The InvestSense Podcast: Recent Episodes
InvestSense
InvestSense discuss the latest in portfolio management, economics and investments while joined by leading voices from around the world.
Learn more about InvestSense: https://www.investsense.com.au/solutions
Global economic sentiment shifted in the week as US data strengthened, and Eurozone data weakened. Weaker global economic data raised concerns about central bank hawkishness, leading to a stronger US dollar and weaker currencies. Crude oil prices remained resilient amid supply concerns, while tech stocks led US markets lower as Apple took a hit.
The week of August 28th to September 1st, 2023, saw a delicate balance between economic indicators and market sentiment play out in markets. The United States enjoyed what appears to be Goldilocks labor conditions, with strong job growth and a tightening labor market.
Fed Chair Jerome Powell's Speech at Jackson Hole Symposium
The week began with great anticipation for Fed Chair Jerome Powell's speech at the Jackson Hole Economic Symposium. While some expected ground-breaking announcements, Powell's speech proved to be relatively anticlimactic. Doves interpreted his remarks as a signal that there would be no immediate plans for additional rate hikes, while hawks noted that Powell mentioned hypothetical situations that could warrant tightening in the future. Overall, Powell emphasized the need to anchor inflation at 2% and take a gradual approach to assess the impact of previous rate hikes.
European Central Bank (ECB) President Christine Lagarde's Message
In a similar vein, ECB President Christine Lagarde reiterated the ECB's commitment to maintaining high interest rates for as long as necessary to achieve the 2% inflation target in the Eurozone. This aligns with the ECB's ongoing efforts to stimulate economic growth.
Eurozone PMI Data and Consumer Confidence
However, economic data from the Eurozone painted a less optimistic picture. The Eurozone, French, and German Purchasing Managers' Index (PMI) readings were weaker than expected, with services falling below consensus and manufacturing showing slight improvement. Additionally, the European Commission's index of Eurozone consumer confidence fell to -16, indicating a negative sentiment among consumers.
UK PMI Data and US Housing Market
In the UK, PMI data fell short of expectations, particularly in the manufacturing and services sectors. On the other hand, the US housing market experienced a significant decline in existing home sales, reaching the lowest level since the aftermath of the US housing bubble in 2010. This was attributed to rising mortgage rates, which deterred potential buyers.
China Lending Policy Rate Reductions
In China, the reductions in lending policy rates were less significant than anticipated. The People's Bank of China (PBoC) reduced the 1-Year Medium-Term Lending Facility Rate by 15 basis points to 2.50%. However, the 1-Year Loan Prime Rate was only decreased by 10 basis points to 3.45%, while the 5-Year rate remained unchanged at 4.20%. This conservative approach may be aimed at preserving banking sector profitability and preventing excessive depreciation of the Chinese yuan.
Overall though, several factors contributed to the erosion of confidence in China's economy. Disappointing data, signs of deflation, record youth unemployment, and continued liquidity issues in the debt-laden property sector played a significant role. These factors have raised concerns about China's economic growth and the government's limited options to address the downturn. As a result, there has been an increased prospect of accelerated capital outflows, with overseas funds selling the equivalent of USD 10.7 billion from the mainland market over a 13-day trading period.
Despite these challenges, analysts believe that the risks of a systemic crisis stemming from China's property sector are relatively low. Increased regulation has led to a smaller "shadow" banking system, including trusts, compared to previous years. While risks persist on the periphery of the financial system, they are potentially resolvable through regulatory intervention. Nevertheless, analysts continue to monitor developments in the property sector and potential spillover effects on other sectors.
The Australian Reporting Season
The Australian stock market experienced mixed results during the reporting season. The retail sector, in particular, last week showcased the contrasting performances we have seen in this reporting season. Premier Investments saw a surge of 12.3% after forecasting near double-digit sales growth, while Breville Group experienced a nearly 10% increase in its stock price, primarily driven by strong sales of coffee machines. However, A2 Milk faced a decline of over 13% as the company flagged a slowdown in demand, influenced by falling birth rates in China.
Mining giant BHP reported revenue and profits slightly below expectations, contributing negatively to the overall performance of the Australian stock market. On the other hand, Woodside, a major player in the gas industry, managed to avoid industrial action that could have threatened global LNG supply, positively impacting the market.
