Ben Daly: We're joined by the head of our Australian Equity Business, Randal Jenneke. Randal, thanks for your time. The fourth quarter of 2018 saw a very difficult time, at least from a relative perspective, for active Australian equity managers. What are the characteristics of the particular market that sort of led to that?
Randal Jenneke: So you're right that the fourth quarter was a really tough period for a lot of active managers. And if you think through the key issues that dominated the market, really it was a slowdown in growth, in a lot of markets around the world. We had the trade frictions between China and the US, and then also concerns that the Fed in the US in particular was going to rise rates and really hurt economic growth within the US, and so the market really swung very defensively. If you look at the best performing sectors during that December quarter, it was the two defensive sectors like property trusts, utilities, staples and the like.
Randal Jenneke: The one exception was materials and the mining stocks actually did really well. Which was mainly due to two key buybacks, one for Rio and one for BHP. The market really went very defensive and it caught a lot of investors by surprise. In our view, we think the market overreacted and became too concerned about growth and the impact that it was going to have on earnings. If you look at what's transpired since then, the market now I think has come to realise that the picture's not as bad as what was feared during that quarter.
Randal Jenneke: In this quarter, we've seen that the market has now bounced about 11% domestically, more than recouping the losses that we saw within that December quarter. The market now's starting to focus more back on the fundamentals. Defensive sectors have still done reasonably well, it's mainly because bond yields have come down the last three or four months, but I think as the market starts to grapple with some of these issues, you can see some stabilisation now in terms of growth and also the earnings picture. So, I do think that whilst the fourth quarter was really tough for a whole lot of managers, that the picture for the rest of this year actually looks pretty good.
Ben Daly: As you say, the first quarter of this year has seen a pretty significant rebound. How have you positioned the portfolio to look to capture what you highlighted in the prior answer about increasing earnings and the like. What sectors are we seeing that are attractive?
Randal Jenneke: So the first thing we always do is come back to our process, and think about what are those quality growth names in the marketplace that we like on a longer-term, structural basis and the good news, as far as I'm concerned, is that there's more opportunities we've seen in that part of the market come up in the last 6 months than we've seen for probably the last two years.
Randal Jenneke: So what we’ve been able to do is really take advantage of that. So firstly, when I think about some of the names where we've changed our position size, I think of a name like James Hardy. James Hardy was one of those stocks in the December quarter that got hit by the concerns over rising rates, so there we increased our position substantially and what we've clearly now seen in the US is that with rates coming down, we're starting to see improvement in the US housing market as well. We feel very good about that position.
Randal Jenneke: We have added new positions to the portfolio over the last quarter, too. Treasury Wine Estates is one new position we added too. Again, the market, we believe, became too concerned about what's been happening in terms of Chinese growth and it's missing the fact that this is really about a company that's controlling more of it's own destiny in terms of what it's doing on the distribution side of it's business and penetrating the broader city base within China.
Randal Jenneke: To a large extent, its performance is not so much tied to the macro picture and the market really I think is missing that. Generally over the quarter, we've maintained or increased our position into those really high-quality, structural businesses. We picked up some new names like Treasury Wine Estate, as I've touched on. The one change that we made around our positioning at a sector level is around the mining names, and that's because the iron ore picture has definitely changed. We've seen that this is going to be more of a supply constrained marketplace, particularly given the issues that Vale have had with their dam problems in Brazil.
Randal Jenneke: And also we've seen now with Chinese growth starting to pick up as well that what the market thought was going to be a surplus for the iron ore market is moving into a deficit for the iron ore market and we think that is going to be a key factor leading to stronger prices, for longer.
Ben Daly: Okay, and finally here in Australia we're nearing a federal election. Do you have a view on how that's likely to play out, and does that have any meaningful impacts on the broader economy, or at least the share market?
Randal Jenneke: So, you're right that we do have an election next month. We fully expect that the most likely outcome is a change of government, we think that's going to mean a number of different policy changes. So, tax is clearly one but also changes to private health insurance, the energy sector, too. We're spending a lot of time looking at what are the individual sector impacts. On a broader level, we're going to see more of a stimulatory fiscal policy environment, going forward and that should be supportive for domestic growth which has been on the weak side over the last six months.
Randal Jenneke: I think that should hopefully provide some stabilisation. We still remain concerned about the housing market, domestically, and what that they mean more broadly. But we think that's a better backdrop than what otherwise may have been the case. I don't think those things in and of themselves change our broader structural view around the portfolio but we are probably at the margin, becoming a little bit more comfortable with some of that downside risks for the domestic economy.
Ben Daly: Great, thanks for that, Randal.
Ben Daly: Thank you for your continued support. If you have any follow-up questions or inquiries, please don't hesitate to reach out to any of your T. Rowe representatives.
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