AUSTRALIA’S MOST POPULAR BUSINESS PODCAST

Fear & Greed, Fear and Greed

Reporting season is on us again, and all eyes are on ASX-listed companies for their results and their outlook.

Matthew Kidman, Principal at Centennial Asset Management, talks to Sean Aylmer about the stocks and sectors he’s keeping an eye on.

This is general information only. You should seek professional advice before making investment decisions.

Find out more: https://fearandgreed.com.au

See omnystudio.com/listener for privacy information.

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Sean Aylmer: Welcome to the Fear & Greed Business Interview. I’m Sean Aylmer.

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Sean Aylmer: Reporting season is upon us again. It’s an opportunity to

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Sean Aylmer: find out not just how companies have performed, but probably

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Sean Aylmer: more importantly what the outlook is as well. I wanted

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Sean Aylmer: to talk to one of our regular guests about the

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Sean Aylmer: companies and trends he’s keeping an eye on this earnings

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Sean Aylmer: season. Remember, this information is general in nature, and you

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Sean Aylmer: should always seek professional advice before making investment decisions. Matthew

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Sean Aylmer: Kidman is the Principal of Centennial Asset Management. Matthew, welcome

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Sean Aylmer: back to Fear & Greed. First time in 2024, first of

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Sean Aylmer: many I’m hoping.

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Matthew Kidman: Happy new year Sean, yep, looking forward to it.

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Sean Aylmer: Righto. Reporting season, do you like reporting season? You have

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Sean Aylmer: been following the markets for as long as I’ve known

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Sean Aylmer: you, and I’ve probably known you for 25 years. I

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Sean Aylmer: think late nineties is when we first met.

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Matthew Kidman: Yeah.

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Sean Aylmer: Do you like reporting season?

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Matthew Kidman: You know the answer to that. Probably not. Because reporting

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Matthew Kidman: season has changed over times I think, in the sense

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Matthew Kidman: the reaction to the reports, and so the volatility around

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Matthew Kidman: the stocks on the individual reports is what seems like

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Matthew Kidman: it’s got worse and worse, and reactions. And so you’ve

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Matthew Kidman: got to spend some time stepping aside and just watching

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Matthew Kidman: how they react and then moving a lot of the

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Matthew Kidman: time, so it tests your patience. The market’s a volatile

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Matthew Kidman: creature, but it’s all part of the tapestry Sean, and

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Matthew Kidman: we look forward to it twice a year.

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Sean Aylmer: Nice, that rich tapestry, righto. So what do you expect over

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Sean Aylmer: the next four weeks or so? What are some of

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Sean Aylmer: the themes you’re looking for?

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Matthew Kidman: So if we just took calendar year, because we run

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Matthew Kidman: in financial years of course, but this is the end

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Matthew Kidman: of the calendar year. Last calendar year, I only delivered

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Matthew Kidman: about, a bit over three and a half percent EPS growth across

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Matthew Kidman: the board in the ASX 200, really dragged down by energy

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Matthew Kidman: stocks, and to a lesser extent property stocks, where we

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Matthew Kidman: saw energy obviously, all prices were down. And property stocks,

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Matthew Kidman: their interest bills are up because of the rise in

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Matthew Kidman: official rates, and that meant their bottom lines were hit,

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Matthew Kidman: so that dragged it down. The underlying rest of the

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Matthew Kidman: market, or X those sectors was okay, but it is

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Matthew Kidman: slowing. And so we’re in this funny position. If you

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Matthew Kidman: ask me what do I expect, markets want to go

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Matthew Kidman: higher because we’re at the end of the interest rate

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Matthew Kidman: cycle. Bit choppy at the moment as we know, but

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Matthew Kidman: they generally want to go higher, led by the Americans.

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Matthew Kidman: The problem for Australia is that we’re in a slowdown

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Matthew Kidman: mode. We’re almost six to nine months behind the US

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Matthew Kidman: it seems like, so our earnings aren’t showing signs of

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Matthew Kidman: growing at an accelerating rate. So the markets want to

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Matthew Kidman: go higher, but we’re going to have to take the fact

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Matthew Kidman: that reporting season’s going to deliver choppy results, because the

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Matthew Kidman: economy’s slowed from all those interest rate rises.