Coles, a prominent supermarket chain, saw a decrease in its share price as it missed expectations, while investors responded positively to Woolworths' results. Ramsay Healthcare suffered a decline in its share price and faced challenges, and Wisetech experienced a significant setback as its shares were slashed by a fifth due to the company's failure to deliver guidance. Qantas, however, reported soaring profits and announced another buyback scheme, further boosting the market.
Looking Ahead
Upcoming US Labor Market Reports
Looking ahead, the US labor market reports will be closely watched. The Job Opening and Labor Turnover Survey (JOLTS) will provide insights into the number of unfilled jobs and the voluntary quit rate. Additionally, the upcoming payroll report is expected to show an increase of 168,000 nonfarm jobs, with an unchanged unemployment rate of 3.5%. Average hourly earnings are projected to rise by 0.3% month-on-month and 4.3% year-on-year.
Eurozone Inflation Data and ECB Rate Hike Expectations
The Eurozone preliminary inflation data for August will be significant in determining the likelihood of additional ECB rate hikes. Market expectations suggest a 34% chance of a 25 basis points hike in September, rising to 52% by October. However, the potential risk of a recession in the second half of 2023 may limit the ECB's ability to tighten monetary policy further.
US Home Prices and Eurozone Inflation Readings
In the US, the S&P Case-Shiller Home Price Index is expected to show a 0.8% month-on-month increase in home prices, approaching the record high of June 2022. Meanwhile, Eurozone inflation readings will provide further insights into the trajectory of inflation and its implications for ECB rate hikes. It is crucial to closely monitor these indicators to gauge the overall economic landscape.
Amidst the concluding chapters of COVID-19 and its market upheavals, the global economic landscape is teetering on the brink of a potential regime change. This article dives deep into three distinct economic scenarios – Bull, Bear, and Muddle-Through – each outlining varying futures shaped by productivity gains, global debt, and decision-making by central authorities. In an environment where economic forecasts often teeter around existing numbers, outliers might offer the most actionable insights. As market dynamics pivot, the challenge lies in identifying undervalued opportunities that promise substantial returns, echoing historic market rebounds like the post-Dot Com era. The conference aims to distill these insights and offers a platform for informed investment choices.
Last week markets continued in general to be on the back foot, particularly China, while global cyclicals remained strong.
Global markets experienced a mixed week, as Fitch cut the US government's credit rating, while earnings were resilient.
Markets were again flat to slightly positive last week which means that, barring an overnight mishap in the Northern Hemisphere, most equity portfolios will be up another 2-3% for the month.
Last week was uneventful and markets have been more or less flat for the last 10 days, with the exception of the UK, which rallied on the news that inflation was not as high as expected (though still higher than most places), plus some of the economic data has not been quite as dire as has been expected.
Most markets were up last week and while tech stocks and AI beneficiaries continued to lead the way the rally was more broad-based than we have seen recently, with most sectors and markets up by 2 - 5%.
Last week we saw some volatility creep into markets as we turned the page on a new financial year. US labour data was mixed but just strong enough to suggest that higher rates might be around for a bit longer. This caused some volatility in bond markets, with short term (2 year) rates up again and hitting 15-year highs.
Hopes of a soft economic landing permeated markets last week and even the hapless UK market caught a bid late in the week, leaving it up a percent along with the ASX, while Europe, Japan and he US ended the quarter on a high note, up by 2-3%.
We had intended to retire the AI but following some quite positive feedback (which we don’t usually get) it gets a reprieve.
US inflation moderated, the Federal Reserve temporally paused its rate hiking cycle while consumer sales and sentiment gauges firmed. On the face of it, this looks like an immaculate ‘disinflation’, and the dominant narrative in the press is that a resilient US consumer has fanned hopes of a soft landing.
This week we used a couple of AI programs to produce an AI generated market summary, and then added our own commentary below for comparison.
It may be drawing a long bow but it now seems plausible that, just below the surface, AI inspired optimism has helped markets remain surprising resilient throughout this year, particularly when facing the US regional banking crisis that started in mid-March and more recently the polemic surrounding the US Debt Ceiling.
All that mattered in markets last week was AI, at not just who is going to make money in this space but who already is...
