Latest / ausbiz a.m / 25.09.26 Luke Winchester, Merewether Capital
Transcript
- nadine: Good morning to you. It's a pleasure to be here with you again on this Friday morning, a sunny morning in Sydney. I hope it is wherever you are. It is the 25th of September, and I'm sure many of you have checked your phones already, checked the headlines already. But look, US Equities came out of the gates really hot this week. All of that AI enthusiasm, enthusiasm for CPUs, Meta, you know, the most downloaded app, the Meta Muse on the Apple. App store was enough to send it 12% higher at one point, but you know, then reality gets in the way, doesn't it? So once again, last night, we had longer-end yields continuing to move higher, oil moving higher. I mean, Brent up over 4% on one day, back above $107 per barrel. Central bankers not pushing back at all on the notion that we could have more interest rate hikes. And so that sort of sets up this session here in Australia. I can't imagine that it's going to be a really positive session. I mean, perhaps I could be proven wrong. We did have the SP 500 and the Nasdaq relatively flat. And again, we saw a gain in meta overnight up by 4.5%. But most other sectors in the SP 500 were in the red, and European stocks were lower. Enough of that. Maybe. My guest has some good news for us. My guest is Luke Winchester from Merryweather Capital. Luke, let's start with something nice. Is it sunny up where you are? Luke Winchester: It is Nadine. It's a beautiful morning. Let's hope it translates into the markets today. nadine: Yeah, I doubt that might be the case, but Luke Winchester: Mm-hmm. nadine: maybe I'm just I don't know, maybe I'm battered and bruised a little bit from our experience so far this week. I think that the main game is this US bond yield story. Would you agree? Luke Winchester: Definitely. and it's interesting because it's it's it's moving on a few different factors, like obviously the the conflict in the Middle East, energy prices, sticky inflation. but you know, as best as I can tell, reading this morning yields up another ten, eleven basis points on the back of a a strong PMI read out of the US last night. And I think it's interesting to contrast where we are with these global economies because the US economy, it's it's a bit of a two speed economy, but the the main speed, this this this AI spend, you know, the the CapEx spend from that, the beneficiaries of that, you know, it's it's driving the US economy much, much faster than what we're seeing here domestically. and so you're seeing the equity markets, I think, not quite knowing what to do. You're looking at you know, economic indicators remaining quite strong, corporate earnings very strong, valuations are still at reasonable levels, driven by you know, primarily those earnings of the of the Mag Seven and and some of the large constituencies of the index. but at the same time, you know, the traditional relationship you'd normally see between equities and bonds sort of not really playing out. So tricky, tricky market. And I think that's why, as you said, it feels like every week we get to a Thursday or Friday. I think everyone's just exhausted because there's so much to digest and so much so much moving on. And and we wait to see sort of, you know, if something breaks here because Hist history suggests that when we get yields where they are, up up around this this five percent on the US ten year, that that generally the markets tend to something something breaks. So yeah. nadine: Luke, how do you as an investor I guess war game for something breaking? Like what does breaking in your mind mean? Luke Winchester: Yeah, well look, I mean I I think realistically what I mean by that, I I think investors are always fighting the last war and and the last war is still the GFC for a lot of people. And so, you know, we're naturally looking around at at systemic risks and you know, you've seen some people talk about private credit potentially, you know, being a risk like that. I I don't see anything like that. I think the risk is just still valuations look lofty, especially if you remove as I said before, I think At a at a absolute level, yes, you can look at at these at these strong earnings coming through from particularly the Mag 7 in the US. but strip away below that, and and you've got earnings still at pretty high levels, and you could see a market correction 10, 20% just on the back of valuations having to readjust to where the risk-free rate is with those yields. so yeah, I'm not I'm not I'm not a doomer from the point of view of you know there's systemic problems and and we need a a washout in markets like we've seen in the past. But things look frothy and where yields are, it normally washes away that sort of froth just as as valuations have to reset. nadine: Mm-hmm. So, Luke, for those listening, I'm very familiar with what you do. You are a mic micro cap investor here in Australia. when you consider what's happening and the sort of eggshells that we're on in some ways when it comes to geopolitics, when it comes to interest rates, you know, which are set to rise here in Australia next week, even the job data yesterday rising at 4.6%, the unemployment rate I should say. You know, really hasn't quelled any of those calls for an interest rate hike next week. where do you look for opportunity in this market? Luke Winchester: It's it's a really good question. I think it's it's one that investors have been asking themselves now for some time. I think holding a little bit of extra cash is a good idea. I I put out the Meriwether Capital August report a few weeks ago and and noted that that's something we're we're currently doing. we've just got a little bit more cash than normal. I think it's always a good time when you get some jitters in markets just to be just to know what you own. I I think particularly when when things get a bit exuberant and and people can jump onto a thematic or jump onto a trend and and and sort of not really have a a a tight understanding of of exactly what they own their portfolios. So so doing the work, knowing what you own, knowing sort of what's exposed to to these different factors playing out, you know, globally and and and economically. and then I I keep coming back to it, but valuation. Valuation is an anchor and and oftentimes, you know, it's it it needs the it needs the forest fire to sort of cleanse things because valuations are really driven by sentiment, narrative, things like that. And so when they detach from fundamentals, you