Are China’s BATs flying too high? Why is nobody checking the Crown Casino allegations? Why the ASX may not break 6000 this year.

This week James Kirby and I discuss the Crown Casino allegations. Why does nobody want to know about it?
 
Plus:
  • Banks and reporting: facts are holding the market back, and it may not crack 6000 this year;
  • BATs are flying in China;
  • Meanwhile, in Australian supermarkets, Daigous are still going hard;
  • Floating notes explained; and
  • Are Australians too complacent on housing and too concerned on stocks?

Hello, I’m Alan Kohler, publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

And we are The Money Café.

The Money Café.

G’day James, it’s good to see you again and just on the way here I was talking to Stephen Mayne, my friend who you know as well, of course, who has just spent more than an hour with Tim Costello grilling the Chairman of Crown at their AGM, the Chairman being John Alexander.

But James Packer is there too, isn’t he?  James Packer is there but…

Yeah, but Alexander is the Chairman.  They kept all the reporting out of it, no cameras, no nothing.  So, I suppose they had reporters in there taking notes but…

Reporters have been filing – you know, basically running out the door and e-mailing back to the office just like once upon a time.  So, there are reports starting to come out, yes, of what’s going on inside but yeah, they did a complete incommunicado.

But it is interesting, and I think you’ve been saying that that’s interesting how the big scandal around Crown, the accusations that they were hit with, is not really…

It’s not taking off.

It’s not taking off as a story.

No, it’s like the sound of silence, it’s like nobody wants to know about this and I’m always uncomfortable when nobody wants to know about a scandal or wants to ask questions about it.  So, Andrew Wilkie dropped these quite spectacular allegations in parliament admittedly under parliamentary privilege, and he hasn’t made it outside of parliament.  This is a point John Alexander is making really continually.  A fourth whistle blower has come forward as well, Wilkie said yesterday.  Prime Minister doesn’t want to know, he says the regulators should take that up, the regulators don’t seem to want to know, I think the wider media don’t seem to want to know.  I certainly haven’t seen any story that progresses the issue.

Well the trouble is it’s a difficult story because you’ve got he said she said, or he said he said, and part of the accusations are against the regulator.

That’s right.  The government says the regulator will look after that but the accusations were against the regulator.

Somebody has to appoint an independent inquiry into it and nobody seems very keen to do that for some reason.

No, well you have to say one of the reasons – one reason, just a pure hard logic reason, is that it’s one of the biggest taxpayers in the land, it’s a major company, a major employer…

We don’t want to kill the golden goose, the goose that lays the golden egg.

That’s right.  I really would like to see some further examination of it though and just turning it around, Alan, on an investor point of view you’ve got a stock there that’s now $11.  Today’s AGM, what I’ve read so far, they haven’t got any million-dollar solutions to their problems just yet but you have to think here’s a stock, it’s really pared down its debt, it’s pulled back from overseas and they made a mess of that in terms of getting out of Macau.  But, it’s now an Australian focus gambling stock, it’s the big one, it has the Melbourne Casino and it’s got the licence for Barangaroo.  You think about it long term, you’ve got this stock that’s probably undervalued.

Yeah, I guess so.  I mean it’s interesting that nobody is actually having a crack at a class action or there’s no talk of a class action.

That’s right, there’s no talk of class actions and that’s also interesting because there are so many. 

There’s so many going on!

This week I noticed that this American researcher here, a specialist researcher in the area, a legal researcher, 30% of all opt-in class actions in the world were filed in Australia last year.

Really?

Yeah.

Wow.

Incredible.

I didn’t know that.

And the litigation…

Well this is because we’ve got IMF Bentham here who’s funding them.