Nothing continued to happen last week (and the week before that, for that matter). Apart from two outlying and positive market moves, that is, the Nasdaq went up and so did Japanese equities, for reasons that couldn’t be more different.
As John Wayne said in The Lucky Texan (1934), “It’s quiet out there. Ain’t natural”. That seems to sum up what many traders and managers feel about markets at the moment, as the noisy post-COVID data environment continues to confuse.
April was a muddle through month where most markets ended where they started, some having moved about a bit more than others. The Nasdaq, and by extension the US market, continued to be the lightning rod for risk, but ended the month just in positive territory. Emerging markets were slightly down, while the biggest winner was Japan.
Jonathan Tolub provides a primer on Andrew Hunt’s recent research, and views on US banks and Asian economic activity in particular.
After a relatively quiet few weeks the financial newswires have sprung back into life with positive US earnings surprises, another distressed US bank and an Australian inflation print that appears to have something for everyone.
Jonathan Ramsay and Jonathan Tolub discuss the upcoming Portfolio Construction Forum Finology Summit 2023.
Markets have been remarkably well behaved since Easter, as most markets are up by 1-2% across the board with very little volatility.
With many markets closed for a few days either side of Easter and market liquidity being generally very low, the financial news been mercifully subdued (including this weeks US CPI print). There was, however, mini-scare at the end of last week as a number of jobs related reports came out suggesting that the overheating US economy might be slowing down.
Markets have calmed down a great deal in the last two weeks and more recently have mounted a bit of a recovery, with US tech and emerging markets leading the way
Early last week a much-awaited inflation gauge in the US confirmed that inflation remained ‘sticky’, and that the pace of increases might even be accelerating again. For the second week in a row a hawkish and normally market moving Fed speech that should have seen yields go higher was overshadowed by events in the banking sector that had exactly the opposite effect
On Friday morning Silicon Valley Bank (SVB) had been the 16th largest US bank and a successful S&P 500 company, but by Saturday morning it was bankrupt after a sudden run on its deposit base had rendered it unviable.
Bond yields were up again last week but so were equity markets which was a nice change that lead to the first up week in the last four. In fact, while markets have been on the back foot recently, most commentators have been pleasantly surprised that they haven’t reacted too badly to an apparent wind shift in the gusty inflationary data.
On Friday the widely followed US PCE inflation data was published, and it tied a neat bow around this thesis with broad based inflation measures covering core as well as volatile items like food and energy higher than expected.
Last week, the S&P 500 traded in a 3% range, having done a 2% round trip on Thursday, followed by a 3% fall on Friday after the inflation data release and then another almost 2% round trip yesterday. Emerging markets were the worst performing, down 4% for the week. Taking a step back though, most equity markets haven’t given back that much of their gains from January, while Europe and the Nasdaq remain up 10% for the year.
Markets followed a recently familiar path last week, rising early in the week on strong economic data and hopes of a ‘no-landing’ only to fall back as the market digests the inflationary consequences, helped by cautious rhetoric from various US Federal Reserve Board members.
A ‘no-landing’ scenario is one where the US economy just keeps flying high as inflation naturally subsides, thereby easing pressure on the Fed to kill the economy with higher rates. Ironically the main threat to the ‘no-landing’ scenario is, well, ‘no-landing’. The evident capacity constraints in the US economy and the fear of sticky, persistent inflation mean that the Fed needs and wants to slow the economy, even if inflation appears to be heading in the right direction.
Even if markets went nowhere it was the Nasdaq that moved most while there was also quite a lot of dispersion amongst the US tech titans. Tesla and Apple were the biggest contributors while Microsoft was the biggest detractor.
It wasn’t that big a move for Microsoft (down 5% in the last few days) but it coincided with news that its roll-out of Sydney (AKA BingChat) has encountered similar problems to Google’s AI the week before (which also undermined the parent company’s stock performance. Microsoft is still up the year but this underlined again that the adoption of so-called ‘large language models’ might not be a straightforward process for the large incumbent tech stocks and the disruptors could yet be disrupted.
European equities proved much more resilient while Japan flat lined and Chinese stocks were on the back foot. The results season in the US just surpassed very weak expectations while in Europe results have shown signs of outright strength and even a nascent recovery, especially amongst the banks.