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Sean Aylmer: Okay, so that’s kind of the macroeconomic view.

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Matthew Kidman: That’s the conundrum I would say.

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Sean Aylmer: The conundrum, yeah. What about things, I guess specific things

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Sean Aylmer: that you would like to see, be that on the

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Sean Aylmer: cost side, be that around labor, be that around AI,

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Sean Aylmer: anything like that?

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Matthew Kidman: Yeah, definitely. So a couple of things we want to

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Matthew Kidman: see. We don’t expect the outlooks to be too encouraging

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Matthew Kidman: in the sense that, a lot of top line growth.

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Matthew Kidman: So I think that 3, 4, 5% top line growth

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Matthew Kidman: will stay in this half. That’s okay. What you would

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Matthew Kidman: like to see is a couple of things. One is

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Matthew Kidman: that wage growth, which is a big part of everyone’s

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Matthew Kidman: cost base, is moderating. That the peak in wage growth

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Matthew Kidman: and wage supply or labor supply was, the tightness around

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Matthew Kidman: that, the peak was probably the middle or early part

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Matthew Kidman: of 2023 when we had those wage rises 5, 6,

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Matthew Kidman: 7, 8%, we’d like to see them moderate. That’s a

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Matthew Kidman: good sign both for future interest rates and for margins

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Matthew Kidman: for companies.
The other thing we would like to see

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Matthew Kidman: is that companies have materially lowered their cost base over the

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Matthew Kidman: last six or so months, and so they will keep costs flat for a

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Matthew Kidman: while. Because that’s the environment we’re in, that the top line’s not

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Matthew Kidman: growing, so good companies will keep a control over their

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Matthew Kidman: cost base. Now, one of those big costs that stung

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Matthew Kidman: everyone last year was the interest bill, because the interest

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Matthew Kidman: rates went up, you had any debt, and you got stung.

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Matthew Kidman: So paying down debt, keeping a lid on wages, maybe

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Matthew Kidman: even having to lose a few people or restructure your

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Matthew Kidman: workforce so the cost isn’t as big, and things like

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Matthew Kidman: that that are working in their favor, definitely.

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Sean Aylmer: Okay. What about sectors? I know you keep a close eye on a lot

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Sean Aylmer: of retailers for example. What can you expect, particularly given

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Sean Aylmer: the official Bureau of Statistics figures aren’t great for that sector?

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Matthew Kidman: Well they’re pretty good up until December, so everyone’s latched

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Matthew Kidman: onto that idea that December was weak, and obviously December’s

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Matthew Kidman: important because it’s got Christmas in it. But I think

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Matthew Kidman: that’s partly the trend over the last little while for

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Matthew Kidman: retailers, where it’s no longer just Christmas. It’s Black Friday,

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Matthew Kidman: Cyber Monday, and there are a few events now in

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Matthew Kidman: October, so it’s smoothed out. I think what you’ll get

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Matthew Kidman: with retail is a mixed bag. There will be some

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Matthew Kidman: that do very poorly that have struggled in this environment,

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Matthew Kidman: and there’ll be others that do quite well. So if

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Matthew Kidman: you just broke it down into sectors, I think anyone

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Matthew Kidman: that is around apparel and footwear is going to struggle

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Matthew Kidman: a bit. That seems to us to have struggled. Strangely,

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Matthew Kidman: electronics and home wares have seemed to have done okay,

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Matthew Kidman: so I think you’re going to get a mixed bag,

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Matthew Kidman: and yes, there will be stuff you can buy and

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Matthew Kidman: stuff you can sell.
But I don’t think retail, we’ve

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Matthew Kidman: talked about before, is that cheap. So I think industrials

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Matthew Kidman: will do quite well because of that cost based issue

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Matthew Kidman: we talked about. I think they’ve really worked at that.

