Confident about the prospect of a tech slowdown (a situation exacerbated by the influence of sector thematic exchange-traded funds in the market), Longlead was short semi-conductor names including TSMC from about the first quarter of 2018. The fund also was short factory automation group SMC Corp from late 2017. It also benefited from tail risk hedging in months such as February and December, when markets fell heavily.
In the December quarter, which wiped out plenty of institutional investors’ performance for the year, Longlead scraped a positive return, highly unusual as the MSCI Asia Pacific index had one of its worst quarters since the financial crisis.
So how is this fund positioned now? At the moment, most of its investments are in Asia, with between 15 per cent and 20 per cent of its positions in the local market.
West says there’s more to play out in the slowdown, so they are looking for defensive plays. The fund isn’t confident a China stimulus package will offset a synchronised economic decline and a trade war. The trade war has complicated how to read the outlook, he says, on the basis that United States companies getting in ahead of the changes have boosted inventories. But Japan’s NIDC, which manufactures precision motors, said early this month that the slowdown in revenue growth in November and December orders was the sharpest seen in 46 years.
The fund has a position in China Tower, a newly listed mobile-tower company, which on an EV/EBITDA valuation is trading at less than half its comparable US peers. The fund has been long since it listed. It’s a sector, Longlead argues, that gets long-term margin growth, predictable earnings and tends to attract infrastructure funds as well as long positions. That hasn’t happened yet with China Tower. Infrastructure funds haven’t yet bought in — perhaps waiting for dividend payments to begin, which Longlead says could be ahead of schedule based on the business performance.
Slowing housing market
West notes Australia doesn’t have many of these industries. The fund says the main way to play the slowdown this year will be through the slowing housing market, and how individual companies will be affected by that.
One company Longlead is shorting is Domain Holdings Group, in which Nine, publisher of The Australian Financial Review, owns almost 60 per cent. West says the impact of a protracted slowdown will start to be felt this year; companies such as Domain haven’t yet been tested in a real slowdown, and Domain, while having pushed through some price increases, hasn’t quite proven it can continue to do so. (Regal Funds Management said in August Domain rival REA was among its short positions.)
And another strategy is through the retailers, including JB HiFi and Harvey Norman, that benefit from more sales as more people move house. But for the moment, that short is overdone, Longlead believes, and it would be unlikely to revisit the trade without a significant leg down.
Another potential short for the fund is companies with heavy Chinese exposure. That includes mineral sands producer Iluka Resources, which the fund has previously shorted.
West says despite the recent strong update, he believes pricing has probably peaked and if China’s sales and sales volumes continue to fall, it will flow through to the demand for tiles, ceramics, paints and pigments.