Katana’s Romano Sala Tenna talks BHP-Woodside, market predictions and his ASX ‘deep value’ plays
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Stockhead caught up with portfolio manager Romano Sala Tenna of Katana Asset Management to find out what he’s been investing in, and his market predictions for the rest of the year.
Investors breathed a sigh of relief this week, when US Fed Chairman Jerome Powell soothed market concerns about possible interest rates hikes.
Powell said although inflation remains a concern, he emphasised that interest rates hikes would remain a distant prospect.
The chairman however signalled that he would reduce the bank’s $US120bn of asset purchases soon, without giving a specific timeline.
Sala Tenna says the US Fed is usually very cautious about sudden policy changes, even the perception of sudden policy changes.
But in theory, if we do see a rate hike, he believes it will impact on growth stocks.
“A rate hike or tapering would obviously impact the yield curve, and you could see the 10-year US Treasury head back up to 1.50~1.60% like they were a couple months ago,” Sala Tenna told Stockhead.
“Theoretically that would impact long duration growth assets such as tech plays.”
“But we make a distinction between speculative tech and real tech. Real techs would be the FAANG stock with real diverse growing businesses, and we don’t see them getting affected by tapering.”
“Speculative tech stocks are things like the SPACs, or concept stocks with such long-dated earnings that when you discount the earnings back to today’s dollar terms, they’d look miniscule if discount rates start to rise,” he added.
In the broader market however, Sala Tenna still sees an upside trajectory despite equity markets in the US and Australia trading at or close to record levels.
“You could argue the Dow Jones is rolling over, but there’s also a very strong uptrend track there.”
“So we think there might be a 10% to 15% correction, but the path of least resistance is still on the upside,” he said.
Sala Tenna said the market might have entered into a period of “everything rally”.
This happens when so much money is being printed, coupled with interest rates being so low.
“As confidence increases, the velocity and speed at which money is transmitted around the economy increases. As this happens, you’re likely to see all assets being inflated.”
It’s important, he says, to have a predisposition toward real earnings stories – like the old-word cyclical stocks that are recovering, or the material plays which have been left behind.
“We’re not interested in value, but we’re interested in deep values.”
Sala Tenna says he’s seeing some really deep value plays emerge within the materials sector.
Other companies that are on Katana’s watchlist are the reopening stocks.
“We’re not playing them yet, but once we see a bit more tangible evidence of a move into a reopening phase, we’re going to buy them,” Sala Tenna said.
Asked what he thought about the recent BHP (ASX:BHP) and Woodside (ASX:WPL) merger, and if it would be beneficial for existing shareholders, Sala Tenna believes that for Woodside shareholders, the short to medium term outlook is going to be challenging.
“Woodside is going to issue somewhere around 1 billion of its own shares if the merger is consummated. We believe that a lot of the BHP shareholders will not hold on to those Woodside shares, and so those shares are going to be dumped in the market,” he said.
The merger was an all scrip deal where Woodside shareholders get 52%, and BHP shareholders get an equivalent 48% of the new enlarged entity.
For the medium to longer term, Sala Tenna believes it’s a good deal for Woodside as the company will own Tier 1 assets globally, which were obtained relatively cheaply at around 4.7 times EBITDA.
From a BHP shareholder perspective, the deal makes a lot of sense, he said.
“They will end up with exactly the same assets, but now they can choose how they want to play out the ESG preferences.”
“It’s a brave move by BHP to remove their second largest pillar (gas and oil). But it’s easy to be brave in a year when 80% of your revenue is coming from iron ore, but through the cycles there will be a massive hole for them to fill,” Sala Tenna said.
“I’m not saying it’s a wrong move, but it’s a brave move.”
And where would the iron ore price go to from here?
Sala Tenna was uncommitted but willing to give this advice: “We knew it was clearly unsustainable at those record prices, but in the short term we’re expecting a bit of a bounce back from these levels.”
Sala Tenna says that Katana invests in small caps but with smaller portions.
“We have to see a higher level of potential return to invest in small caps than we would with larger caps,” he said.
“We wouldn’t buy a small cap company for a 10% rerturn, we’re looking for minimum return of 40-60%.”
He believes the liquidity risk inherent in small caps warrants that extra risk-return premium.
Some of the smaller cap names he’s looking at include Kina Securities (ASX:KSL).
Aeris is one of the only four copper producers in the Australian market, and Katana has been a big investor in Aeris over its journey, Sala Tenna said.
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.