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Inside Payments New PayPal CEO on the virus surge p16

GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG ANZ urges Wealth Investment banks win private banking p17

GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG Markets Iron ore prices to stricken firms: propel unloved miners p20

Market snapshot ‘wind up now’ S&P/ASX 200 Index (points)

5860

GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG raided their contact lists for experi- Close 5840 James Frost 5755.69 enced bankers as they set about creat- 5820 ANZ Bank urged business owners not ing state-based ‘‘cells’’, or triage centres, to stick their heads in the sand during to manage growing bad debts. Grey- 5800 the coronavirus crisis, warning those haired bankers will be teamed up with who know they won’t recover to take younger relationship managers as they Change 5780 -95.41 action now, while they can still realise have difficult conversations with cus- (-1.63%) 5760 some value from stricken businesses. tomers about struggling businesses. ‘‘For some business owners, the The latest APRA figures show about 10:00 12:00 2:00 4:00 smartest thing for them to do is to wind 750,000 loans worth about $250 billion it up now, and walk away with some have been deferred; the split between S&P/ASX 200 stocks Friday equity,’’ ANZ’s head of retail and busi- home loans and business loans is ness banking, Mark Hand, said. roughly 60:40, but it depended on each Best Close ($)Change(%) Many small to medium enterprises bank’s lending profile. Austal 3.34 +10.23 have been given a six-month reprieve Mr Hand said the six-month deferr- Northern Star 14.80 +7.64 Clinuvel Pharmac 24.22 +6.98 by banks propping up their businesses als were not a deadline and the bank Polynovo 2.75 +6.18 by loan deferrals, and the government would proactively contact businesses Gold Road Res 1.81 +5.23 via wage subsidies. But senior bankers to help them arrive at the right solu- Graeme Carson says the fund made a reasonably well-timed exit from logistics recognise that ultimately, many will company GetSwift, which ran into trouble with ASIC. PHOTO: ARSINEH HOUSPIAN Worst never recover. Virgin Money UK 1.805 -10.20 ‘‘There are businesses that are broke The smartest thing New Hope Corp 1.35 -8.16 now and have no chance of survival but for them to do is to WestpacBanking 17.22 -6.36 have been given a six-month stay of Agility, conviction and cash Scentre Grp 2.23 -6.30 execution,’’ Mr Hand said. ‘‘They will wind it up now, and 8.40 -6.15 hope that the Christmas trading period walk away. will deliver a miracle and they’ll survive pay off for Cyan’s Carson Indices Close (points) Change Mark Hand, ANZ ASX 200 5755.7 -95.4 –butnoteveryonewill.’’ Nikkei 21877.89 -38.42 ANZ made provisions for $1.67 billion GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG Hang Seng (pm) 22961.47 -171.29 in bad debts – including $1 billion just tion. Some may be able to scale down, ‘‘We went into this downturn with a Shanghai A 2989.86 +6.58 from COVID-19 – at its interim results on or pivot to online. Monday fundie Alove cash balance of about 35 per cent,’’ he Currency Change April 30. The bank says about 15 per The conversations to come will be says. ‘‘We’re not an institutional fund TWI 58.8 +0.2 cent of its business lending book – or much longer and more involved – tak- of small caps has led to and we’ve got a very broad client base, $A/US¢ 66.56 +0.34 $A/¥ 71.32 -0.04 19,000 customers – have asked for sup- ing hours or days – than the deferral some sublime results. so we had no real redemption risk $A/€0.6005 steady port. This includes repayment deferrals, decisions put in place after an average whereby we were forced sellers in any- $A/£ 0.5400 +0.0002 fee waivers or other forms of assistance. 10-minute phone call. thing, and it meant we could put the GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG Rates Close (%) Change With banks across the board putting ‘‘We can’t wait six months. We need William McInnes cash to work opportunistically.’’ Cash rate 0.25 steady more resources into call centres to deal to start these conversations with cus- Carson says the firm took a four- 180-day bills 0.162 -0.005 10-yr bonds 0.897 -0.001 with the volume of inquiries, Mr Hand tomers now. The question for us is, The COVID-19 pandemic has been a pronged approach to the pandemic, said ANZ had also begun resourcing ‘How do we get in front of the problem once in a lifetime event for money man- selling companies that appeared directly Commodities Close ($US)Change ‘‘workout’’ and restructuring special- and give them the best chance of walk- agers. Many took a significant hit exposed to the virus, holding businesses Gold (spot) 1726.30 steady Iron ore 102.39 +5.30 ists, to deal with the inevitable spike in ing away with some capital?’’’ through February and March as the local that would experience short-term chal- Oil WTI 35.49 +1.78 business failures he sees from late 2020 Every business customer is different, market tumbled nearly 40 per cent. lenges, deploying excess capital as the and beyond. however, and will require different- While bigger fund managers strug- market fell and holding a small amount ‘‘It is better to have a fence at the top treatment. While some of ANZ’s cus- gled to keep up with the wild swings, of cash for recapitalisations. of the hill than a hospital at the bot- tomers were forced to draw the Cyan Investment Management portfo- ‘‘Early on we did divest a few things tom,’’ he told The Australian Financial Continued p17 lio manager Graeme Carson says his that we thought were working close to Review.‘‘Wehavenointerestinseeing fund has been able to act quickly to the highest risk-profile job,’’ he says. Go to afr.com our customers go into bankruptcy.’’ ̈ Karen Maley Bankers more optimistic help weather the sell-off and maximise ‘‘We were shareholders in , and for live updates Mr Hand and his executives have on problem loans p28 the rebound. Continued p21