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Matthew Kidman: I think technology companies will do quite well, because technology

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Matthew Kidman: spend has kept going along, but they’ve cut their costs over

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Matthew Kidman: the last two years as we’ve seen in the US, so

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Matthew Kidman: I think that’s all right. The mining sector, they do

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Matthew Kidman: their quarterly so it’s not as important, but I think

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Matthew Kidman: the mining sectors and energy is still going to struggle,

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Matthew Kidman: because commodity prices are weak, so a bit of a

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Matthew Kidman: mixed bag.

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Sean Aylmer: Stay with me. Matthew, we’ll be back in a minute.

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Sean Aylmer: My guest this morning is Matthew Kidman, principal at Centennial Asset

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Sean Aylmer: Management. What about financials? We’re saying the big banks particularly

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Sean Aylmer: run really hard, but financials are a lot bigger than

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Sean Aylmer: just the big banks. What do you expect from that sector?

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Matthew Kidman: Yeah, so I keep getting that wrong. And I know you’re

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Matthew Kidman: very close to your financials, you ask me every time

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Matthew Kidman: that I come on. Whichever way you cut it the

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Matthew Kidman: big banks are expensive now. That doesn’t mean they can’t

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Matthew Kidman: keep running, because I think what was interesting, and I

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Matthew Kidman: think what might be really good for the non- bank

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Matthew Kidman: financials is that the all- important housing market, two things

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Matthew Kidman: are happening there that have encouraged people. One is that

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Matthew Kidman: the net interest margin that everyone’s concentrated on the last

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Matthew Kidman: couple of years, I think it’s stabilized and could improve

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Matthew Kidman: in the outlook. It kept getting crunched, because margins weren’t

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Matthew Kidman: as good as what they were say, two or three

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Matthew Kidman: years ago, so the margin was coming down. Think they’re

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Matthew Kidman: starting to stabilize, good sign.
But more importantly, what makes

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Matthew Kidman: these banks run, and other lenders, and there are a

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Matthew Kidman: lot of non- bank lenders out there these days, is

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Matthew Kidman: the actual housing market, which is the biggest market in

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Matthew Kidman: Australia for lending as everyone would know, is showing some

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Matthew Kidman: more growth. So bottom of the cycle, it might grow 3%, top

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Matthew Kidman: of a cycle where things are going well, 7 or

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Matthew Kidman: 8%. We were heading towards 3%, but recently data showed

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Matthew Kidman: it’s probably growing at 5- 6%. That’s pretty healthy, and

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Matthew Kidman: that’s kicked along those banks. And I think if that

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Matthew Kidman: can maintain, that will be a really good sign for

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Matthew Kidman: those financials going through the rest of the year.

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Sean Aylmer: I just want to talk about AI, because I think it was last

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Sean Aylmer: time around 60% of companies said that they had doing

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Sean Aylmer: something with AI. Now that’s just a sentence, whether or

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Sean Aylmer: not they’re actually doing anything or just sitting in a

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Sean Aylmer: room chatting about it, or actually using ChatGPT is a

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Sean Aylmer: huge spectrum there. Do you want to see companies talking

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Sean Aylmer: about that sort of stuff?

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Matthew Kidman: Not really, unless it’s substantive, unless they can show us

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Matthew Kidman: the tangible benefits of it. I think what they can

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Matthew Kidman: tell you is that, look, we’re spending money on development

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Matthew Kidman: and using technology to our advantage. But people that just

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Matthew Kidman: come to us and say, ” Look, we’ve got this great

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Matthew Kidman: investment AI, it’s going to save all this money,” it

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Matthew Kidman: probably will over the goodness of time, but it’s probably

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Matthew Kidman: going to have false starts. So AI is something that’s

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Matthew Kidman: gone from maybe somewhere in a pitch deck to front

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Matthew Kidman: part of a pitch deck, because ChatGPT just forced everyone

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Matthew Kidman: to look at it, and everyone in the public, and

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Matthew Kidman: fund managers, and people like me know about it, so

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Matthew Kidman: they get questioned about it.
But I think the reality

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Matthew Kidman: is, not many companies at this point will be big

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Matthew Kidman: winners at that overnight. Some started their programs years ago

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Matthew Kidman: and have been benefiting, and others will find a way

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Matthew Kidman: in the future. So I’m not a bear on AI, but the

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Matthew Kidman: reality is it takes a while, and most companies don’t

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Matthew Kidman: know how to use it properly yet, and in reality,

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Matthew Kidman: they are most likely to be using it to their

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Matthew Kidman: disadvantage at the moment, where they’re spending money on trying

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Matthew Kidman: to implement systems without getting any noticeable returns.

