AFR: Why global banks are better value than the ASX’s big four


Antipodes founder and chief investment officer Jacob Mitchell says Antipodes sees values in the global banks, Siemens.

Has the rally in Chinese stocks run too far?

In China today, money supply is accelerating at its fastest pace in five years, which has not yet fully translated to activity due to lockdowns. This increase will be felt more broadly through the economy as China reopens.

Also, in China significant pent-up household demand and accumulated savings have now amassed to 14 per cent of a normal year’s consumption and much of this underspend has occurred in service areas.

Hence, we prefer resilient domestic advertising/service focused businesses such as Alibaba, Galaxy Entertainment, Country Garden Services and Ping An Insurance.

Why are you bullish on European equities?

We took a contrarian view on European equities, particularly multinational European-listed businesses, last year when there was a significant level of panic in the market.

Specifically, we are finding great opportunities in the companies that benefit from the Western world’s policy-driven energy transition. For example, Siemens, which is at the forefront of factory automation and retooling of manufacturing lines for a lower carbon world, and its subsidiary, Siemens Energy, which manufactures gas/wind turbines and high voltage transmission equipment.

On the European domestic facing front, we continue to favour European banks, namely ING and UniCredit where the market has been slow to appreciate the significant improvement in asset quality and capital position over the decade since the financial crisis.

Do you see value in Australian shares?

Local investors pay a very high scarcity premium for the perceived secular growth opportunity. However, as global investors, when we benchmark these companies against global best of breed peers, in many cases the premium is not justified – and we currently find more potential shorts than longs.

Clearly Australia has competitive advantage in resources, and we currently own Newcrest. Australian banks trade on close to 14 times FY24 earnings with lower growth and payout potential relative to US banks on 9.5 times, and eurozone banks on 6.5 times.

Eurozone banks also offer payout yields of greater than 12 per cent and rising given accretive buybacks.

Which US stocks could surprise with their results this earnings season?

We’re seeing a disconnect between weak sentiment and optimistic earnings forecasts. US earnings have only just entered a downgrade cycle, and you must ask, is this being priced in yet? We don’t think so.

The average starting valuation of US equities today is 17.7 times forward earnings. However, US earnings forecasts for the next 12 months have fallen just 4 per cent from the recent peak, with current analyst forecasts still implying upcoming earnings will remain flat compared to last year. Using prior recessions as a guide, earnings forecasts in the US could fall another 10 to 15 per cent which would lift the current valuation of US equities to closer to 19 times forward earnings – a 15 per cent premium to historical valuations.

Apple will be vulnerable to a lengthening handset replacement cycle and Alphabet to a slowdown in digital ad-spend growth. In other areas of big tech, for example Meta, arguably this slowdown is already priced.

But we’re in no way negative on the entire US market.

In the enterprise resource planning (ERP) space, we hold Oracle, which recently announced overall revenue growth of 18 per cent year-on-year, led by growing the adoption of its cloud infrastructure. Similarly, in pharmaceuticals we like Merck & Co’s diversified earnings and lower patent cliff risk relative to competitors.

Which areas of the market are you shorting?

We look for companies suffering from a weakening in competitive advantage that are also over-valued, over-hyped and are facing a near-term downside catalyst.

From this perspective, we currently find payroll focused software companies quite prospective. These stocks outperformed most parts of the software sector benefitting from the tailwind of COVID stimulus that led to a tight labour market and accelerating growth. The payroll industry held on to this outperformance even as other areas of software cratered as the stocks benefitted from higher payroll “float” income as rates rose.

However, the sector faces recessionary challenges with the Fed’s tightening program ultimately leading to a reversal in employment growth and deferral in business decisions to upgrade.

We see short opportunities across both the new-entrant SAAS platforms and more established incumbents such as Automatic Data Processing Inc.

Which stock would you nominate as your top pick for the year ahead?

We would pick Siemens Energy for both the year ahead and the long-term.

As a leading manufacturer of gas and wind turbines and grid technologies, Siemens Energy represents one of the most well-rounded exposures to the energy transition and is also one of the cheapest decarbonisation plays in the market today.

The gas turbines are also capable of pivoting to hydrogen power generation, with up to 75 per cent co-firing capability today and 100 per cent by 2030.

Siemens Energy trades at around 5 times our estimated 2025 EV/EBITA. Given the favourable policy backdrop afforded by the US Inflation Reduction Act with $US370 billion earmarked for energy security and climate initiatives and Europe’s legislative response progressing, we see multiple positive catalysts for a potential re-rate.


The article was first published by Alex Gluyas in The Australian Financial Review on 19 January, 2023. Read the full article here.


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25 January 2023