Lynas in rare air, but must get cracking on Kalgoorlie plant

GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG Brad Thompson but that is nothing new for a company Department of Defence (DoD) funding permanent waste disposal facility in in the eye of a parochial political storm to help build a heavy rare earths for low-level radioactive There is never a dull moment at Lynas Due in the US – after just having survived separation plant in Texas. And it had to waste stockpiled at its Kuantan plant. Corporation. But last Friday wasn’t one diligence one in Malaysia. again shut and restart its Malaysia Ms Lacaze told The Australian of its finest, when the company had to In the past 18 months, Lynas has had operations, this time because of Financial Review last week that Lynas justify market disclosures over possible to shut then restart its $1 billion COVID-19 restrictions there. was set to build a heavy rare separation funding from the United States military processing plant in Malaysia after Lynas has also reset finance and off- plant in Texas with local partner Blue after a ‘‘please explain’’ from the ASX reaching production licence limits. take agreements with its powerful Line with or without DoD backing, but compliance team. Soon after that it fought off a Japan Inc backers, and in April talked its main focus was on what it needed to The rare earth metals producer’s world’s biggest non-China supplier of $1.5 billion takeover tilt from about curtailing production and sales do in WA and Malaysia. disclosure defence ended a week when rare earths. , pitched at $2.25 a share. after a plunge in rare earths prices. ‘‘We have a relatively short timeline live-wire managing director Amanda Lynas analysts tend to agree on its It then navigated its way through It has been a busy and tough time to execute and we like to execute Lacaze spent hours in virtual meetings strategic value and exposure to long- protests and politicking to secure three personally for Ms Lacaze, who normally projects on time and on budget, or even with investors and potential investors, term growth in electric vehicle and years of breathing space in Malaysia resides in Malaysia but has been locked before time and under budget, and we many of them based in the US. green technology demand. But there’s a but, as part of that licence renewal, had down in Queensland since a funeral for do that by maintaining a focus on the The round of investor meetings lot of variation on where they think the to hastily select a site for a new her mother, Joan, in March. critical aspects that we need to deliver,’’ came hot on the heels of three brokers share price – which closed on Friday at cracking and leaching plant not too far There is no slowing down as Lynas she said. –CanaccordGenuity,CLSAand $2.06 – will end up, with the company’s from its Mount Weld rare earths mine races to meet the deadlines set by CLSA said that if Lynas could Euroz – initiating coverage on a future far from straightforward. in Western , which will cost Malaysian authorities on building the overcome these short-term challenges, company seen by the US, Japan and The additional broker coverage the best part of $500 million. new cracking and leaching plant at it was well placed to ‘‘earn its place Australia as having a key role as the comes as Lynas has a lot on its plate, More recently, it has applied for US Kalgoorlie in and a Continued p22 AFRGA1 A013 Monday 1 June 2020 21 AFR www.afr.com | The Australian Financial Review Monday Markets