In Australia there was similar level of noise around inflation and dispersion between stocks, albeit with a more industrial or bricks and mortar feel and the market was the weakest performer for the second week in a row.
This was mainly driven by CBA (down 7%) and the other local banks despite CBA reporting record profits. The underlying fear is that this is perhaps as good as it gets, reflected in the banks guidance that suggested that the increase in so-called ‘net interest margins’ (the difference between what the bank pays depositors and receives form mortgagees) had peaked.
CBA also highlighted that $96bn in fixed rate mortgages would reset higher this year an perhaps reflects a broader fear in the market that this might be as good as it gets for the local economy if the RBA is forced to tighten more than expected.
Fed officials sought to impress upon markets the notion that it would take more than one apparently weaker inflation print and an impending recession to pause this US rate hiking cycle. Headlines like “Housing industry braces for a downturn, but investors are piling in” neatly summarise the tone of a market where both the rate cycle and resultant recession has been so well telegraphed. The fact that both are so well priced in by markets means that any incrementally better (or at least less bad) news can cause markets to rebound sharply with particularly beaten down stocks or sectors jumping by the most.
Early last week it looked like an imploding crypto exchange might be the next leveraged player that the Fed hiking cycle had broken but by the end of the week early signs of a peak in inflation had sent markets rocketing higher.
US markets snapped a month-long winning streak and fell back by three percent while UK, European and Asian markets were up strongly. The negative sentiment in the US centered on the prospects for tech stocks, and the Nasdaq was down almost 6% with market heavyweights Apple, Google, and Amazon down by around 10% as investors fretted over the dual headwind of declining earnings and higher interest rates
Markets capped a very strong month with a strong week and for an apparent kaleidoscope of reasons including not as dismal as expected earnings, anecdotal evidence of slowing inflationary pressures in the US and even some economic resilience in recession bound and energy starved Europe. Against these ‘almost positives’ there was enough in the news to make a 10% rise in markets during October seem improbable on the face of it - including an overall increase in inflation (and medium-term interest rate expectations), tightening US dollar liquidity conditions, a deepening of economic woes in China (not to mention the geopolitical implications of a harder line Chinese Communist party after the recent 5 year congress ) and an ever more belligerent Russian leadership.
In this episode, we cover why equity markets reacted to the Fed minutes last week, and dissect the widely-anticipated quantitative tightening and how will it affect markets, the economy and households.
We discuss the role of the banking system and what all this means for credit trends and give a playbook for 2022 - government bonds vs credit, US vs Equities vs the rest of the world, growth vs defensive assets.
For more information about the InvestSense Multi-Asset Managed Accounts, visit https://www.investsense.com.au/
Is it time to assess the long-term impact of the Ukraine War on the global economy
As inflation influences become more entrenched how will politicians react? Does it matter?
Is the odd shape of the bond yield curve telling us something or is ist just noise?
Liquidity has surprised on the upside. How long can that last?
Are we already entering a recession?
What does all that mean for equity valuations?
Who are the generators of inflation and who will be the ungrateful recipients
Are we about to see the start of another credit cycle?
Does the Fed have a blind spot?
The unseen tightening
Has the markets’ teflon coating worn off?
Are we heading for the recession we have to have?
-
Why the quantity of money (liquidity) is less well understood than the price (interest rates) something which could become more widely acknowledged in 2022.
-
Lessons form past tightening cycles.
-
Why monetary policy can’t really multi-task
-
The potential drivers of bond market volatility in 2022
-
The optionality of holding cash
The week that wasMarkets slid again last week but the selling was concentrated in US tech, most of which is down 10% or so this year. Much of last week’s selling occurred in the last 2 sessions of the week. However, it was the pattern of trading that was just as worrying for many observers with some fairly pronounced intra-day swings on Thursday and Friday that ended with the market selling off dramatically into the close. On Friday the proximate cause was Netflix which reported weaker subscriber numbers and a pessimistic outlook which was seen by some as a potential crack in the pristine earnings and cash flow credentials of the broader US tech sector. In a winner takes all, platform driven digital economy, these have been seen as safe havens while many smaller, less profitable tech and biotech stocks have already halved in value during 2021. 15-20 of these tech titans represent a 1/3rd of the US market and over 2/3rds of the Nasdaq, so this reversal has happened very much below the surface, until this year. Investors appreciate and pay a hefty multiple for the ‘bird in the hand’ of massive current cash flows plus strong growth prospects. Higher interest rate expectations are turning from a tailwind into a headwind and now cracks in the growth story are adding to the markets doubts. Regulatory curbs, although not on the scale of those in China, have also been gaining bipartisan and cross-country support in recent weeks.