And IMF Bentham get – one of the interesting things is that this report said that IMF Bentham get up to 40% of the payouts, 40% – that’s before the lawyers get anything.  So, for what it’s worth there’s a review, there’s a Victorian Law Reform Commissioner actually having a look at the whole thing about class actions because it really – you know, it really is getting to a point that it’s getting a little bit crazy, there are so many, there’s one every week.  There’s now class action lawyers suing each other, there’s two different sets of this going on.  Maurice Blackburn sued Slater & Gordon already, and Shine Lawyers who advertise on television all the time, they’re being sued by a crowd called Quinn Emmanuel, who are a multinational.

What for?

Well, the Slater & Gordon one was about the behaviour as the stock.  I don’t know what the Shine Lawyers one is about but it’s on.  So you’ve got to sit back and say hang on a second, who really wins here?  More broadly, Alan, and looking at the stock market we talk about Crown and we talk about Rio with their class action, and Commbank with their class action, but we’re just coming into the AGM season now and the reporting season, we’ve got the big banks about to report, three of the four big banks.  That’s all three but not Commbank will report their full year results in the next few weeks and ANZ seem to have come out with a fairly strong result today.  What do you think of the tempo of the market right now?

Well, I think it’s interesting and I think the ANZ situation is probably what we’re going to see a fair bit of over the next few weeks which is that the result’s fine, there’s nothing wrong with the result, but the trouble is the market has got a bit ahead of it and has strengthened quite a lot ahead of the results.

The wider market you mean, the ASX?

No, the bank share prices in particular.  I mean they’ve all had a very good run in the first half of October, the market as a whole, but the banks as well, and I think that the markets and the banks have had some buy on the rumour sell on the fact action which…

Well that would stand up to today because ANZ just reported an 18% profit improvement, stock actually dropped a little bit.

Yeah, that’s right, so I think we’re going to see that repeated a few times with all of the banks because they’ve all got a bit ahead of themselves and I think they’ll just come back a bit and it means the market as a whole is going to be a bit weak.

Here’s the big question; will this market ever crack 6,000?  It rolls up, it teases us…

Well, it might not.

It goes right up to 5,950 and then it can’t break it.

It might not, and in fact it might not really seriously break 6,000 next year, you’d have to say.  I mean it’s all about earnings.  The reason the American stock market is rising so strongly is because of earnings, it’s not really because of the prospect of a Trump tax cut, it’s about earnings and earnings in America are strong.

Yeah, and you’ve got these spectacular earnings of some of the – in terms of earnings growth anyway, of some of the big tech companies.

I made a speech yesterday to a group of investors, retired investors, and they all want to know what’s going on in the Australian market, why is it so weak and the American market is so strong.  My answer, which is possibly a little bit of an over-simplification, was that we don’t have Silicon Valley.

No, and we don’t have the pharmaceuticals either, we don’t have the Pfizers and the Viagras and the…

That’s right, and the American market is dominated by technology and the big FANG stocks, Facebook, Apple, Amazon and Google.

Netflix.  Yeah, that’s right.

But you’ve been looking at what are called the BATs.

I’ve been looking at bats.  Now, folks…

Now, I’ve had a problem with bats at home.

BATs with FANGs.

No, bats with bottoms pooing all over my deck, that’s the problem I’ve been having, with actual bats.  But no, what are your BATs?

Real bats.  Well, this is an acronym of course, needless to say, and it’s very interesting.  Of course sometimes themes are – they always come up with an acronym in the end for a theme but this one is really a serious theme, it’s about the Chinese version of the American tech giants and there’s three huge companies, Baidu, Alibaba and Tencent, BAT, there’s your bats. 

It used to stand for British American Tobacco.

It did and probably still does but we don’t talk about them anymore even though I believe they’re a perfectly good investment.  Now, I got our old chum, Clay Carter, just to do an exercise for me and to take a look at them because he is very good at this sort of thing and he told me that if you look at the market cap of those huge companies, Facebook, Netflix, Google and Amazon they have a market cap of 1.6 trillion.  The market cap of those three companies I just mentioned, the BATs, it’s a trillion US and their share of advertising and everything else is on a par…

And there’s only three of them.

There’s only three, yeah.

