- Emanuel Datt says persistent supply chain issues could bring back manufacturing to Australia
- He says geopolitical tensions could provide investment opportunities
- Datt also shares his top ASX stock picks
Investing in Australia will remain challenging in an unstable post-Covid world, but the geopolitical crisis may present some good investing opportunities.
That’s the view of Emanuel Datt, founder and managing director of Melbourne-based Datt Capital, a Family Office that has recently taken external investor funds.
Speaking directly to Stockhead, Datt said that Covid-related social restrictions will weigh heavily on the near term economic prospects of the Australian corporate sector.
“Cities with some of the harshest social restrictions in the world like Melbourne will find it difficult to bounce back than those localities with less onerous restrictions,” Datt told Stockhead.
“I think there will be uncertainty until the various state policies are broadly in line with each other, and that will continue to act as a handbrake for businesses “
Aussie companies react to supply chain issues
Datt also expects significant changes in the manufacturing of materials and services driven by supply chain issues.
Over time we’ve seen seen a decline in Australia’s manufacturing capabilities, forcing us to source a lot of our goods and services from other parts of Asia, especially China.
“But shipping costs have risen very considerably in the past year or so, and that affects the price of these imported goods,” he said.
According to Datt, this could lead to a move towards bringing some elements of the production back onshore.
As an example, he cites household products company, GWA Ltd (ASX:GWA), as a case in point.
GWA recently advised that it has jointly chartered transport ships to get its products from China to three seperate ports in Australia because of the bottlenecks in traditional channels.
Other companies like speciality home fragrance manufacturer Dusk Group (ASX:DSK) and chemicals producer DGL Group (ASX:DGL) are trying to bring their production back onshore.
“The on-shoring to mitigate supply chain issues is clearly a trend, and will only accelerate,” says Datt.
“There’s obviously a case for building up the security of supplies, and companies are now willing to pay a bit more just to be certain there’s not going to be supply disruptions going forward,” he added.
Impact of geopolitical tensions on Aussie stocks
Datt believes that rising geopolitical tensions will impact the availability of commodities, whose supply may be used to exert political pressure on the global stage.
These same forces will lead to Aussie companies focusing on managing jurisdictional risk, particularly in the resources sector.
“At the moment, the supply of Russian gas to Europe has not been disrupted, but the Europeans are definitely trying to reduce their reliance on Russia,” Datt said.
On Monday, EU foreign ministers met and disagreed on how to slap sanctions on Russia’s lucrative energy sector.
Germany was the most vocal in rejecting the idea, saying the country and the whole bloc were just too dependent on Russian oil. The 27-nation EU bloc currently relies on Russia for 40% of its gas.
“Just imagine if you were a manufacturer with one key input being natural gas. If your input prices have suddenly risen by a few hundred percents, you would have to pass the cost down eventually,” Datt told Stockhead.
But as crude as this might sound, the current conflict may actually benefit Australia’s resources sector, Datt said.
For example, Whitehaven Coal (ASX: WHC) has this week moved quickly to source 70,000 tonnes of thermal coal that the Australian government will donate to Ukraine. (Separately, the company also said it would contribute $250k to the Australian Red Cross Ukraine Crisis Appeal.)
“Ultimately, we’re in a situation where Russian commodities are not purchasable by a lot of the Western world and democratic countries like Japan and Korea,” Datt said.
“So I think there’s a real benefit here to Australian commodity producers.”
Datt’s stock tips
The Datt Fund is an absolute return fund, meaning that it doesn’t track any particular index but rather, has a return target of 5% plus the RBA cash rate (which is currently at 0.1%).
According to Datt, the fund has returned over 15% per annum over the last three years.
These are some of the top stocks in the fund currently.
Whitehaven is a thermal coal producer, with mines primarily located in NSW.
“We identified Whitehaven as a value stock since the Russian Ukraine situation began,” Datt explained.
“Russia sells a lot of thermal coal to a mainly Japanese, Korean and Chinese customers, and some of those countries may stop purchasing from Russia,” he said.
“We also like Whitehaven because it has a strong cash position and some good growth projects.”
Nickel Mines is emerging as a globally significant, low cost producer of nickel pig iron – a key ingredient in the production of stainless steel. The company owns significant nickel mine assets in Indonesia.
“Our interest in Nickel Mines follows a similar theme as Whitehaven, in the sense that Russian nickels are no longer palatable or marketable to large portion of the world now,” Datt said.
“We also like the stock because nickel is a very critical mineral for electric vehicles.”
Santos is the second-largest independent oil and gas producer in Australia. It’s a major upstream producer in WA and Queensland’s onshore Surat and Bowen Basins, with gas from Santos’ Roma field supplying homes in the region.
“One thing we like about Santos is its exposure to LNG, which is just quite heavily exposed to this rising energy prices thematic,” said Datt.
“I believe that LNG prices will stay quite strong going forward, irrespective of where the crude oil prices go. One reason is again tied to Europe trying to reduce their dependence on Russian gas.”
In the non-resources sector, Datt likes the look of online brokerage company, Selfwealth.
The broker offers low cost, flat-fee structure and investment access in both Australia and the US.
“Big platforms like CommSec and NAB Trade are large legacy businesses of the big four banks, but Selfwealth has actually been able to grab market share off those players over time,” Datt explained.
“Selfwealth has grown really rapidly since Covid, and we see them eventually becoming the largest player in the market.”
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The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.