That left the Nasdaq down another 7% and the broader S&P down almost 6% while Europe and especially the UK were much more resilient, down around 1.5% and 0.7% respectively. Asia also fared better, and the Chinese and Hong Kong markets were actually up on the prospect of fiscal, monetary and even regulatory easing by the Chinese Government. Even Latin American and Eastern European markets did relatively well, making this look like a quite US centric correction, for now at least.
The Australian market was down almost 3% and it had its own interesting internal dynamics. With not much of a tech sector to speak of (at least in market capitalisation terms) Australian national champions, market darlings and export hopefuls tend to take much of the flows from investors with an eye on growth. Many of these stocks like Cochlear, ResMed and Goodman Group were on the back foot last week while the two dominant sectors, banks and resources were also in negative territory. On the other hand, many of the less well known mid-cap names in sectors like Consumer Staples and, ironically, some of the less well-hyped IT stocks (in more administrative and operational areas) were notably resilient. Some like Appen, which had previously fallen from grace, were actually up maybe indicating a degree of rotation into less highly rated or expensive stocks as AfterPay exits the index (having been bought by Block, formerly known as Square).
Near the end of the week bond markets rebounded slightly indicating again that the inflation debate could still have 2 sides, but commodity markets remained resolutely inflationary with pretty much every type of commodity in the green, including gold. Energy stocks were also strong performers here and abroad and it is likely that what now looks like more than Russian posturing has also bolstered energy prices.
Fixed income government bond yields came down slightly at the end of the week and ended more or less where they started, while rises in implied inflation expectations started to moderate meaning that real rates remained firm, even if still negative. Credit spreads eased again, and high yield bonds indices were down. In the context of that asset class, it was a fairly slight move but maybe something to keep an eye on as volatility in credit markets and drying up of liquidity is something that could change the Fed’s rhetoric. For now, though the bond markets appear to remain very much open for business and we hear that debt issuance continues unabated.
The week that wasMarkets were more settled last week, but interest rate expectations continued to set the tone with the US market proving especially sensitive. Markets were at first buoyed by Fed Chair Jerome Powell’s insistence that inflationary pressures would abate later in the year but the next day an annual US inflation print of 7% put markets on the back foot again and long-term interest rates spiked again on Friday. This is the fourth week in a row that long-term rates have been on the rise and the third week the Nasdaq tech index has ended in the red.
In Australia long-term rates are now just below 2% which at least makes them at least roughly equivalent to long-term inflation expectations. At a sector level, the inflationary theme continued with energy stocks again being the stand-out performers (up by 6% overseas and 4% in Australia), followed by materials which was of particular benefit to the local market (BHP, Rio, Fortescue and Woodside were all up between 5% and 10% last week). As signs of easing in China became more tangible, Chinese tech and healthcare stocks also rebounded strongly. Elsewhere performance was mixed as the market switched focus from weak December consumption data to the upcoming US earnings season. Expectations remain quite high but some weaker than expected bank results on Friday was an ominous sign. Either way it is likely to be a noisy earnings season as the strong rebound of 2021 is juxtaposed with an uncertain but potentially improving post-Omicron outlook. Wesfarmers is a case in point. It was one of many Australian Consumer Discretionary and Consumer Staple stocks that fell sharply last week amid concerns over supply chain disruptions and Omicron induced labour shortages, only to rebound today when the trading update confirmed the market’s fears. ‘Sell the rumor, buy the news’ as they say. That left the local market down almost 1% alongside Japan and Europe and behind the UK and US (both flat for the week) and emerging markets (up more than 2%).