So, how many in the 1.6 trillion?  Five.

Five, yeah, because there’s two As, it’s FAANGs. 

So, on average the same really, 1.6 divided by 5 and 1 divided by 3.

Yeah, so if people are thinking of looking overseas and looking at the big tech company, the big tech plays, it’s perfectly sensible to look at these Chinese ones as well.  Because they don’t have the PE craziness of the American ones but they are really up.  So far this year all those – the three bats, the lowest, Baidu, is up 60% so they’re all up 60% plus while the American ones, they’re good, Amazon is 30% up, Google is 30% up, this is all in US dollars, but it’s a big theme, really interesting.  It’s something to look at, I would think, for anyone who is looking at the market and saying it’s so frustrating, we know the American stock market as we have said before – it’s up 280% since the GFC and we’re up 90% and we’re not going to catch up it would seem in the near future.

No, so one of the interesting contrasts between this action in the BATs, as you put it, sort of the capitalism side of China, and the fact that they have crowned Chairman Xi this week as sort of Chairman for life.

That’s the scary bit, that’s the risk.

And socialism with Chinese characteristics.  I mean…

Edging towards dictatorship.

Well, yeah.  Which is going to win, it’s interesting.  The other side of the – if I could pre-empt your question, is…

Yes, you can.

…the other side of Chinese capitalism, is the daigous.

Yes.

Which I’ve been doing some work on that.

Now hang on, explain to people what daigous are?

A daigou is somebody who is a Chinese person, generally or almost entirely, who shops in Australia…

It’s the name of the people, is it, is that what they are?

Well it’s a person, they’re called daigous.

Okay, I never knew that, right.

The individuals are called daigous and they go shopping in Australia for products that are wanted in China and they buy them, and they send them individually…

Such as infant formula is the big one, isn’t it?

The main thing is baby formula but also vitamins, supplements and some other food.

Right, yeah.

So, I’ve been working on it for a column in the Australian this Saturday so I can give you a bit of a scoop on what I’ve found out.

I am excited about that, Alan, yes?

And so I spoke to this woman called Livia Wong, among other people, who is an organiser of daigous based in Sydney.  She is called the Queen of the daigous.

Right.

Anyway, I said to her so how many parcels are being sent from Australia to China by daigous, she says about 50,000 or 60,000 per day.

Per day.

Per day.

When you say sending they’re bringing them – they’re physically bringing them with them, are they?

No, they’re sending them off by mail.

So they run into the shops, they grab everything…

They go to the shops, they buy ten or five tins of baby formula, put them in a little box, put the address on them, stamp and off they go.

I thought this whole thing had cooled down.

She says 50,000 to 60,000 a day.

I thought it had cooled down, and I thought there was some rules.

No, there’s now a listed company on the stock exchange who all they do is they have five daigou stores.  So, there’s now a whole lot of shops starting up that specialise in supplying daigous.

Yeah, right.

And apparently Olivia Wang says there’s 1,500 specialty daigou stores around Australia now.  So, I rang up a2 Milk.

The listed company.

They’ve got infant powder.  I said how much of your output is now daigous, they wouldn’t tell me but it’s huge and it’s a really important part of their business.

But they don’t want to be taped in with them because it’ll make their stock price really volatile.  That’s what happened to Bellamy’s and Blackmores even.

Well, the thing is it’s not really subject to regulations, completely in a sense anarchic in that people are basically – and what they do is they go into a shop and they’ll take a picture of the product, they’ll post it on WeChat which is owned by one of these stocks that you just mentioned…

Yes I think it is.

But I can’t remember which one.  Anyway, WeChat is the Chinese social media thing, they posted a picture of it on WeChat saying who wants half as dozen tins of this?  Somebody will go back and say yes, send them to me, so they buy them and it’s all done on WeChat.

How could an Australian investor get in on this, and they may as well because you can’t seem to be able to stop it.

