Kate Howitt is portfolio manager of Fidelity’s Australian Opportunities Fund.

Which stocks do you think make appealing takeover targets?

With $20 billion-plus bids being lobbed for Sydney Airport and Ramsay Health Care, the scale of deals has ratcheted up to new highs. That potentially puts a lot of companies in play.

We expect that the next five years will see a further round of consolidation in the media space. Nine Entertainment have paved the way and shown the power of the combined media proposition with a bigger audience to sell to. Others are struggling to keep up and will need to partner up.

“There’s not much enthusiasm built into the share price of Nickel Mines,” says Fidelity’s Kate Howitt. Jessica Hromas

Which of the banks is best positioned for a rising interest rate environment?

Newly listed Judo Bank provides the most direct leverage to rising rates. Its funding costs are anchored by the RBA’s fixed-rate Term Funding Facility, whilst its interest income automatically expands with rate rises. That will provide a significant boost to the bank’s margins, on top of the bank’s strong growth in lending.

As an added bonus, since Judo operates in the small and medium enterprise (SME) sector rather than the highly competitive mortgage sector, its rates-driven upside is less likely to be competed away.

Any IPOs you’re in, or you like the look of?

Recently, the vast majority of IPOs and follow-on raisings have been at the small end of the resources sector. For many of these, the raisings have been opportunistically timed to take advantage of current commodity pricing, with funds raised intended to cover anticipated capital expenditure cost inflation. We haven’t found them particularly compelling.

Is it nearing time to take some profits on resources stocks which benefited from strong commodity prices?

Decarbonisation will provide a very long-term tailwind to demand for many mining commodities, however it won’t be a linear path. We prefer companies which offer some diversification, such as Independence Group which has exposure to nickel, lithium and a little copper.

For earlier-stage pure-play companies operating in the hottest sectors such as lithium, a round of profit-taking wouldn’t go astray, especially as operations based in Western Australia risk a double whammy of weakening commodity prices and higher COVID-related costs.

Are you concerned about concentration risk following BHP’s rebalance?

We like BHP’s commodity positioning, its proactive approach to securing social license to operate and its strong cash flows – but there’s no denying the stock will be pulled around by perceptions of China’s economic outlook and by commodity price swings.

Fortunately, the Aussie market hosts a number of other global winners such as CSL, Macquarie Group and Goodman Group, so with some judicious diversification you can benefit from the upside whilst smoothing out the downside.

What’s a stock that you think the market is really undervaluing?

Unlike most small mining stocks, there’s not much enthusiasm built into the share price of Nickel Mines. The company’s output will roughly triple over the next few years, making it one of the few resources companies not needing commodity prices to do the heavy lifting of earnings growth. The shares were sold off in March over concerns about their joint venture partner, Tsingshan, fears over rising input costs, and concerns over the outlook for demand for stainless steel in China.

The shares are on single digit price-earnings over the next few years – that’s not single digit price-to-sales, which is what the tech companies are coming down to – that’s single digit multiples of real cash-covered earnings!

The company’s latest quarterly showed a great outcome on both production and margins; a few more quarterlies like that the risk discount in the shares will be squeezed out.

What’s a stock you’d like to own but can’t for some reason?

My fund is benchmarked to the S&P/ASX 200, so only Aussie stocks are on the menu for me. Looking further afield, in today’s environment it’s hard to find a stock that’s better positioned than Cheniere Energy Inc.

The company operates LNG “trains” which package up US shale gas for export to other markets – hello Europe! – and it has a juicy 60 per cent market share of that market. Similar to Nickel Mines, Cheniere has upside from volume growth rather than commodity prices.

Any TV shows or podcasts you’re enjoying, or have recently enjoyed?

I’m a big fan of the “Capitalisn’t” podcast put out by my alma mater, The University of Chicago. I will confess to a little binge-watching of “The Candidate” on Netflix – a snappy satire on modern America featuring the wildly talented Ben Platt. “Morning Wars” and “Dickinson” on Apple TV+ have provided some excellent treadmill-TV.

Nine is the publisher of The Australian Financial Review.

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