Speaker 0:
Hello and welcome to this. Boutiques connect. I'm joined today by Carl Wells, portfolio manager at Flagship Asset Management. Welcome, Caryl. Thanks for having me, Chloe. So, Carl, globally, we've been seeing some of the steepest interest rates. Hikes have interest rates topped out. And how is this informing your global equity allocation?

Speaker 1:
We certainly believe they've topped out. Um, so in in a number of places, we've seen an inflation peak and start to decline. Uh, with the US and Europe in particular,

Speaker 1:
the UK seems to be one of the holdouts in in terms of declining inflation for now and in some emerging markets, like Brazil, we've already beginning to see interest rate cuts. So, um, a couple of weeks ago, the Brazilian central bank cut interest rates by 50 basis points when only 25 basis points was expected. I'm sure other central banks will follow soon.

Speaker 0:
So do we anticipate then a hard landing or a soft landing? And how are recession fears in informing your your global equity allocations?

Speaker 1:
Well, the market is telling us there's probably going to be no recession at all, or or or soft landing. Um, I. I think the the probabilities that the market is pricing in for hard landing are are only 20%.

Speaker 1:
Um, we believe there are a number of, uh, flashing amber lights. Uh, though, So if you look at the, um, conference board leading economic indicator index um, that is, um, that has declined for for the 15th, uh, month in a row. And from, uh, from a consumer perspective, uh, consumer confidence remains high. Uh, but we have seen, uh that, uh the consumers rate of savings has has declined considerably.

Speaker 1:
And we've seen delinquencies starting to rise. Um, in the US as well. Finally, from a corporate side, we we've also seen, uh, PM I starting to decline. So it's it's it's it's a mixed market. Um,

Speaker 1:
um, at the moment, we'd say risk to the downsides. And our view is partly coloured by the fact that equity, uh, valuations are quite high. So we looking at a average market multiple of about 21 times earnings for the market versus around 16, um, times, um, as a long term average.

Speaker 1:
And so we, um, in our asset allocation funds, uh, we we only 6% are weighted towards equities at at the moment with the balance of our funds sitting in cash and, uh, other fixed income instruments car.

Speaker 0:
So then, if equities are overpriced, I mean, you did mention the PE ratio a little bit high, uh, higher than, um, than than historically. Are you still finding pockets of value?

Speaker 1:
Yeah. So if if one looks out of the the top 50 most expensive stocks which includes, uh, what have now become known as the Magnificent seven, the market multiple is actually sitting only at 16 times. So So that 20 times, um, you know, headline number is a little bit misleading. We believe it is a market for, uh, stock pickers at at the moment, and and we're seeing some very, very interesting single stock opportunities currently.

Speaker 0:
So, Carl, something quite exciting has happened with one of, um, flagship's largest holdings. Perhaps you can take us through the acquisition that has recently taken place.

Speaker 1:
So, um, the the the recent acquisition was of a company, uh called Capri Holdings. Capri is the owner of the Michael Kors, Versace and Jimmy Choo brands. It was acquired by, um, one of their competitors, Coach Um well, tapestry, which owns the coach brand Capri had had been a challenging stock for us this year. It it had fallen considerably.

Speaker 1:
Uh, but they were. They were taken out at a 65% premium to to their share price. And and I think it's a It's a vindication of your philo philosophy and process. Um, you know when um,

Speaker 1:
you know other other people and especially trade buyers, see the value you see in a stock. OK,

Speaker 0:
so what was the main reason behind, um, tapestry acquiring Capri?

Speaker 1:
Well, there were a lot of synergies. Uh, so, um, both Michael Coors and Coach, for example, um, Tapestry's largest brand. They compete in a very similar space.

Speaker 1:
So, uh, from a cost perspective that there were a lot of head office costs that could be taken out. There's also a lot of logistical cost savings in in terms of delivering handbags to, uh, micro and Coach stores, which are obvious, um, often in very close proximity to one another.

Speaker 1:
And, uh, the management teams are are saying there's potentially 2 $200 million per year of of of synergies, um, on the table, which is which is a sub, a substantial

Speaker 0:
amount certainly quite a profitable acquisition that took place there. So what have been some of the other changes then that you perhaps have initiated in the in the in the equity fund?

Speaker 1:
Well, uh, the primary changes we we making at the moment is is to sell some of the stocks that have actually performed really well for us, but but are starting to look overpriced. Uh, so Microsoft, uh, we recently sold it. We reluctantly let go of it. But on 30 times earnings, we think there's value elsewhere. Another one is applied material also performed, uh, performed very well for us, but, uh, looking quite full in terms of its valuation. And, um, we we sort of finding, um,

Speaker 1:
value in, in, in in the cheaper parts of the market. So, for example, large oil we have 10% of of our fund in in between oil stocks and oil services stocks. Uh, we think the oil price is likely to remain higher than, uh than the market expects currently,

Speaker 1:
Um, and we acquired, uh, uh, shares in British American Tobacco. And and that's also looking very cheap. Six times PE ratio. Um, it's it's now the leader in vaping, uh, globally and in the US. Um, and and and so we think it It similarly looks very attractive,

Speaker 0:
Carl. So you guys have a, uh, a small allocation to China geographically through Alibaba. Are there any concerns there? Geographically speaking, we

Speaker 1:
certainly wouldn't describe ourselves as as China bulls. Um and historically, that's been due to, amongst other things, that the regulatory risk we see, um, we we don't see the Chinese government is being consistent in the way they treat companies, especially large companies.

Speaker 1:
And recently, um, our negative, uh, view has been, uh, further compounded by the fact that we're seeing a number of Chinese property developers, uh, default on the international bonds, including country garden. Um, so definitely China wouldn't be a core holding for our funds, but we do have indirect exposure to China. And that's through, For example, the luxury goods companies like Capri and Tapestry um which have 22 40% of their businesses sitting in China.

Speaker 1:
And those businesses, unbelievably are are performing quite well even against poor poor macro backdrop in China.

Speaker 0:
OK, so through the pandemic, the Chinese demand for luxury goods really, really did well we saw it with caring and, um LV MH. But now, with China reopening and your allocation now to tapestry, are there any concerns with this,

Speaker 0:
the Chinese reopening and perhaps a less favourable outcome for for China than what everyone anticipated

Speaker 1:
it. Well, I think you've always got to be on the lookout for things. I mean, we still have an emerging middle to upper class consumer in in China which I think should provide a support to those shares. And while the macroeconomic backdrop is poor, um, there there is a chance that things improve in the future.

Speaker 1:
Provide evaluations are are conducive to holding a stock that that also provides, um, a huge

Speaker 0:
support. OK, well, Carl, thank you very much for sharing your insights with us. We appreciate it.

Speaker 1:
Thanks. Thanks for having me.