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Sean Aylmer: Okay, now I can’t let you go Matthew without asking

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Sean Aylmer: about a couple of specific stocks. Which ones are you

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Sean Aylmer: just going to keep a particularly close eye on? Whether

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Sean Aylmer: you hold those or not, I’m just interested whether there’s

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Sean Aylmer: two or three small caps that you’re particularly interested in.

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Matthew Kidman: Yeah, we’re always interested in everything, especially the ones we own. I think

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Matthew Kidman: you’re 100% right, I think in terms of retail, there’s

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Matthew Kidman: been a bit of a resurgence in retail, but retail

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Matthew Kidman: is really important to the overall economy, because consumers, about

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Matthew Kidman: 60% of our economy as you know. And one I’d

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Matthew Kidman: like to keep an eye on that’s struggled is Harvey

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Matthew Kidman: Norman, because they cover a lot of different areas. They’re

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Matthew Kidman: obviously electronics, home wares, kitchens and bathrooms and carpets, they’re

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Matthew Kidman: just about everywhere. They will give you a good read,

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Matthew Kidman: because they’ve struggled since COVID ended, and I think they’re

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Matthew Kidman: a good bellwether. JB Hi- Fi, their kind of rival,

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Matthew Kidman: seems to tick most boxes, and doesn’t give you a

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Matthew Kidman: good idea in the general economy like Harvey Norman, who

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Matthew Kidman: are a bit more mature. So I think that’s really

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Matthew Kidman: important.
I think the other area, and you’ve already touched

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Matthew Kidman: on it, is the non- bank financials. So a lot

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Matthew Kidman: of them are trading at big discounts to their book,

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Matthew Kidman: or decent discounts. So one that I like, and I like the management

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Matthew Kidman: of, and who’s quite a big player in the mortgage

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Matthew Kidman: market, is a little company called Resimac, and it taps

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Matthew Kidman: the wholesale market. It doesn’t use deposits to fund its

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Matthew Kidman: loans, and I think they are a really interesting company in

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Matthew Kidman: the sense that they’ve got scale, but those issues that

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Matthew Kidman: we talked about before, net interest margin and home loan

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Matthew Kidman: growth, will start to show up in their books if

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Matthew Kidman: we’re right. Now, that will be a real bellwether for

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Matthew Kidman: the Australian economy, because the consumer and the housing market

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Matthew Kidman: is the domestic driver, while mining and agriculture is the

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Matthew Kidman: external, the exports, and e know they’re going pretty well. So

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Matthew Kidman: I’d like to see the internal engine telling us it’s

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Matthew Kidman: hit bottom and they’re going okay, because the lead indicator for all

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Matthew Kidman: recoveries out of an interest rate cycle is the consumer.

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Matthew Kidman: They switch on first. They switch on six months before

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Matthew Kidman: corporates do, who then start to spend capex, or governments,

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Matthew Kidman: or whoever. So I’d like to see that running, so

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Matthew Kidman: there’s a couple of stocks.

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Sean Aylmer: Fantastic. Matthew, thank you for talking to Fear & Greed.

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Matthew Kidman: Thank you Sean.

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Sean Aylmer: That was Matthew Kidman from Centennial Asset Management. This is

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Sean Aylmer: the Fear & Greed Business Interview. Remember, this information is general

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Sean Aylmer: in nature, and you should always seek professional advice before

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Sean Aylmer: making any investment decisions. Join us every morning for the

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Sean Aylmer: full episode of Fear & Greed, Australia’s best business podcast. I’m

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Sean Aylmer: Sean Aylmer. Have a great day.