usually need that trigger, that event. And and as I sort of hinted at before, in recent years it's been those bond yields ticking up, which has been that sort of catalyst for that valuation reset in markets. but if you've got stocks are already trading on, you know, reasonable or or cheap valuations, then obviously you're insulated from that. You're not you're not you're not taking the risk where valuations reset back to to to where fundamentals are. So that's how I'm playing it. I mean, I I I'm a you know, we're within the fund, we're we're long term investors. We take a three to five year time frame. So I'm not trying to to play short term games and move to a hundred percent cash or short the mark or anything like that. It's owning good businesses through through a medium longer term lens, but being aware of of the the conditions right now, yeah. We we need to make sure that, you know, which businesses are exposed, how the portfolio allocation altogether is exposed and and sort of adjusting for that. nadine: I'm going to be mean to you on this Friday morning because I know you have had a cup of coffee. If you look at your portfolio right now, and I know it's sort of like choosing between your favorite children, but what is sort of a stock in your portfolio that you think, yeah, it's doing really well right now. I like this one. I'm happy I have this one. Luke Winchester: Well, one we added to after the half year reporting is Ostco Healthcare. And I know you've heard me talk about this one a few times. it's about a hundred mil market cap and and sixteen mil cash, about twelve times earnings. you know, take that cash off it, it it comes down to to sort of nine, ten times earnings. So I think it sort of ticks those boxes I was talking about before. The valuation's fine. It's in that defensive healthcare sector. The the share price copped a bit of a whack on a a little blip to earnings because given the the demands from AI in the chip in the semiconductor space, there was a bit of a a tightness of supply and a squeeze on on on pricing for for some of their some of their products. but it looks like they're managing that well. Gross margins sort of held up and and and management's, you know, called to a a positive FY twenty seven. but that's the sort of name I'm looking at where I I I don't see too much disruption to the operations. The valuation looks reasonable, the the balance sheet's in really good position. And so that's something that that, you know, Whatever goes on with headlines around the Middle East, whatever goes on with headlines around US bond yields, comfortable sitting and owning that over, as I said before, that sort of three to five year time frame, I I think it still does quite well. So that that's the sort of example of of how you know, sort of positioning more towards those sorts of names rather than the ones that might be on thirty, forty times earnings, but with hyper growth and and sort of, you know, the market looking out a few years for for earnings to come through. nadine: well, I'm glad I asked. just one more question. When you wake up in the morning, Friday morning, you see headlines like you saw this morning. Luke, do you ever feel like you've got to go out and buy something? You've got to go out and start looking for something to get that might be cheap. How do you, as a professional investor, you know, running a fund in the microcap space in Australia, like, do you feel pressure to be active or how Luke Winchester: We're not very active. look, there is there is pressure to be active and and a lot of it comes from the emotions around investing. when when as I said before, share prices can really detach from fundamentals and and when that happens, you know, we can become emotional and and sort of act on those. but at the same time, you're right. I think you you need to be prepared and understanding that you know, today doesn't look too bad relative to to some others we've seen in the past. But you if we rewind back to you know, the tariff tantrum, you know, the the the the the breakout of the Iran war sort of back in in March and April over the last couple of years. There were days when, you know, you would wake up to see the US down three or four percent. And you would know, you know, this is going to be a day where, especially with the illiquidity in in micro and small caps, there's gonna be opportunities where names could be off 10 to 15 percent and and and and provide that sort of you know, attractive entry point. So not not looking to be active for the sake of it. But being aware that these these sorts of environments and this sort of volatility creates the opportunity. So being being prepared for that, I think certainly is is something that that I'm always trying to do. nadine: Thank you. Thanks for indulging my curiosity. I I sometimes have the time to ask these types of questions. Sometimes I do not. But on this Friday morning, it's great to have you with us. A Friday morning that we're not really expecting any big economic data. We got that out of the week, or out of the way, I should say, yesterday with the jobs data. but we are expecting the ASX to fall after that flat finish on Wall Street. higher treasury yields will be the key speaking point, I know, on Osbiz today. futures are down by 29 points. Utilities and industrials were higher in the US. We'll see if that happens here. obviously the commodities complex will, you know, be fundamental to how this market performs. We've had Brent oil up, so watch the energy sector, gold down by about 0.4%, iron ore down slightly. I actually don't have the copper price in front of me. Apologies. we've got the Reserve Bank of Australia next week. Tonight we have. August durable goods in the US. But as I said, it really seems like we've got the big economic data out of the way. We'll see what Corporate Australia brings for us today. Yesterday we had Premier and Washington H sold Pats. Both share prices performed quite well on earnings, which I thought was, you know, one of those narratives that continued and proved itself correct yesterday at least. Luke Winchester, Merry Weather Capital. I hope you have a wonderful day. I hope you have a really good weekend. Thank you so much for joining us this morning. Luke Winchester: Thanks and then you too. nadine: And hope you all have a good day of trade out there. Or like Luke says, don't feel pressure. Sometimes it's okay to sit and watch what's going on around you. thanks for listening to Ozbiz AM. We'll catch you next week.