CEO INSIGHTS – Week Ending 8 June 2018 By NAOS Asset Management

“Right now, there’s no question: It’s [the US economy] feeling strong. I mean, if we’re in the sixth inning, we have our sluggers coming to bat right now. Right now, business is good. There’s no question about it” Warren Buffet, Chairman, Berkshire Hathaway

As part of the NAOS investment process, we pay particular attention to the comments made by company CEOs 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.

US Economy

“If you look at how the table is set, consumers are in very good shape. Their balance sheets, their income, wages are going up, their debt levels are low. All of the credit ratings since the great recession are pristine. Business sentiment is almost at the highest level, consumer sentiment is high, the market is wide open, housing is in short supply, so it looks pretty good” Jamie Dimon, CEO, JP Morgan

“I don’t see a real pot hole. Yes it’s been a 9 year recovery but the growth has only been 20%. The average recovery would have been closer to 40% growth over more like a 7-8 year period. So the slack is being pulled up, and it may very well be that this is just a long and delayed cycle. We may very well have years of growth ahead and I think growth is getting stronger today, not weaker” Jamie Dimon, CEO, JP Morgan

“We have seen carrier rates and fuel cost on the rise” Todd Vasos, CEO, Dollar General

Domestic Economy

“China is the gift that just keeps on giving, and Australia was fortunate to have abundant resources and be relatively accessible to the world’s largest consumer of those resources” James Gorman, CEO, Morgan Stanley

Global Economy

“Political risk is the most important risk facing global financial markets today, while the global economy is incredibly robust and unusually synchronised in its growth, with geopolitical risks, while evident, not so large. Geopolitical risk is actually at a very low ebb” James Gorman, CEO, Morgan Stanley

Lending

“We’re on track to achieve 10% growth in home lending this year [resulting from the Royal Commission] – four years ago that loan segment wasn’t growing at all” Scott Morgan, CEO, Greater Bank

“Until recently, it’s fair to say the customer-owned banking sector struggled to really demonstrate our value proposition to the community, but in the past year there’s been a definite lift in our business – more than I’ve seen in over 10 years in this industry” Scott Morgan, CEO, Greater Bank

Digital Advertising

“Overall, our media spend is shifting more into digital, streaming audio and streaming television to align with the beauty enthusiasts' digital-first lifestyle. And these marketing programs are supporting the high levels of brand awareness we achieved last year” Mary Dillon, CEO, Ulta Beauty

Whitegoods

“The Australian whitegoods and built-in kitchen appliance market lacks competitive tension which has resulted in a limited number of players enjoying inflated margins. One major factor contributing to this lack of competition is the additional complexity and logistical requirements arising from distributing bulky products” Ruslan Kogan, Founder, Kogan.com

Retail

“Whatever sort of retail we’re talking about, the overall composition has to be good enough for consumers to leave their homes and to come and be in a place and spend time there… They have an expectation of what they hope to experience, and that has to outstrip what they can do on an iPad” Carolyn Viney, Executive General Manager, Development, Vicinity Centres

“We’re not going to go after size any more [with Target], and we’ll just be a nice new boutique retailer that plays in mid-tier, and I’d like to make sure it's a profitable mid-tier business” Guy Russo, CEO, Westfield

“We employed a whole load of capital six or seven years ago in [store] refurbishment ... and in more recent years we haven’t had to employ the same amount… We’re going to employ more capital in the next few years” John Durkan, Outgoing MD, Coles

Mergers & Acquisitions

“When it comes to larger scale mergers and acquisitions, particularly when a control premium is associated, it is more challenging to realise superior returns, I am therefore especially cautious when evaluating such opportunities” Rob Scott, CEO, Wesfarmers

Banking

“It’s important to note the Australian banking system remains strongly capitalised and deserves credit for the way they got through the financial crisis. On this measure they compare favourably to many international banks” James Gorman, CEO, Morgan Stanley

“Most of the issues in banking and finance relate to sales practices. The key issues are whether a product performs as advertised and whether the client is getting what he or she wants” James Gorman, CEO, Morgan Stanley

Wool

“Stocks of wool are extraordinarily low and Australia and South Africa have been impacted by drought, prompting a sell-off of sheep, hence reduced production” Chris Wilcox, Director, National Council of Wool Selling Brokers of Australia

Agriculture

“The agricultural sector in Australia needs much more investment if it wants to remain competitive, and the superannuation industry is an obvious source. Only about 0.2 per cent of the $2t-plus in assets managed by Australian superannuation funds are in agriculture – an extraordinary situation” Rick Wilson, Member for O’Connor

Commercial Fishing

“If you take, for instance, the stocks managed by the Commonwealth — the Australian Fisheries Management Authority — we don't have a single species that's currently subject to overfishing” Bryan Skepper, General Manager, Sydney Fish Market

Mining

“Automation and technology is clearly changing the way we work, including reducing the number of future roles for truck drivers, train drivers and drillers” Rio Tinto Spokesman

Energy

“There's clearly been downward pressure on wholesale [electricity] prices and we see [the market] turning a corner, and, although this is a modest fall, it's led us to carry out a decrease in prices ... where they would have otherwise increased” Frank Calabria, CEO, Origin Energy

“Consumers have recently been paying around $1.60 for petrol. These prices are higher than any time since mid-2014 in some cities… Unfortunately, the international factors pushing up wholesale petrol prices mean that these higher prices are being passed on to Australian motorists at the petrol bowser” Rod Sims, Chairman, ACCC

Thank you for reading.

Important information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529) (NAOS) for general information purposes only and must not be construed as investment advice. Certain economic, market or company information contained in this material may have been obtained from published sources prepared by third parties. Nothing contained herein should be construed as granting by implication or otherwise, any license or right to use such third party content without the written permission of the owner.