MoneyTalks: This fund manager is hanging on to his cash, but battery metals stand out
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MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Katana Asset Management portfolio manager Romano Sala Tenna.
Interest rates are on the rise across the Western world and it’s no surprise fund managers are looking to cash to provide a bit of insurance at a time of great economic uncertainty.
It’s a strategy Perth-based fundie Katana Asset Management has clung to in recent times, with a little over 35% of its Australian Equities Fund committed to cash.
Despite the outperformance of equities through the first half of the calendar year, Katana finished 1.66% after fees above the All Ords for FY23, which recorded a 14.75% gain across the past 12 months.
Portfolio manager Romano Sala Tenna, who describes himself as a contrarian investor, is beginning to become just a tad uneasy about sitting where the crowd is.
He says we could be looking at an “abnormal” market, with most people around the world predicting some form of market fall.
“What’s abnormal is it’s probably the most predicted correction in the history of the stock market, certainly from what we’re seeing. Consensus positioning is already that we have to have a leg down. And when the consensus positioning is such … the path of least resistance then becomes the upside,” he said.
“If everyone’s already positioned for the market to correct, as they say the bears have no shares, people have already sold. They’re already sitting on surplus cash.
“Three weeks ago, there was a survey out of the US showing that 60% of US managers are overweight cash and underweight US equities.
“Now if people already position for the correction, then you’re not going to see that same panic, the same sell down, you’re going to actually see people buying the dips.
“So that’s something that worries us, is that we don’t like to be where the herd is. We don’t like to be positioned in a consensus way and we find ourselves in that position at the moment, sitting on a lot of cash like every other professional manager in the global sphere.”
But Sala Tenna continues to see another leg down as what he describes as the “fastest rate rise in history” takes control of consumers’ purse strings.
“Anecdotally, you can’t have – to our mind – the fastest rate rise in history and not break something. You’ve got to have some some disconnect in the system there,” he told Stockhead.
“If we delve into that a little bit more deeply, what we believe is that corporate earnings have to take a serious leg down, so there’s two aspects to corporate earnings.
“There’s your input side and there’s the output side.
“On the input side, what we’re seeing is with cost inflation we’re seeing an impact on what it costs to manufacture. Now initially, that was in energy, fuel, consumables and the like, raw commodities.
“Those things have now abated, but we’re now seeing a level of cost inflation on the wage side.”
When corporate earnings get hit, share prices typically follow suit, Sala Tenna notes.
Rather than looking at where you do want to be, Sala Tenna says it’s important to work out where you don’t want to be.
“Most things we don’t want to be in at the moment. We were getting excited about the retail sector, it’s bounced a bit this week,” he said.
“The retail sector is exciting, there’s some great companies like Nick Scali (ASX:NCK), JB Hi Fi (ASX:JBH), and Supercheap Auto (ASX:SUL) that we’re really excited about but we don’t want to be there yet.
“We’re seeing some great opportunities in financial services. We’ve seen some great opportunities in the non-bank sector, things like Pepper Money and the like, fantastic buying, but we still think it’s a bit early, they still have a leg down.
“REITS, we don’t want to be in REITs at the moment… that is the wrong place to be.
“So there’s a lot of things that we don’t want to be in right at the moment, but which has really restricted our universe of what we do want to be exposed to.”
One of the sectors Sala Tenna says is standing out from that perspective is EV facing metals, especially lithium and copper, which are key to the transition from fossil fuels to electricity and renewable powered transport.
“There’s so much strength and momentum in that space that even if we go into a recession, we’re still going to see incrementally improving demand,” he said.
“So the two we’re specifically exposed to are lithium and copper — if you look at our top 10, six of the companies are exposed to lithium and copper which is a very high level of concentration, it’s very abnormal for us.”
In lithium, Katana is focused on the tried and tested. Some of its largest positions are in Mineral Resources (ASX:MIN), Wesfarmers (ASX:WES), IGO (ASX:IGO) and Allkem (ASX:AKE), while Pilbara Minerals (ASX:PLS) sits just outside its top 10 exposures.
Copper is a trickier beast to tame.
“In the copper space it’s very hard to get quality copper exposure in the ASX now since OZ Min’s been taken over,” Sala Tenna said.
“So we’ve got certainly got a top 10 position in Sandfire (ASX:SFR), around the top 10 mark, and we’ve also played it via WIRE.AXW, which is a Global X copper ETF … and our mandate permits us to buy ASX listed ETFs.
“That’s one way for us to be able to play that global theme.”
The phrase is actually “all that glisters is not gold”. But gold is one of the sectors looking pretty alright in a potentially recessionary world.
“So gold is still one sector that we’re not bullish on but we’re not negative on,” Sala Tenna says.
“What we do see is that there is some very good value, so even though the gold price is hard to call, and we’re sort of neutral on gold price, we are bullish on some gold stocks specifically because we do think the market’s missed them for whatever reason.”
This is one area where Sala Tenna sees value in companies with smaller to mid-cap exposure.
“We think that Tietto (ASX:TIE) is an absolute standout,” he said.
Tietto recently opened the 3Moz plus Abujar mine in Cote d’Ivoire.
“We think that they’ve done a great job of bringing that plant into production, and that it’s only a matter of time before they’ll start to print some very, very serious cash numbers.
“So there’s an example from the gold space.
“Also in the gold space, we’re very bullish on De Grey (ASX:DEG).
“We don’t understand how it doesn’t get taken out at some stage.”
While De Grey and Tietto are relatively common stock picks for gold watchers, Sala Tenna sees value in other places as well.
“If you want to go to the really small end of the gold space I think after the Pantoro-Tulla merger we think that Pantoro (ASX:PNR) at seven cents is just too cheap,” he said.
“I’m not saying it’s a high quality company, but that market cap ($330m) for a 100,000oz producer here in Australia with a pathway to increase it and a big resource in a tier 1 jurisdiction – Norseman – I would think that Pantoro’s too cheap.”
At Stockhead, we tell it like it is. While De Grey Mining is a Stockhead advertiser, it did not sponsor this article.