Marcus Bogdan, Portfolio Manager of the Switzer Dividend Growth Fund (Quoted Managed Fund) recently spoke to Peter Switzer on Switzer TV to discuss how the market is performing since the start of the year.
Watch the full interview here:
Peter Switzer (PS): We’re catching up now with Marcus Bogdan, the fund manager from Blackmore Capital, and he looks after Switzer Dividend Growth Fund, but specialize of course in dividends, but Marcus is always on the lookout for growth as well. At the moment, there hasn’t been much growth, the market’s been down pretty seriously since the beginning of the year.
Marcus Bogdan (MB): It has, it’s been a very unusual start to the year. The ASX 200 is down around six and a half percent, so it’s a significant pullback, but the underlying movements are quite interesting and there’s definitely been a separation, or a bifurcation in performance of the markets. What has done incredibly well is the big Australian, BHP, has actually moved up considerably in the last month or so. You’ve had the unification shareholding agreement there, and also quite strong underlying commodity prices, particularly iron ore. That’s going to generate a lot of cash for BHP, and that will represent a very good dividend yield expected for their first-half result. Energy has been well supported because of the oil sector, but on the other side of that, growth stocks are the ones that have been punished considerably with the expectation that interest rates now will start to rise, and potentially quite aggressively in the US. I don’t think we’re going to have that same framework in Australia, or to that extent. And the other areas which have been affected, now they’ve been affected because they’ve been in the jaws of Omicron, has been the healthcare sector, and consumer staples. And I think both of those sectors are starting to look interesting because I think the impacts that they’re seeing will be short-term.
PS: Yeah. It’s interesting today I did a story for TGB around the fact that food prices in the December quarter, the inflation basically doubled not food price, but the rise in, yeah. And that should be good for some of your holding, like Woolworths and Coles.
MB: Yes, it’s should, that should certainly translate, and you’re starting to see inflation, not only in fresh, particularly in meat, but also now in dry goods. And historically that has translated into a better performance for the supermarkets. And both obviously Woolworths and Coles are in the portfolio.
PS: You made reference to telcos, are you saying that the dividend yield looks good because the market has probably oversold these companies?
MB: Well, they have also come back in the last month or so, around where the market has pulled back, around 6%, but Spark New Zealand, which is the New Zealand telecom company, which is listed on the ASX 200 is now providing a dividend yield of around 5.7%. We think that is absolutely maintainable and they should be able to grow their dividend over the forecast period. And Telstra, which is one of the outperformers last year, has also come back in January, and now they’re yielding just over 4%. The 16 cents we believe is maintainable, and Telstra has the additional benefit of franking credits on top of that.
PS: I noticed that the unit price of Switzer Dividend Growth Fund has coptered, and I figure part of it’s because the banks have coptered, and so on and so forth. Are you expecting a rebound of the unit price as the banks, and some of the core holdings of your funds, start to recover from the sell-off?
MB: Yeah, they are absolutely sensitive to those elements. Importantly, the reduction in the portfolio hasn’t been as great as the market over January so far, and it’s exhibited lower volatility, better downside protection. But you’re absolutely right, collectively the banks, consumer staples, healthcare sectors, I think they all should recover over time. And the banks are interesting because they should pay attractive dividends yields of at least 4%. And they may be beneficiaries of higher interest rates and improving their margin outlook.
PS: Okay, what is your position on the Westpac buyback?
MB: The Westpac buyback, depending on your tax consideration, but obviously that franking credit that potentially you can receive is attractive for those investors in the right tax bracket.
PS: It’s not necessarily something you participate in with the fund?
MB: No. I think, but it will resolve, the net result of it will be that there’ll be fewer shares on issue for Westpac, and that will be beneficial to earnings per share growth and the sustainability of the dividend.
PS: And what about CSL, what’s your position on CSL?
MB: We still believe that CSL is one of Australia’s outstanding companies and that the outlook for CSL remains particularly promising. And it’s underlying business of plasma therapies, the level of new R&D expenditure that they’ve got there, and the potential of new products. And they’ve got a history, a very strong history of bringing new products in and new revenue streams in. The vaccine business should continue to do well, but they’re currently acquiring a Swiss company and that is expected to deliver EPS accretive over the forecast period. And so CSL has been sold down, it’s been sold down over 10% in January, but we believe that the underlying fundamentals of CSL remain robust.
PS: So if you were forced to make a decision about whether CSL was a buy at these levels, or a sell, what would you say?
MB: Oh, for the investor, for the medium to long-term we certainly believe that CSL remains a core portfolio stock.
PS: Okay, let’s get big picture now, we know that part of the activity around the moment is that the US is going to be raising interest rates and basically the Central Bank boss there, Jerome Powell said this morning it’s going to be March. What is your best guess on how many interest rate rises the Fed will impose? We once we were talking three, I think the market has been predicting five, but you’ve got Jamie Dimon saying seven, I think Jeremy Siegel’s actually said eight. What’s your best guess?
MB: Well, as someone like you, who’s studied economics, it is a social science, and six months ago there was no prospects of interest rate rises in the United States in 2022. Fast forward, with much higher inflation, very, very strong employment numbers, and the Federal Reserve is deeply behind the curve. And so that has accelerated their push to not only cease their liquidity, but also start to raise interest rates. And I was on a conference yesterday with Goldman Sachs, and their suggestion is that there’ll be four interest rate rises in the United States, but I think it’s a quite different prospect for Australia, for this year.
PS: Well, let’s finish on Australia, but let me just do one last thing, that given the fact that the market is a little bit more excitable about rising interest rates than say Goldman Sachs, and even the Federal Reserve, do you think then that if it does come to pass that rates don’t rise as quickly as some people think now, tech stocks could actually come back into favour because A they’ve been sold off, and B, the interest rates scenario might not be as scary as it currently is.
MB: If bond yields start to form on the expectation, we’ve got slower economic growth, or the pathway forward on those interest rate rises is not as significant as you’re stating, there will be a recalibration, and a re-look back at those growth stocks. But I think the emphasis on those growth stocks has to be first and foremost on those growth stocks that have actually got profitability. Those strong companies, such as Microsoft, rather than those companies which have good growth prospects, but are still not translating that into earnings. So, I do think that this year the emphasis will be on quality, and sustainable franchises.
PS: Okay. Let’s finish up on local interest rates. Until the inflation number this week, we were thinking November was more likely, now we have Bill Evans from Westpac go for August, and a lot more economists agreeing with Bill now that August could be the first-rate rise, and then they might have another two after that, we could end up at 1% by the end of the year. What’s your feeling on that?
MB: We’re certainly not going to be moving at the trajectory of the United States, and nor should we, because our economic fundamentals, whilst they have similar characteristics, are different. But in the latter half, if we continue on what we expect to be still good economic growth in Australia, a very good outlook on employment, and also starting to see wages growth coming up to where the RBA would want it to be, I think it is a natural extension that we do start to see interest rate rises coming off their very, very low base. And I don’t necessarily think that that’s a bad thing, I think if they can do it gradually, and consistently, then I think the markets can absorb that.
PS: Yeah, great stuff. Marcus Bogan, Blackmore Capital and Switzer Dividend Growth Fund, thanks for joining us.
MB: Thanks, Peter.
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