Most commodity markets were up again, apart from precious metals and copper which were flat. This could be due to an increasing sense that, as COVID numbers seem be peaking the market is looking through the current disruptions and seeing buoyant production activity, or it could also be due to expectations of persistent supply chain disruption. The broad based and steady rises we have seen recently perhaps imply the former explanation and bond markets may be supporting this thesis. The last half of 2021 was characterised by significant volatility in short-term rates while the last four weeks has seen steadier rises in both nominal and real rates of interest across the interest rate maturity spectrum and perhaps especially at the long end. Corporate bond spreads eased again very slightly and certainly didn’t display any signs of distress at the prospect of higher funding rates. If the Chinese authorities, the Fed and smaller central banks like the RBA have a playbook for quietly exiting the post-COVID regime of extreme monetary stimulus this is probably what they were hoping for. So far so good.
-
Bloc One: The US and Australia - need to keep the asset price train going
-
Bloc Two: The Euro Zone - looking for a soft landing
-
Bloc Three: China & Much of Asia - depend on China maintaining control
-
Bloc Four: The Island Nations of Japan and the UK (and NZ?) - all have different problems and will have different solutions
Markets finished the month of November down slightly on Monday as the economic impact of Omicron put investors on the backfoot.
After a relatively quiet start to the week markets sold-off on Thursday and then again more sharply after the Australian close on Friday. the likely impact off Omicron will probably not be known for a week or so (when it is hoped scientists will have a better idea of current vaccine effectiveness).
Have we seen peak inflation? Supply chain disruption may have actually peaked a few weeks ago?
Contrary to expectations Santa may even get a helping hand from Chinese producers ‘dumping’ excess inventory in the run-up to Christmas.
Still, much of this will still take months to work through the inflation data. How long can the Fed and other central banks defy the data and markets?
Are we seeing the ghost of QE future in Japan right now?
Can the RBA really promise no rate rises next year?
The Fed and the RBA have both mortgaged their credibility but can they keep up the payments?
While markets were slightly down for the week they were surprising resilient in the face of of blow-out inflation numbers, not just in the US but in China and even in Germany of all places.
What does the future hold for the Chinese growth model? Where to from here, and what will the implications be for the west? Do they have another ‘magic fiscal button’?
What do supply side disruptions mean for real wealth and global demand?
What are the liquidity headwinds that will dominate until the fiscal follow-up next year? What does this mean for equity volatility, and what rotations can we expect to see in the near future?
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss
-
When and how markets might to less then ’transitory’ inflation?
-
Whether the bond markets’ apparent expectation of a slowdown coherent with likely inflation?
-
Is now one of the few times when perhaps you should perhaps 'fight the Fed'?
In this podcast they discuss:
-
Whether large Chinese tech is now looking cheap or whether growth prospects are being impaired?
-
The implications of investing via a so-called Variable Interest Entity (VIE)
-
The less considered implications of VIE’s for local Chinese regulators.
-
What China is really looking to achieve by reining in its national tech champions?
-
What all this means for foreign share-holders.
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss markets, monetary policy and portfolios.
In this episode they discuss:
The bottom line - the world can produce less and people have more money to spend on goods.
When will the market be forced to take inflation seriously
The meaning of transitory? And Does it really matter?
The near term technical outlook - the demand for Treasuries?
What could get in the way of an inflationary recovery.
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss markets, monetary policy and portfolios.
In this episode they discuss:
More inflation that is looking less transitory?
Whether the output gap actually measurable in this environment?
What would make the Fed change course, what would be the impact on markets?
Is China now overheating?
Could we end up importing inflation rather than than deflation from Asia?>
Why now is not a time to be making hero calls?
Why it may not be a good idea to look through the inflation spike, even if it us just a spike.
Why the saying ‘don’t fight the fed’ may not mean what you think it does right now.
Key ThemesEconomic Backdrop: Strong monetary/fiscal stimulus
•Will result in not only a 2021 rebound but a genuine and sustained multi-year reflation
Valuations: Many maintain markets not expensive given low interest rates
•Polarisation of markets mean some sectors more expensive
•Value equities to outperform
Rates: Central banks talking lower for longer 3 years
•Most managers are sanguine?
•Rebound inflation spike already priced in?
•Sustained rise in inflation, not so much
Click the image below to download our initial summary and some ‘best-of’ slides:
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss
Click here to listen on Spotify.
