Marcus Bogdan on the Inflation Debate

Marcus Bogdan, Portfolio Manager of the Switzer Dividend Growth Fund (Quoted Managed Fund) recently spoke to Paul Rickard on Switzer TV to discuss the big debate in markets, whether inflation is transitory or it’s here to stay, and whether the central banks are going to have to work a lot harder to get it under control.

Watch the full interview here:

Video Transcript

Paul Rickard (PR): The big debate in markets is whether inflation is transitory or it’s here to stay and the central banks are going to have to work a lot harder to get it under control. Joining me now to discuss that and also to look at the banks and also companies like Amcor is Marcus Bogdan from Blackmore Capital and also the manager of the Switzer Dividend Growth Fund. Marcus, thanks for joining us on Switzer. I might just start by talking to you about where you stand on the inflation debate. We’ve got sort of the two schools of thought out there at the moment. One is it’s I guess, from the bulls, that is transitory, and we’ll get through all the supply side shocks and the central banks will get this under control. The other side’s saying, “Well the central banks have been very slow to react. They’re behind the ball game. This is going to be a lot harder. It’s more structural and the markets are right to remain on edge.” What’s your position on that at the moment?

Marcus Bogdan (MB): Good morning, Paul. Well, I think the supply chain issue, the evidence of what we’re seeing on supply chain is that those disruptions have been continuous, and they’ve been problematic. I do think that there are absolutely elements there that are structural in terms of higher inflation pulses, particularly around labour and labour shortages. Elements there of also shortening supply chain and issues around supply chains suggests that, we are in a period of elevated inflation going forward. And particularly if you look at, the long tail impact of potentially of food inflation as well as higher energy prices. So those elements tend to suggest that the higher rates that we’re seeing, could actually become even more problematic in the next couple of months, but then obviously the use of monetary policy and higher interest rates could moderate some of the demand that we are seeing, particularly on the good side. So, the net summary of all of that is that I do think we’re in a period of extended elevated inflation. At some point it will moderate from these higher levels, but I don’t think in the foreseeable future that it will go back to the sorts of levels that we’re accustomed to over the last decade.

PR: And do you think the recession argument, that if the central banks play this too hard, they might just choke off growth? Are you worried about the suggestion that perhaps the US and maybe Australia might, if growth slows too much we might head towards the recession?

MB: It’s a very tough balance the central banks have to manage now as inflation has become problematic at these elevated levels. There’s no doubt that I think that we’re at the mature end of the economic and the earning cycle in both the US and the Australian economies. But the evidence to date is that, GDP, and we saw that yesterday in Australia, we’re still printing good numbers here despite the rise of Omicron and the disruptions that had, the floods that we saw earlier. So, there is a robustness particularly in the Australian economy and you are also seeing that in just the tight labour markets in the US. But I do think the pathway forward is for further moderation of economic growth and further moderation of earnings growth as well.

PR: Let’s look at how you’re sort of translating that to sort of some views on some companies and how you’re investing, particularly on behalf of the Switzer Dividend Growth Fund. First, I want to talk about is Amcor, which is been doing really well on the market. So, what’s your position in Amcor and what’s your view in terms of how they’re handling the challenges in this, heightened inflation environment.

MB: We hold a substantial position in Amcor in the portfolio. Amcor is two parts of their businesses, is flexible plastics and rigid plastics. It is primarily a Northern hemisphere business. It definitely faces into the US and European economies and their results have been very encouraging over the last year. They’ve constantly upgraded their earnings guidance. Last week they indicated that they are moving their guidance to the upper end of their range and expecting to see for 2022 earnings per share growth between 9.5% and 11%. They are very strong numbers. One of the reasons that they’ve been able to perform so strongly, is that they have a very good mechanisms of passing through higher costs, whether it be with through energy and plastics or transportation. And their markets, they’re facing into consumer staples. 95% of the business relates to consumer staples. And those markets have remained incredibly resilient. So, we like Amcor, we certainly are encouraged by the way that they have executed and continues to be a good position in the portfolio.

PR: Would you characterize Amcor as perhaps almost like a defensive stock given their exposure to sort of pretty resilient markets in a lot of consumer and consumer staples packaging?

MB: Yes, now we were classified as a defensive industrials, and we’ve got a couple of other companies that fall under that category in the portfolio, including companies like Brambles and Cleanaway as well. There are elements in Amcor which were affected by the pandemic. They’ve got a very significant proportion of their earnings relating to healthcare in terms of packaging in hospitals and in pharmaceuticals. Now we’re starting to see that business also recover as well. But net, it is a defensive industrial.

PR: Okay. Let’s move on to the banks. We had three of the four majors plus Macquarie Report in the early part of May and I think you’ve done the rounds. And so, what’s your sort of take on the opportunities in the financial sector particularly in regards to the major banks?

MB: Well, the retail banks on the whole are enjoying the benefits of strong growth in mortgages, and that was reflected in the last week or so, a strong growth in business lending and a robust deposit growth as well. So, all of those elements have led to sort of favourable earnings results broadly for the banking sector. They have navigated the fixed mortgage element quite well so far in terms of their net interest margins. What has been a continually problematic has been on the expense side, and I don’t think that’s going to alleviate in the short term. But we do think that that has been largely reflected in the robustness that you’ve seen in banking shares. And now with price earnings ratios of around 15 times of an average for the retail banks we see them as fair value at the moment. The standout would be NAB, which is generating results above system, particularly in housing and business. And that has been a very good recovery play.

PR: So are you positioned more in NAB and just explain sort of how you are positioning amongst those four and if, as long as you have cover those.

MB: Yeah absolutely. So, we have positions in Commonwealth Bank which is obviously has had the premium valuation against the other banks and rightly so because they have executed incredibly well and have enjoyed the economies of scale. Also, the technology benefit that bank has produced. NAB, which has been a laggard for much of my career but is certainly starting to execute much better. And then, I think probably the one on the cheapest valuation is Westpac where we do see that that is a slow boom, but a recovery there and provides a dividend yield of over 5%. So positioned across CBA, NAB and Westpac at this point.

PR: Okay. So missing from that was ANZ but let me ask you about Macquarie, if I can, as well because, look different sort of bank and investment bank and a global operator. I mean, so when you are thinking about your portfolio and, and looking at Macquarie how do you sort of put a lens around Macquarie?

MB: Our lens on Macquarie is favourable. We do think that they have positioned themselves for this transition towards green infrastructure, is particularly significant. That was illustrated by the acquisition of the Green Investment Bank in the UK. There’s no doubt that Macquarie will be one of the global leaders in green infrastructure going forward. On the other side of the things, they’re also benefiting from the high volatility in commodities prices. So that they’ve got a commodities energy business which is certainly benefiting from what they’re seeing in those markets as well. It is important to point out that, Macquarie is viewed as a sort of a market player in the market. So, it can be quite volatile and it’s certainly volatile across May, but and we do believe that over the medium and long term, Macquarie positioning themselves for future growth, particularly in green infrastructure.

PR: Marcus Bogdan from Blackmore Capital and also the manager of the Switzer Dividend Growth Fund. Thanks for joining us on Switzer.

MB: Pleasure. Thank you, Paul cheers.

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