Well, you can buy the shares in the company that now has got daigou stores, it’s called AuMake and its symbol is AU8.

And this is an ASX listed company?

ASX listed company, it’s only come on in July and I can’t remember what the market cap is but it’s still quite small.

Right, it’d be a small cap I expect.

Quite small.  But, it’s got five actual stores in Sydney.

Right.

Or you could buy a2 Milk.

Or you could buy Bellamy’s, it’s still there.

Bellamy’s – Bellamy’s has come back a long way all because of daigous.

They all have, yeah.  But it was always about daigous, why have they come back?  That is, why have these stocks linked with this business rebounded?

Well, Bellamy’s got sold off because they lost their licence in China and then they got it back.

They got it back, okay, right.

Then the daigou thing has just been growing steadily all the time.  Yes, anyway that’s my daigou story.  Read all about it in The Australian on Saturday is all I’d say to you.

Yes I will, I’ll probably be able to read it before it comes out because I can look into the system.

Can you?

I can, of course I can.

You’re an insider trader.

I’m The Wealth Editor, I can look into the system of the newspaper I mean to say.  Now, we have quite a good batch of questions this week.

Let’s look at all these questions.

So, why don’t we take them alternately.

Five questions, we need to get stuck into the questions or otherwise…

Okay, I’ll ask you the first one which is from Michael.  Michael asks what are your best guestimate predictions for global share markets and economies – Michael is not cutting corners with his question – for the next one to two years.

Well he’s hit us between the eyes with the question.

Do you know the answer to everything, Alan, in the next two years?  Global share markets.  Well the global growth is being upgraded all the time, isn’t it?  By the World Bank.

Well, we have a synchronised global growth at the moment, everyone is growing for the first time in six years.  It’s a rare event, it’s all happening, there’s no reason to think the growth won’t continue.

I suppose the thing is to say that really it’s no kidding, I know people are saying this for a long time but Australian retail investors you really have to have overseas investments, you really have to have exposure to wider markets.

Yeah that’s right, totally.  Particularly with the way that the Australian government and Australian national politics are totally hopeless.

I know, it’s really at a low.

I mean fair dinkum, yeah.  I mean the good thing about America is that it seems to be so strong and powerfully connected to technology and the growth of technology that even Donald Trump can’t stuff it up.  He’s doing his best…

Yeah, but he’s a Republican president, remember, he is a Republican even though half of the Republicans don’t like him he is Republican.

Well, they’re having a very entertaining stoush.  We’re not quite answering your question, Michael, but predictions for global share markets…

It was a very ambitious question, Michael, but we tried.  Yes, it’s synchronized global growth.

My view is, here you go, it’s more likely that the global share markets will rise a lot from here than they crash but I don’t know which it’ll be but it’s more likely to…

Yeah, I think that’s a consensus view, Alan, I do.

Do you think so, everyone thinks that do they?

Yeah, well global growth estimates have all been up for ages.

I thought I was right out there.

No, you’re not original on that one.

Okay, question from Andrew for you, James.

Yes?

I love your podcast, look forward to it every week – thank you very much Andrew – would you please explain what floating rate notes are and what you think of them as in investment?

Yes.

Okay, you’re the Wealth Editor, tell us about that one.

You’ve got me live on the grill here, Andrew.  Floating rate notes – there’s two types of bonds, one is a fixed rate and one is floating rate.  In a near – well, where we are right now at the bottom of the interest rate cycle – and I know Australia is sort of dragging its heels on that one, but rates will raft up for sure with the rest of the world in the next year or two.  Then, floating rate notes would be a much sounder – I would expect – investment when you have the prospect of…

Yeah but, James, what does it float on?

The interest rate itself, what they call the coupon floats, it’s linked to inflation, that’s how it works.  So in Australia, for instance, it would be linked to the CPI.  That’s basically it, some rates are fixed, the majority of them are fixed by the way.  For some reason floating rates are not as popular as fixed rates but that’s okay when rates are going down or stabilising but as they go up you’d like to be in floating rate notes, Andrew.  Okay, a question from Adrian, we’ll put this one back to you, Alan.  With the Fed unwinding its balance sheet who are the companies or governments paying back these bonds to the Fed and what impact will that flow have on said companies and governments?