Australia could avoid technical recession fate

GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG increased slightly,’’ said Tony Morriss, Economy Bank of America head of Australia and GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG William McInnes New Zealand economics, who is fore- casting a 0.1 per cent increase in the Australia could avoid a technical reces- first quarter. sion and maintain its record of having ‘‘While construction work done fell the world’s longest economic growth in the first quarter, the underlying com- streak – economists say it is possible ponents reflected a rise in private the economy did not contract in the engineering and non-residential build- first quarter, despite the bushfires and ing work.’’ early COVID-19 shutdowns. Mr Morriss also noted that a sharp The label does little to ease the underlying problems being felt during the COVID-19 pandemic. PHOTO: AAP Although the market consensus is increase in resources exports might for a negative GDP print for the first have offset the weakness in services. A is a 0.4 per cent contraction. Although Australia last recorded a technical quarter, to be released on Wednesday, small increase in consumption There’s often been the majority of economists forecast a recession in 1991. economists say it is a close call, and the through household spending before cases where a small contraction as their base case, While there is potential for the coun- lucky country could avoid a technical the lockdowns in March may also have many acknowledge that a positive res- try to continue its record run of eco- recession – two consecutive quarters of been enough to support the economy. negative looked ult is possible. nomic growth, the label does little to negative economic growth. Deutsche Bank economist Phil likely and then ‘‘The most likely outcome is a small ease the underlying problems being felt Although a heavy contraction is Odonaghoe said while there was no negative, but I’ve seen enough of these during the COVID-19 pandemic. expected for the second quarter, a pos- doubt Australia was ‘‘in recession’’, he something else to know we still get it wrong and there ‘‘It is possible that GDP may have itive print in the first quarter could was expecting the economy would comes along and are a lot of things we don’t have much expanded in the first quarter,’’ said ANZ mean Australia avoids the recession avoid a technical recession. visibility on,’’ said AMP Capital chief head of Australian economics David tag, given that a sharp rebound in activ- ‘‘Business investment partials pushes it up. economist Shane Oliver. Plank. ‘‘While some will no doubt claim ity is forecast for the third quarter. released [last week] were soft, but have Shane Oliver, AMP Capital chief ‘‘There’s often been cases where a this means Australia’s uninterrupted economist Five of the 24 economists surveyed actually held up better than we expec- negative looked likely and then some- run of no recession since the early 1990s by Bloomberg forecast a positive first- ted,’’ he said. thing else comes along and pushes it continues, the fact that close to 20 per quarter figure, although this remains ‘‘Despite a weaker outcome on dwell- up.’’ cent of the population is unemployed or subject to the final partial data points to ing investment, and ahead of key parti- tially, just one negative quarter of The bar to avoiding the technical underemployed demonstrates how be released early this week. als due next week, that leaves our Q1 growth in 2020.’’ recession tag is pretty low. Even a flat little substance there is in the so-called ‘‘The housing sector was starting to GDP forecast sitting at 0.1 per cent. According to Bloomberg, the con- print on Wednesday would be suffi- ‘technical’ recession of two negative pick up and mining investment ‘‘The net of all that means, poten- sensus forecast for Wednesday’s GDP cient to avoid the label. quarters in a row.’’

