CEO Insights – Week Ending Friday 13/01/17 By NAOS Asset Management

As part of the NAOS investment process, we pay particular attention to the comments made by company CEO’s and business leaders in order to gain a greater understanding of the current investment environment and key trends that may be emerging. Below are quotes from the week which in our view detail some of the most important and prominent industry trends and economic factors impacting their businesses.

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Retail

“All the stores had an amazing Boxing Day, but what is interesting is how shopping habits are forming over the period, so consumer electronics is becoming more and more a staple purchase and coupled with that I know there are challenges in physical media, but we still sell the CDs, the DVDs, the games, vinyl is back”

Richard Murray, CEO, JB Hi-Fi

“What we are seeing is that second generation product where somebody might have bought a $99 Fitbit, but now they are trading up to a $400 device. You may have bought the low end Apple watch and now you are buying the new model. You might have first bought a $99 drone, now you are buying a $600 drone”

Richard Murray, CEO, JB Hi-Fi

“[We are seeing] a back drop of choppy macro conditions in our various geographic markets and higher than usual competitor discounting in Australia and Canada”

Michael Hill International Market Update

“[December] was a really strong period for us. We saw really strong full-price selling, great execution both in-stores and online”

Laurent Potdevin, CEO, Lululemon

“We've seen phenomenal growth in China. There is huge potential for increased wine consumption particularly in the rising middle class who want quality products with a strong reputation”

Michael Clarke, CEO, Treasury Wines

“The [US] department stores are getting killed. It's because they are selling on price but you can get disintermediated on the internet with similar goods, quality and a maybe a lower price. This has been an enormous sea change and it has been driven almost entirely by Amazon”

Steve Odland, Former Chairman, Office Depot

“What they didn't understand is people don't want to drive to these super centres or malls, track around for a few hours and discover they don't have your size because they've cut back on the inventory”

Steve Odland, Former Chairman, Office Depot

“We believe that our performance during the holiday season reflects the broader challenges facing much of the retail industry… Store sales continued to be impacted by changing customer behaviour. Our apparel business, which includes women’s, men’s and children’s, performed well, with particular strength in active and cold-weather merchandise. Sales were also strong in fine jewellery, as well as furniture and bedding, reflecting the success of our initiatives in those categories. However, ongoing weakness in handbags and watches negatively impacted our results”

Terry Lundgren, CEO, Macy’s

“Strong sales on Black Friday and during the week before Christmas were offset by softness in early November and December”

Kevin Mansell, CEO, Kohl’s

Gas Prices

“Prices [gas] are going to fluctuate a bit – there's a lot more seasonality in the market now – but we're just delighted to have continued strong pricing that is supported by government policy, where it's all about getting more gas into the energy mix”

Glenn Corrie, MD, Sino Gas & Energy

“Mid-2017 until late 2018 is really the crunch point in [gas] supply. There's a reasonable chance that there could be curtailments for industrial customers during cold or hot weather – probably more likely cold weather – as supply to retail customers will be obviously a priority. It's quite frightening for manufacturing”

Mark Chellew, Chairman, Manufacturing Australia

Commercial & Residential Property

“The offshore investors have accounted for a rising proportion of major [commercial property]  transactions in recent years. 2016 was no exception, with foreign investors accounting for a record number of transactions across the Australian commercial property sector. We are detecting no decline in offshore interest in the Australian market, but the limiting factor is a scarcity of stock. We are certainly finding that offshore investors are willing to broaden their mandates, both in terms of locations and sectors”

Stephen Conry, CEO, JLL

“Quality developments are settling. But they are taking longer than historic averages due mainly to the processing of [mortgage] applications. A lot of the forecasters are not on the ground and so they are not experiencing the market first-hand”

Luke Hartman, CEO, Metro

Commodities

“[The copper price] was too low. Supply is much tighter than people would believe ... It probably went a little too high, too quickly but I think the $2.50 mark is the right level as it starts to increase back toward $3”

Andrew Mitchelmore, CEO, MMG

Pharmaceuticals

“In addition to government downward pressure on pricing, the new drug developers in big pharma are also facing generic drug competition, with 70 per cent of all prescriptions in the US now filled by generic drugs”

Paul Rennie, CEO, Paradigm BioPharmaceuticals

Competition

“A huge number of Australian companies subscribe to the national champions theory and I suspect the Business Council does as well – big is better, give me the scale so I can take on the world. But having these large companies that dominate the Australian scene is not good for Australia. And if all they are doing is dominating the Australian scene, and if that's where they've spent their focus, they are not going to succeed overseas”

Rod Sims, Chairman, ACCC

“We face numerous cases here where we have, say, four players are going to three, or three players are going to two … and it's as if we are the ones having to explain the problems with that. It should be the other way around. You should have to explain to us why it's a good idea”

Rod Sims, Chairman, ACCC

Domestic M&A

“In a low organic growth environment, management and boards have to consider M&A opportunities to focus on growth, especially those that are strong managers”

John Knox, CEO Australia, Credit Suisse

“We are seeing assets today and opportunities today [in mining] that we weren't seeing a year ago”

Jason Chang, MD, EMR Capital

Fixed Income

“As you have an ageing society, more people are using these 'target date' funds more and they are accumulating wealth so there is more money going into fixed income. We expect that trend to continue”

Greg Davis, Global Head of Fixed Income, Vanguard

“If rates rise, as those coupons are paid and those bonds mature, they're being invested at higher yields and those will result in a higher total return in the long run. Investors lose sight of that as they get whipsawed by the gyrations in the market”

Greg Davis, Global Head of Fixed Income, Vanguard

Thank you for reading.

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