Well, the Fed isn’t actually calling them in and requiring them to be paid back, what they’re doing is allowing the bonds that it owns to expire, to mature.

And they’re not buying new ones.

And they’re not buying new ones.  So, it’s not requiring them to be paid back.  Maybe at some point they will do that but they’re not at the moment, they’re just doing that.

So, he says what impact would that have on governments?

Well, gradually it does remove liquidity from the system, I mean the whole thing is that the markets over the past sort of eight or nine years have been floating on the liquidity from all the central banks, the Fed, European Central Bank and Bank of Japan in particular which have been buying bonds from the private sector…

So money was cheap.

…and so they’ve been driving interest rates down and pumping cash into the system, which is essentially new money, they’ve printed the money.  Well, of course it doesn’t get printed it gets created in digital form.  They’ve created the money, they’ve given the money to banks primarily by buying assets off the banks, mainly bonds, and that’s allowed this huge amount of liquidity to be put back into the system.  That liquidity has been driving the share prices up.  Now, you would think that a reversal of that will be bearish on the markets opposite to the way that they were bullish on the way up.  But, look it’s going to happen so slowly.   The Fed has been saying it’ll be like watching paint dry.

Yes, but they want it to be boring because they don’t want drama.

That’s right.  Anyway, the European Central Bank and the Bank of Japan in recent years have been doing far more of this than the Fed.  The Fed’s decision to reverse the process is very gradually probably won’t have that much impact.  I mean look, it would have an impact if they did it suddenly, if they did it in a big way or they increased interest rates in a big way, but I don’t think that’s going to happen.  Your turn now.  From Toby D.

Yes, Toby D.

And who listens to it on his bike ride to work with each new episode.  Well, good on you, Toby, I hope you don’t fall off your bike…

Good idea Toby.

…hang on there and stick to the bike paths is all I can say to you, Toby.  I was reading this week about a product called Equity Builder, which purports to offer leveraged investing without the risk of margin calls.  Looking more closely the approved investment list seems primarily made up of i-shares and ETFs, I guess for risk minimisation on the banks’ behalf.  Are these sorts of investment vehicles a good idea?

Okay, Toby, I see where you’re coming from.  What he is talking about is there’s a product, so it’s a pre-packaged product if you like from a bank, I would guess, and it’s called Equity Builder.  So, what they say is rather than you taking on a loan to buy shares they’re offering this share base product and they’ve got some loans, the bank itself actually takes out loans.  That’s where the leverage comes from.  So, let’s just presume for every dollar that you put in they’ll buy shares worth 1.50, something like that.  Then he says, that’s very interesting, it’s really interesting, he says it’s primarily made up of ETFs.  Well I would say that the way it goes is that shares themselves, actual stock picking, that’s always going to be stronger.  Individual shares have the capacity to outpace ETFs in any market.  Unless the index really shoots the lights out because you’re buying the index with ETFs I’d be personally very slow to be using borrowed money buying indexed funds because even if it’s a great year – let’s say it’s a really good year for the ASX this year, it’s 10%.  Now, what’s the borrowing rate?  Maybe the borrowing rate isn’t far off 10%, you really have to shoot the lights out if you’re in a leveraged product.

Yeah, I agree with you, James.  I think the other thing to note is that margin calls are of course bad but they’re not the only thing that you’ve got to worry about when you use leverage to invest in shares.  I mean just to be clear just so everyone understands a margin call is what happens when you buy shares with borrowed money the bank will lend you usually 50% of the value of the shares you buy.  If you buy $100 worth of shares you can borrow $50.  But the point is that if the shares fell to $80 you’re going to have to top up because you have to maintain your equity.

That’s right.