strategy and their clarity of the execu- panies, management has to be close to cars such as Ferrari but has since From page 13 tion and their plans. We were investing or at the very top of your list. dropped that position. as much in them as anything. ‘‘That’s at the centre of our process, ‘‘We decided to exit that around Agility, conviction and ‘‘Sometimes you meet these outliers being able to sit down with them and when COVID hit,’’ Carson says. cash pay off for Cyan early on and get lucky.’’ truly understand their philosophies ‘‘We weren’t smart enough to truly The fund took the decision to eventu- and strategies of these people who are understand what the true impacts of ally sell its shares in the company in heavily invested in these businesses.’’ coronavirus were going to be then. We because we’re small and nimble, we October 2019, exiting its final position is by no means the firm’s got our last bid out when Italy was were able to get out of that position.’’ around the $33 mark. only success. starting to show bad signs. While the 77 per cent fall in Webjet’s When Afterpay fell to a low of $8.90 ‘‘Bellamy’s [Australia] was another ‘‘The way it was priced, it was going share price may have presented a good during the depths of the market sell-off one we invested in early on. We were to need capital, it’s thinly traded, has a time for Carson to jump back in, he in March, Carson says there was a there in the IPO and it did very well for big market cap and we just thought the says the economic uncertainty meant temptation to buy back in, particularly us,’’ Carson says. risk-return profile was a bit chipped in there was still a sticking point at its cur- given the stock has risen close to ‘‘We do like IPOs. We think they’re a that one. Again, because we’re small rent valuation. 450 per cent since. good opportunity when there’s only a and nimble, we were fortuitous to be ‘‘If we could have participated in the ‘‘Given we know the company well, finite number of shares available to a able to get out. recapitalisation of the balance sheet, there certainly was temptation and I portion of the market and it’s genuinely ‘‘Timing-wise we were lucky, but we we probably would have but we wish we had,’’ he says. accessing capital for growth. haven’t bought back in.’’ couldn’t get stock,’’ he says. ‘‘But we didn’t and we decided to ‘‘Our most recent IPO has been Many of the fund’s successes have ‘‘Now it’s recovered pretty strongly. move on. We still think it’s an amazing Impressive strategy: Afterpay’s Anthony QuickFee, which is a payment solu- come from small companies with We like the company but we haven’t business but we think we’re better off Eisen and Nick Molnar. PHOTO: JAMES tions platform for professional services global ambitions successfully executing chosen to enter back in because we still trying to identify smaller growth BRICKWOOD companies, such as lawyers and an international expansion although think there’s a lot of uncertainty out opportunities that suit our investing accountants. They’re now getting Carson says it’s not something every there economically. philosophy.’’ egory,’’ Carson says. ‘‘We have the cash- pretty good traction in the states.’’ company in the fund has to have. ‘‘We actually also took an opportun- The Afterpay story is a great example generative businesses, which are a little In the smaller end of the market ‘‘If you can find one that you believe istic position in JB Hi-Fi in March when of why Carson loves small caps and it’s bit bigger and a little bit more mature; however, it’s just as much about pick- that the management has got the abil- it got sold down.’’ alovehe’sbuiltthroughhiscareer. then we’ve got the out-and-out growth ing the losers as picking the winners. ity to execute on a global scale, of The strategy paid off. Graduating from Monash University companies and they are generally well- ‘‘Most of the best investment deci- course, that’s a fantastic leverage’’ ‘‘We did take a bit of a hit in February in 1994, Carson landed a job at established businesses that still have a sions we’ve made are the things we opportunity, he says. and March with everyone else but Macquarie Bank in the private banking lot of growth ahead of them. haven’t invested in,’’ says Carson. ‘‘But I think it’s very important not to we’ve rebounded pretty well with area. He later joined Banker’s Trust on ‘‘The third category is the emerging ‘‘Those things that go really bad, forget how many Australian compan- double-digit returns in both April and the sell-side in an advisory role before businesses, which are earlier stage life- avoiding those is very, very important. ies have struggled to do that as well. It May, to the point where we’re now 7 or moving into research. For us, given we’re high conviction, can be the making or the breaking of a 8percentaheadofmarketoverthelast ‘‘The majority of the first half of my that means we have to choose carefully lot of these businesses. three months,’’ Carson says. career was as a sell-side analyst focused If you’re investing in what we invest in. If you get one very ‘‘But then if they do manage to have a Quick, short-term adjustments to the on industrials and then increasingly in smaller companies, wrong, it’s very expensive.’’ business that expands overseas such as portfolio proved useful during the the small-cap area which I found most The fund was an earlier investor in an Afterpay, then you get those huge unprecedented COVID-19 pandemic, interesting,’’ he says. management has to GetSwift, the embattled logistics com- returns.’’ but it’s a very different approach to the In 2013, Carson teamed up with Dean be close to or at the pany that has faced an investigation by Anumberofthefund’sstockshave fund’s normal mentality. Fergie to start Cyan Investment Man- the Australian Securities and Invest- strong international exposure includ- Cyan has made a name for itself agement, investing in ASX-listed small very top of your list. ments Commission. Alleged breaches ing Alcidion, , Cit- investing in some of the market’s top- capitalisation companies. Graeme Carson, Cyan Investment of the Corporations Act led to its shares adel Group and Scroll. Management portfolio manager performing stocks early in their life Since inception, the fund has made plummeting more than 80 per cent in Outside of running the fund, Carson cycle. an average annual return of 11.4 per just three months in early 2018. says most of his spare time is spent The fund participated in the cent, comfortably ahead of the S&P ‘‘We were in at the IPO and got a with his three children, with a fort- Afterpay Touch initial public offering Small Ordinaries Accumulation Index cycle companies. If you get those ones return of about 500 to 600 per cent but nightly golf game thrown in. in April 2016, buying the stock for $1 – which has returned an average of right, that’s when you get significant then we started feeling uncomfortable ‘‘I enjoy getting out with my mates the best investment decision Carson 5.6 per cent. returns of many multiples. We always about the communication and the pri- and playing golf, trying to stay reason- says he’s ever made. The high conviction strategy is find we’re one of the first institutions cing of the business,’’ Carson says. ‘‘It ably fit but I tend to need something to ‘‘It started as an emerging position in focused on growth over a three- to five- investing in those.’’ tripled again from where we sold but work towards as a goal,’’ he says. our portfolio. It wasn’t profitable, it was year period, with roughly 30 positions He says the attraction of small caps eventually all the bad news came to light ‘‘I did Kokoda last year, which was very small and it was barely even held in the portfolio at a time. comes from the access fund managers and a lot of people lost a lot of money.’’ challenging and very rewarding and proven as a business model,’’ he says. ‘‘We break the portfolio up into three get to the owners and managers of the In December, the fund invested in quite a lot of fun in the end. We were ‘‘But we were just so impressed by clear categories and we only have a cer- business. Carbon Revolution, a manufacturer of there for Anzac Day and that was a Nick Molnar and Anthony Eisen, their tain percentage exposure in each cat- ‘‘If you’re investing in smaller com- carbon fibre wheels for high-end sports great experience.’’ AFRGA1 A021