Click here to listen on Apple.
Click here to listen on Google.
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss:
-
Has the Fed underestimated the Phillips Curve?
-
Where does all this ‘liquidity’ and cash go - a ‘constipated’ system
-
Why rates rather than spreads maybe the best post-COVID Barometer
-
Should you trade rates and growth or hide in cash and value?
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss
Click here to listen on Spotify.
Click here to listen on Apple.
Click here to listen on Google.
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss:
-
Have we seen this before?
-
How to invest when the fundamentals don’t matter
-
Melt-up or melt-down?
-
What is the catalyst for melt-up?
-
And what could burst the bubble?
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss
Click here to listen on Spotify.
Click here to listen on Apple.
Click here to listen on Google.
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss:
-
Three Drivers of inflation that make this different from 2009
-
If he had to chose would Fed Chair Powell save Main Street or markets?
-
Is the currency still Australia’s Achilles heel in a hyper stimulated world?
-
Why now is not is a time for conviction calls
-
A game plan if and when global ‘budget constraints’ make a reappearance
Extremes of valuation
Growth - surprisingly not so much
More rotation in 2021 then momentum in the value trade?
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss markets, monetary policy and portfolios.
In this episode they discuss:
-
Liquidity trends now look unusually supportive into the year end
-
What kind of value stocks might especially enjoy a 2021 reflation/inflation trade
-
What could make the Fed care a little less about equity investors and what that means for valuations
-
Boris get’s ‘all Dunkirky’
In this podcast they discuss:
-
The value of buying well
-
Whether you have to choose value or growth in emerging markets or whether there is another way?
-
A emerging markets still a riskier investment than developed markets?
-
A psychological assessment of the post-COVID consumer and some post-COVID investment themes.
-
Some new consumer themes for the post-COVID economy.
Join InvestSense Director Jonathan Ramsay and Andrew as they discuss:
-
What will happen if we have more printing of money, an economic recovery AND that money then circulates more freely than in 2010?
-
What can Jay Powell and the US Fed do about this, and when?
-
Time to go long equities and short duration or could the traditional year-end liquidity drought still throw a spanner in the works ?
Join InvestSense Director Jonathan Ramsay and Jay Sivapalan of Janus Henderson in this podcast as they discuss the current state of play in fixed interest markets.
• Can bond managers add value by timing movements in interest rates?
• Will that be enough to ensure positive real, after inflation, returns and to what extent?
• What other tools are available to help investors get to that now talismanic objective of 2% above inflation over three years?
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss markets, monetary policy and portfolios.
In this episode they discuss:
-
How difficult it has become to exceed such lofty expectations of market support. That’s why they didn’t.
-
Why the liquidity tailwind has turned into a headwind?
-
Why have US Money Market Mutual Funds become such an important part of the global financial system?
-
Does the Fed know how to monitor these flows?
-
Is the Fed stil omnipotent? Or are they intentionally signalling the limits of what can be done through monetary policy?
In this podcast they discuss:
-
Whether the market/index doing a good enough job of allocating to growth?
-
Managing the trade-off between believing in the potential of growth companies and being objective about valuations.
-
A framework for evaluating growth through the lens of Afterpay.
-
Whether there are still enough growth companies still priced to deliver 10% per annum over 10 years?
In this episode they discuss:
-
Just how far has the Fed really gone in micromanaging markets?
-
Having flooded the world with Dollars the Fed is on a mission to overshoot its inflation target and wants to target unemployment in the weakest US states. Have we yet to see the full extent of monetary easing?
-
The US treasury market is much bigger and more widely owned than the Japanese JGB market - can the Fed control yields or will higher inflation targeting mean higher Treasury rates?
-
Go with the flow or sit this one out?
-
Or are there any non-correlated opportunities that are not so tied to interest rates and liquidity?
In this episode they discuss:
-
A view from the UK - are working and social habits undergoing a permanent shift that might be negative for economic growth?
-
Whether government bonds, trading at negative real yields, are no longer fit for purpose as a savings vehicle? What does that mean for index funds?
-
The extent to which:
-
Active, fundamentally driven investment managers have for the most part been subtly ‘fighting the Fed’. Can this continue?