You can’t – so, that’s called a margin call, you actually have to put cash in to the account to top it up.

You do, and one thing I want to say to Toby, because I am an experienced investor and many years ago I was in margin calls and I got the dreaded margin call.  One thing I learnt, Toby, is the person who sold you the Equity Builder product, the friendly sales person that you dealt with in the bank, will not be the same person who calls you about the margin call.  You’ll get a very different tone and a very different type of character from the bank calling you for the margin call.  I would just say…

It is true, but the margin calls – but you also are leveraged into declines.  The point about leverage is that you get a bigger increase in your equity if the stock goes up.  But you also get a bigger loss if it goes down.

Yeah, and I hope the bank makes that clear in its documentation.  The whole idea of the leverage is that it basically expands your profits or expands your losses on the day.

Yeah, which actually moves onto Daniel’s question, which you can ask me now because it’s my turn.

Yes, it’s an unusual question because Daniel says I’m an Aussie currently working in Stab City.

What’s Stab City?

Well, I’m afraid to say Stab City is where I am from.  Stab City is…

What, Limerick?

Yeah, is the colloquial, most unwanted…

Why is it called Stab City?

…and I must say fading – it’s fading, they’re fighting it and I think it’s kind of fading now.

Did a lot of people get stabbed?

Yes, it was the crime capital, unfortunately, of Ireland for many years and still something of an issue in town. 

That was fixed up by your departure 30 years ago, James, I’m sure.

No, it wasn’t at all.  I was gone actually when it all started to blow up.  Anyway, so Daniel who is amazingly in Limerick and obviously listens to us on the internet, which is great to hear we’re building an international audience, Alan.

Well, they’re all listening to us on the internet, James.

Yes, indeed but overseas I should say.  Given the average Australian’s comfort in taking out debt and using leverage – well, isn’t that interesting, we just had a question on that, to invest in the housing market – yeah, that’s absolutely true, people are happy to borrow for housing – what is your opinion on using leverage in the stock market specifically in high yielding stocks and self-funding…  It’s a really good question and, Alan, I mean in theory why should anyone be any more worried or concerned about borrowing to buy high yielding stocks than property?

Because on October the 20th 1987 the market fell 25%.

Yes, it did, and as you said last week it recovered 25% almost as quickly.

Sure, but in the meantime you’re buggered.

In the meantime those people that make the margin calls were making some very heavy margin calls.

Everyone got margin calls and they got margin called out of business. 

I think it’s worth saying there was a time where it was seen as absolutely standard fair to borrow and have a geared share fund.  I think since the GFC people have been petrified, actually, to do it.  But in terms of economic rationale there shouldn’t be such a difference.

Well shirts were lost.

Shirts can be lost in property too.

Yeah, but not so suddenly.

It’s pretty sudden if you have to sell the house and someone says sorry mate, it’s 25% less than it was when you bought it.

Of course.

You know, I’m just saying that I think we’re a little bit too complacent, as Daniel says, on housing, and then maybe overly concerned about share markets which can return very good returns.

Well, we just about got through all of our topics, James, and we answered the questions.  Excellent questions, keep them coming and we’ll be delighted to answer them.  That’s where we should leave it today, James.

Okay.

I was going to say we didn’t have our BT Mega Trend.

We didn’t.  Well I think we can reverse engineer that.  I do think in terms of the Mega Trend it’s class actions, it’s the prevalence and acceleration of class actions and that we have one in three of the opt-in class actions filed in the world last year, is a point I think that people should really think about in terms of the legal action in the market.

Very good.

That’s our BT Mega Trend for this week, folks.

Don’t forget you can subscribe to the Money Café on Apple Podcasts or your app of choice.  While you’re there it’s helpful to leave a review or rating because it helps other listeners find our show.  Send in a question, we’ll answer it on next week’s episode, you can e-mail the question to hello@theconstantinvestor.com.  Until next week I’m Alan Kohler, Publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

Talk to you next week.