Tim McGowen: We’re talking today with Romano Sala Tenna, who is the Portfolio Manager and Founder of Katana Asset Management. The company was founded in September 2003 as a boutique investment manager firm exclusively focused on Australian equities. The fund operates a managed funds structure and since inception has outperformed the all ordinaries by 7.3 per cent per annum net of fees. Romano, nice to see you again. Thanks for your time.
Romano Sala Tenna: Yeah, nice to be here.
Tim McGowen: Now, you’ve come from WA. I’ve assume you’ve flown. There’s lots of horror stories, particularly on the price of airfares to WA, in particular. I have quite a few mining executives come into town. Can you talk through the dynamics of the airline industry to start with and perhaps get your view on Qantas (ASX:QAN)?
Romano Sala Tenna: Yeah, I think right at the moment we’re in a difficult patch where they’re trying to get their carrier loads up to where they need to be, and so they’re having to price more intensely. And so what we’re seeing at the moment is a shortage of flights and exacerbated air prices, which is sort of the worst combination. So, we just need to get through this patch and see air prices come back. We’re paying roughly double, give or take, what we were paying pre-COVID from WA. The loads are absolutely full to the eyeballs. There’s no spare seats. You’re struggling to get your luggage on. I could go through a whole lot of other horror stories there, but I just think we need to get back to the Qantas of old, and I think this period of fee gouging, I think is unsustainable. I think you can justify it in a short period of time whilst they’re building up the load and having to up-staff, so they’re having to… all those costs associated with that. But I think we’d like to see airfares normalise over the next sort of three to six months.
Tim McGowen: Now, of course, it’s the consumer wearing those airfares in terms of price increases. They’re wearing inflation, higher rates. We’ve got energy prices rising, of course, and then a correction in housing pricing. And I remember I read through one of your updates — consumer spending represents 50 per cent of GDP in Australia. So, how will the consumer impact company profits moving forward?
Romano Sala Tenna: I think this is the critical question. I think in Australia we haven’t seen yet. The US is six to nine months ahead of us, and in the US consumer spending makes up 68 per cent of GDP. So, it’s a huge drive of economic growth. What we’re seeing there is that they’re now starting to see some stress in the consumer segment. We saw credit card debt increase 15 per cent month on month, and that’s consumers basically holding to their same patterns and borrowing the money to facilitate those levels of spending. I think in Australia everyone’s talking about tightening their belt. We’re not seeing it yet. I think it’ll be the other side of Christmas before reality bites, and I think the first half of 2023 is going to be a challenging period where consumer spending’s going to have a real test, and I think that’s going to impact corporate profitability.
Tim McGowen: And, Romano, looking through your recent fund update you, you’re quite defensive in regards to having some high cash holdings. That said, you’ve also got some overweight positions in some of the Material stocks. Can you give us your opinion on the Material sector at the moment?
Romano Sala Tenna: Yeah, firstly, the overweight cash holding, of course, as we discussed, is that’s really because we do think consumers are going to fall off a cliff in the first half of 2023. We don’t have the luxury of holding that position for too long. So, if we don’t see what we think should happen in the first sort of quarter of 2023, we’ll need to pivot. But at the moment we’ll hold our nerve on that higher cash weighting
In terms of Materials, it does seem a bit strange to be having high cash and yet high alpha materials. There’s a couple of reasons. One is we’re playing a couple of specific thematic. So, we’re playing the EV thematic because we think that is the number one driver over the next one to two decades. There’s also some energy specifics there. We think with what’s happened in the Ukraine and elsewhere, we think that that’s a smart place to be. And then finally we’re seeing some valuations. We didn’t think we’d be back in the coal sector in the way we are, but when they’re sort of free cash flow yields after everything, bordering on 40 per cent per annum, it seems a bit insane not to be holding those positions and in fact building them and waiting for some of that cash to come back to shareholders as it’s starting to do. So, they’re the main drivers of why we’ve got overweight in Materials right at the moment.
Tim McGowen: So, you touched on the EV sector and you do hold a significant position in Mineral Resources (ASX:MIN), which is one of the top five global lithium producers in the world. What’s your wider thoughts on the EV sector and the dynamics beyond just the dynamics for lithium?
Romano Sala Tenna: As I say, it is the number one theme that we can see over the next one, two, three decades. And so we’ve put a lot of work into trying to understand how it’s best to play that. Our mandate restricts us to being ASX-listed. So, with that in mind, a lot of the great technology companies that we would like to play to get exposure to the hydrogen thematic or the like are out of bounds for us. So, we’re really restricted, unfortunately, at the moment. We’re doing a lot of work on the emerging tech, but we’re not taking positions as yet. So, we’re really restricted to EV metals. Obviously, lithium’s number one, but also we’re looking extensively at copper. I don’t think people quite understand the dynamics in the copper market. It’s going to take about two years to play out, but the market can move ahead of the curve as well. I think over the next couple years you’re going to see a real deficit in that space. And projects, you know, grades were sort of 1 per cent plus 10, 15 years ago. They’re now sort of 0.4, 0.5 per cent. You know, regulations are much longer. From discovery to first production is taking on average about 14 years. So, the big new copper mines that we need to facilitate this deficit must already have been discovered.
Tim McGowen: Graphite’s often forgotten in the EV equation, particularly when compared to lithium was something we were discussing this week. What’s your thoughts on graphite?
Romano Sala Tenna: I think graphite, from memory, was the first EV commodity to move, and you can look through the progression of how they move. You had graphite, and then I think you had nickel, and then I think lithium had run then pull back, and then some of the other metals and so forth, cobalt and the like. I think the reason graphite hasn’t gone on with it is because there is such an abundance of graphite globally, and it’s not something that’s… Even in commercial quantities, even higher grade, it is so abundant that I think that it’s not hard to bring on new supply, and I think it’s quite lumpy in terms of one new mine will probably handle a couple of years of additional demand. And so you’re going to get these massive price spikes and dips, but over time it’s not a deep market. So, it’s one that we’ve stepped away from, and I can’t see ourselves stepping back in any time soon.
Tim McGowen: And, Romano, looking forward… maybe not looking forward to next year, but looking towards next year, what’s your thoughts on 2023?
Romano Sala Tenna: I think it’s going to be a tale of two halves. I’m a bit worried that that is the consensus positioning, as always. We don’t like being in with the herd, and I think the herd is saying exactly this, but I think for good reason. I think the first half of next year, the consumer bites, which impacts corporate profitability. You’ve also got corporate costs or debt servicing costs will bite as we start to see interest rates hit corporate borrowings. And we’ve also got corporate inflation, so wage inflation, but also more generally inflation across their input costs. So, I think these three things impact corporate earnings. So, I think the first half of 2023 is challenging, give or take. I think then you start to see the US Fed will pivot at some point. I think it turns dovish at some point. And I think, give or take, that’s the point where the market will start to look at interest rate cuts and the impact they’ll have, and the old adage “don’t fight the Fed” will come to the fore, and I think we’ll then start to see a recovery from there. So I think we’ve got some medicine, some pain ahead first, but as I said, I am worried that is a consensus position.
Tim McGowen: Romano, always good to see you. Thanks for your time.
Romano Sala Tenna: Pleasure. Thanks, Tim.
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