Glenn Freeman: Thanks for joining us today, Peter.

Peter Warnes: Thanks, Glenn. Always good to be here.

Freeman: Looking through some of the – how companies have performed, you've got some interesting numbers there in front of you. But one of the themes has really stood out has been the outlook. So, those companies that – it wasn't about the results they delivered for fiscal 2019, it was on the outlook, and that's what really affected the share price. Can you just explain this for us?

Warnes: You know, Glenn, going into this reporting season, expectations were wound back a little bit. The confessional was fairly busy, and management had had wound, you know – or softened their expectations. And any company now that came out and the expectation, the market didn't really do much. It was more about what the outlook statement said. And those who were brave enough to put their head on the block must have had some conviction to do that. And if the market accepted and resonated with what they were saying, then you saw some quite nice movements in stock prices within the 24 or 48 hours after the announcement. And those companies that did that, again, as I say, must have had some conviction.

This reporting season has been colored a little bit by offshore influences where you've got markets – high volatility in the markets. And therefore, the real impact in terms of pricing has been affected by what's been happening in the markets generally. So, we haven't got a really, kind of, a clean slate in terms of what the market did after the result because of outside influences. But generally, because of expectations have been wound back a little bit, this was reporting season hasn't surprised too many people in an overall context.

Freeman: And in looking through the list of those companies under Morningstar coverage that have reported, it was roughly even the number of companies that the share prices come off by 5% and those that have actually seen more than a 5% increase.

Warnes: Yeah, and that usually happens. I mean, if the market and the economy is on the way up, then you will see a bias towards the positive reactions, because the investor is in a mood where he's going to appreciate what the companies are saying and then give them a little move. Now, this time around – and yes, this time around, you've had, as I said, outside influences. But if you've either missed the expectation, or the outlook statement has been a bit soft, then there have been stocks that have been given a bit of a hiding. Overall, as you say, the number of stocks that have strongly performed in the market within 24 to 48 hours of the announcement basically evenly balanced at this point in time. We've got a week to go but I don't see any change in that trend. So, yeah, it hasn't been too bad. There's been some rough patches, but they've been good patches as well.

Freeman: You've picked out a couple of sectors that have actually performed particularly strongly, but what are some of the other – what have been the themes across different sectors this earnings season?

Warnes: Glenn, I mean, the two sectors that have done reasonably well as a sector have been healthcare so far and what we call new media. Now, healthcare being an offensive space, and given the pressures out there in the economy, they've all done reasonably well and of course, see the national ones have done probably the best. So, the big three, Cochlear, CSL and ResMed have all done well post their results. Sonic was a good result and was rewarded by the market, and we've still got a few big ones to come in Ramsay to report later. And so, it was a good result and we lifted our fair value there. But again, a lot of self-help in that situation.

And the other sector has been what we call new media, which are the four, if you like, high profile service companies, Carsales, REA, SEEK, and to a lesser extent Domain, which has coming out of Fairfax. All of those companies did well, and their outlook statements were reasonably comfortable, and the markets embraced them. So, those are the two sectors have done reasonably well. Other sectors, it's been company-specific rather than sector.

Freeman: One has been up, and one has been down within the same sector.

Warnes: Yes. I mean, you've seen, like in private healthcare, Medibank Private move higher, whereas nib holdings move lower, because the outlook statement wasn't all that flash, and outlook statements have been, as I say, been driving the market post the results.

Freeman: Now, among those companies that have got international businesses, China and the trade war has been a theme that has had a big impact. And it's not even as simplistic as – it's not all about China either, it has some big flow-on effects too?

Warnes: Well, you know, the U.S.-Chinese trade war, if you like, has a big influence on what's been happening out there, but of course, it's affected global trade volumes and global economies. And what you've seen is that those that are exposed to either North America, or Europe, or China have all had outside influences impacting their bottom line. Brambles, exposure to Europe. Europe is an exporting economy dominated by Germany. German exports are falling sharply. GDP dipped into negative territory in the second quarter. So, Brambles have got a problem in EMEA that has to be sorted. And they've also got some issues in CHEP Americas. So, again, a global company exposed to the volume of goods moving throughout the economies. They are slowing and volumes are down, and that's why all the purchasing managing indexes for manufacturing are all sub-50. It's telling you that global growth is under pressure. So, Brambles is a very, very good benchmark for what's happening out there in terms of movement of goods.

You've got Chinese-facing companies like Blackmores and a2 Milk, they came under pressure, again because the – don't forget the Chinese economy is also – growth is slowing there and the households aren't spending as much and of course, margins have come under pressure and volumes have come under some pressure. On the other hand, they are drinking more, and they are drinking better quality, and so Treasury Wine Estates, they did very, very well. Now, what's going to happen going forward is a moot point, but their result was better than expected whereas the other to worse than expected and/or the outlook statement was pretty ordinary.

But there's no doubt that the trade tensions between U.S. and China is reverberating right throughout every economy out there and having an impact. And central banks around the world have got that as their number one problem area. They're all looking outwardly saying, our monetary policy is being influenced by what's happening offshore, not necessarily onshore.

Freeman: And something also that's reverberating and which you've referred to in your latest, Your Money Weekly is about the lower for longer chorus and how that's playing out and it's affecting otherwise rational investor behavior.

Warnes: Yeah. Well, what it can do, Glenn, is that if you extrapolate from a low or a high point, that's dangerous. That trend is not in perpetuity. And it's dangerous when you do extrapolate from, as I said, low or high points. And when you fall in love with something, sometimes you're not rational, and I suspect that in the bond proxies, the REITs and the utilities and infrastructure that lower for longer perception is driving people towards yield. In other words, the yield is nice, yes, I'm going to go in there because I'm getting nothing, the (tender) effect. Be careful. In the REIT space in particular, prices now have been pushed to significant premiums above NTA. Don't forget what those companies are. They are property companies. Their asset is property and the valuations of those properties, the valuations are driven by discount rates. The lower the bond yield, the lower the discount rate, the higher the valuation. Be careful. I'd be very, very cautious. So I wouldn't be putting any new money into the REIT space at all.

Freeman: And just finally then, so having said all of this, where should investors be looking right now, which sectors, or indeed should they be leaving it in cash?

Warnes: Well, it's very difficult. I haven't seen and I don't think followers of the markets have seen these conditions in our lifetime, and I've been looking at these markets now for 50 years. Look, we've had a (bridge of) pretty reasonable run. We've touched the record only just a month ago. You are allowed to live off capital for a certain period of time and I think that the way the markets are place currently your margin of safety is wafer thin. I'd be very, very careful. I'd be letting cash build. I wouldn't be reinvesting my dividends and where you've got overweight positions in some particular stocks, I'll be taking the tops off. I'd be squirrel like; I'd be grabbing a few nuts in the summertime and put away for when these markets do turn. And turn, they will; it's just a matter of what's going to trigger it. There's a lot of influences out there outside the U.S.-China situation. You've got Brexit, you've got Germany, you've got Hong Kong. The wave is building and when the wave crests, the higher the wave, the bigger the washout.