Kerr Neilson on why global investment exposure is key

Glenn Freeman | 07/08/2017

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Glenn Freeman: Our most recent webcast brought you a discussion between Platinum's co-Founder, Kerr Neilson and Morningstar's director of manager research, Tim Murphy. In a broad-ranging discussion, they touched on a number of macro topics, including emerging markets, geopolitics and currency. Here Kerr discussed some of the larger emerging market economies and some of the opportunities in India which are often overlooked in favour of China.

Kerr Neilson: Would you believe that credit is growing at the slowest rate since independence in 1947? So, credit is growing at the level of 4 per cent a year and yet the economy is growing at 7 per cent. I throw that in to remind people of what linkages they think are real or not real. So, everyone has a view that if China contracts – you'll see where I'm going – if China has a slower growth rate of credit, then it has to go into very slow growth. It's not necessarily true. Here we have a working example of a very interesting economy, growing at 7 per cent real with credit growing at slightly more than half that rate.

Freeman: Kerr also discussed the ongoing commentary around interest rates, particularly within the U.S. and just reminded investors that they shouldn't be unduly distracted by this.

Neilson: Again, it's the constituents. So, I'd rather look at the individual markets rather than the index and the index, which is 54 per cent weighted by the US, I think is a little more challenged than the individual opportunities outside the US. Sorry to bang on about that, but it is to try and get people to think more broadly about here is an index but it doesn't represent the world's activity. It gives more context to the problem of investing, which is, either you are indexed-led or you are opportunity-led. Where we see the rates moving in the States is upward and real rates are starting to now lift. So, this is the inflation-adjusted rate.

Freeman: And in the resources space, Kerr discussed oil, including the supply and demand dynamics and different price scenarios.

Neilson: A lot of oil and oil development is being deferred. And the problem we have here is that we have a decay. So, the world uses about 95 million barrels a year. Electric cars will cut into that, but of course you've then got to factor in a greater use of petroleum products as these other parts of the world, the Vietnamese, the Indonesians and so on grow with their two wheelers and so on. So, I don't think you can look to electric vehicles removing much demand from the demand for oil. So, for the moment, I think you want to work on the basis that 90 million to 95 million barrels a day is what we will be needing.

Freeman: Kerr also discussed global currency movements, including describing how Platinum plays currency and what retail investors can learn from this.

Neilson: Where we think one should be as much more willing to earn the underlying currencies than we would have for quite a while now, because the yen and the euro have moved a lot and have been weaker for quite a while now and we think they tend to go stronger. So, I think the point I'm trying to get across is it's not a daily decision. You decide what are the driving factors behind a currency. You observe the day-to-day fluctuations, but it doesn't change your inherent view.

And historically, what happens with the US currency and this is what makes it a bit more difficult this time around is that as soon as the US starts really growing faster than its normal pattern, you get rates kicking up and that tends to result in the currency weakening because of two things. One is, it drags in imports because the US has a chronic current account deficit. And the interest rate doesn't quite fully compensate. So, right now, you could argue that the dollar has to go stronger because the rates are rising, but it doesn't always follow that, because it's the sucking in of imports that means a lot of funding is required.

Freeman: And in a theme that was emphasised throughout, Kerr also explained why he believes Australian investors should have a higher allocation to global equities.

Neilson: (Indiscernible) did some work on this and he showed that the franking credit looms large in mind but small in fact. So, the large impact is that imputation gives you huge benefits and why you should have a lot of money here. But in fact, it's about 1.5 per cent extra benefits you receive versus international equities. We worry that people become so comfortable with the idea that there's low risk and there's plenty of opportunity here. But this is a very crowded market. Whereas you look at global markets, and there is far better value from what we can see and there's much better choice and those are what give you longer-term better returns in our view. But it doesn't feel like there are too many investors unfortunately.

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

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