is joining us now from Barclay Pearce Capital in studio with us!

Nice to see you. Thanks for coming in Trent. That sort of covered it, didn't it? We're hearing a lot about supply chains, hearing a lot about the pandemic and also, yes, guidance is coming through but by far, not from all.”

Trent Primmer:

“No, I think that's one of the issues as well. Some businesses are kind of suffering from long COVID as well. They don't know the impacts longer-term on their business. Some declining to provide any outlook in their outlook statements. What we consider smart money is sort of energy and resources. That's where we’ve parked a lot of our portfolios, heavily weighted obviously towards energy. That's served us pretty well during reporting season.”

Andrew Geoghegan:

“Did you make that commitment before this crisis started unfolding in Ukraine?” 

Trent Primmer:

“We did. Yeah, we did. With obviously China, thermal coal prices, China previously refusing to take up thermal coal and then suffering some of those rolling blackouts and energy issues and then obviously inflation across Europe. LNG prices going through the roof. We  thought that obviously, a lot of supply, there's an underinvestment in terms of energy in that area so that's where we decided to park some funds. 

We have held quite a bit of cash and started to sell off some of our higher risk, I’d say growth position start of January. Holding a lot of cash at the moment for bargains around reporting season or companies that provide good outlook statements, reducing their debt, beating on their NPAT numbers but also picking up some gold as well. I think that'll carry us quite far with this whole Ukraine-Russia conflict, particularly as well with oil.” 

Andrew Geoghegan:

“When you say you picked up gold, to what extent?”

Trent Primmer:

“We're holding a bit. We're holding about 15% weighting in some of the gold miners. Yesterday was a good day. We had Northern Star up around 8-9%. Our EVM position up around 8-9%. It kind of lost its shimmer for a while and not a lot of people wanting to touch it, but I think this is the time when you want to pick up some of those cheap, good value players, particularly in something that historically holds a lot of value in times where there's distress or markets are frothy, they're quite volatile, particularly in a high inflation environment.

I think it will carry us well longer term. We might see the gold price being suppressed short term because a lot of people have fallen out of love with it, but this is kind of when you want to pick up things that people don't want and that's generally where you make the good money.” 

Nadine Blayney:

“So you trimmed your growth positions in a lot of those tech names. What about some of those names that are really leveraged toward the rising interest rate environment? The rising inflationary environment? So I'm thinking of even potentially the insurers, even potentially Computershare. If you look to some of the payment companies as well?” 

Trent Primmer:

“I think insurance obviously IAG, reasonable result. Interest rate hikes tend to benefit some of these insurance companies. We used to trade QBE quite a lot before interest rate hikes because they hold some of their longer term cash in bonds and some of those higher fixed income assets and when rate hikes start to come through in the market, they have a higher return on their cash balance, which is smart obviously, long term. So, happy with insurers.”

Nadine Blayney:

“You don’t sound enthused about the insurers though because you’re saying in the past you’ve done that.”

Trent Primmer:

“I think there's better places to park your money. Like you said, interest rate rises. I think companies that have exposure and we touched on this last time I spoke on the show. Companies geared towards US earnings that are Australian listed.

So companies like Aristocrat Leisure, James Hardie, Cochlear, CSL. Businesses that have a big target market overseas and report in US earnings but are Aussie-based, they'll tend to do well with the US dollar strengthening against the Aussie. I think that's smart and obviously having a portion of your portfolio geared towards those companies, but I would remain with the thematic of energy prices increasing and that's part of the reason why we're seeing this super high inflation at the moment. 

It's hitting 40 year highs over in the US, 7.5%. That's going to remain for quite some time. I think the gravy train is obviously in energy and resources. High inflation running rate environments, positive for commodity players because they can pass on costs.”

Andrew Geoghegan:

“And specifically which ones? You've mentioned energy, obviously, but as far as resources, is iron ore where you're looking at the moment?"

Trent Primmer:

“Yeah for sure, iron ore. It's like a baby to us really. We've worked on a lot of mining transactions. We do have a large mining transaction, which we'll be listing on the London stock exchange, which is Koch Metals. We've worked on that for several years and we've always been a long term believer in the iron ore price. 

A lot of people have wondered whether the price would be suppressed short to mid-term with China, obviously tapering off production, prior to the Beijing Winter Olympics and Chinese New Year, but we think with those constraints on emissions targets relaxing, that there'll be more investment from China in that space. I don't think that their supply inventories of ore that they've stockpiled at their mills will be enough to carry them through. I think there'll be a buyer of Aussie iron ore. 

Longer term, I don't think it's realistic to aim for 150, 160 US a ton consistently on the iron ore price, but I think something fair would be around 120 USD a ton. I think it'll find support there and we're definitely buying some of these miners. Fortescue, Rio, Champion Iron Ore,  BHP to some extent, and those dividends as well, they pay pretty handsomely while you're holding those positions." 

Nadine Blayney:

"Champion Iron Ore has been, I think, one of the best performers of the year. Were you in that before?"

Trent Primmer:

“We did participate, I think around 90 odd cents in Champion Iron Ore. Some of our guys held it, some sold it, but the guys that did sell it, traded it, they did quite well. The guys that have held it obviously quite happy.”

Nadine Blayney:

"Another sector, last week was sort of the week of the REITs. We heard from Charter Hall, Long WALE REIT. We heard from some of the commercial and the convenience property REITs. Are you liking that space?" 

Trent Primmer:

"I love that space."

Nadine Blayney:

"Do you love the industrial? Do you like the office? Do you like those that have exposure across the board?"

Trent Primmer:

"I think I'd be looking to get exposure to the listed company, because there's liquidity there. I wouldn't necessarily invest in some of the unlisted funds, commercial property funds. There's a risk with getting access to liquidity, they might have semi-annual liquidity period. 

So I like the stocks, the underlying products. I'm not favourable on but I think from an industrial perspective that it makes sense. I think from a commercial perspective in terms of some of their office rates make sense as well.

The yield on these don't pay huge but I think this space in particular, in this timing in particular, low interest rate environment previously, they're buying up a lot in that space. So there's a lot of M and A activity, earnings are creating transactions for them and they get them at, I'm not gonna say pennies on the cents on the dollar, but they get them quite cheap in periods like we've seen during COVID with a lot of people selling off those assets. So it adds to their portfolio, it's earnings accredited for them long-term so Goodman, Charter Hall definitely on our list, yeah."

Watch the full video here.

This interview was arranged by Hans Lee, producer and journalist at ausbiz.

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