-
‘Don’t fight the Fed’ actually means ‘pin your hopes on liquidity. What happens if the liquidity disappears?
-
The deterioration in the Sino-US relationship. Is this the new balance point for the global economy and world share markets?
In this podcast they discuss:
-
The perennial disconnect between fund flows and value opportunities
-
Which regions offer the best opportunities
-
When and where indexing works and where it doesn’t
-
Examples of extreme Value in Japan
Click here for a PDF version of this update.
“The only two things you can truly depend upon are gravity and greed.”
Jack Palance, Ukrainian/American Actor
A new thought has been circulating in the echo chamber of financial punditry in the last few weeks - ‘tech stocks are now defensive ’. This includes Tesla, now trading on a multiple of 75 times what analysts hope earnings will be in three years. The valuation multiples for Amazon and the rest of the FAANGs are more conceivable yet it still remains difficult for a fundamental analyst to conceive of them as truly defensive. Their value is mostly contingent on the beliefs of mainly speculative investors, who can change their mind in an instant. Nevertheless, this idea started to take root during the onset of the COVID Crisis when the market correctly predicted that their cash flows would be less affected than those of industrial companies in the event of an economic shutdown. It is often said that all bubbles start with a sensible idea that gets exaggerated. The legendary investor, George Soros, went a step further and stipulated that you need a ‘fundamental misconception’ to take root before a bubble can truly be formed. The idea here is that a misconceived belief can become self-fulfilling if widely enough held and the fact that it is difficult to rationalise only serves to sever the links with fundamentals. Only at that point does the bubble really have the freedom to inflate.
The following chart shows how this self-reinforcing belief may have gained currency in the aftermath of the COVID Crisis and why a market fall last night in the US, that was led by tech stocks, might prove to be significant if it turns out to be a crack in the sentiment that has underpinned the rise and rise of tech stock valuations.
Source: Bloomberg, InvestSense
This might all seem a bit ‘micro’ and it’s true that a couple of hours of market action a rotation does not make. Nevertheless, it is worth paying attention because by the time it becomes really obvious something is happening it might be too late. The value rotation in early June was quite explosive but the gains evaporated just as quickly when the market sniffed the second wave in the US and further economic weakness. Yesterday may have witnessed a very different thought process - what if safety lies not so much in a blue sky future for evermore successful digital companies but in more mundane bricks and mortar assets or just earnings that someone else is not already paying a wild multiple for.
The last time we saw a rotation into value when the metrics between growth and value companies were quite so stretched was in early 2000 when the dot com bubble burst. It seems inauspicious that last week the tech-heavy Nasdaq Index reached a price/sales multiple last seen in 2000.
Source: Bloomberg
A technical note: Back in the (Dot Com) day it was de rigeur to value tech companies on a multiple of sales on the basis that 1) they had little or no earnings but 2) if they had enough sales and had cornered the market in online pet food or nappies then they could, at will, increase prices with little impact on volume until they traded on a reasonable price/earnings multiple. In that sense price/sales was a leap of faith that envisaged what a mature company might achieve and the same rationale still applies to Amazon (currently trading on a P/E of 140) given its market dominance. And it’s true that Amazon can probably just increase its margins without scaring off too many customers. Applying the same logic to a whole index of companies, many of which are still at the early, unproven and capital intensive end of the disruptive cycle seems again foolhardy. By the same token, many of the companies in the Nasdaq are now very profitable and still growing strongly so we might not necessarily expect the same kind of carnage seen after 2000 when the Nasdaq lost 80% of its value. Plus, with such low interest rates higher valuations are to some extent justified for companies with such a long tail of growth and potential cash flows (if a thirty-year government bond yields next to nothing potentially large profits far in the future are relatively attractive for long term investors).
Source: Bloomberg
Source: Bloomberg
Still, the parallels with the late ’90s remain striking and the first part of the graph on the left (1998 and 1999) looks eerily similar to the last few years. It also seems improbable that our present-day tech stars are not only relatively immune to the COVID Crisis but are somehow, fundamentally, 25% more valuable than they were at the start of 2020. Some degree of speculative fervour, similar to that of 1999, would seem to be at play. Mark Twain’s supposed remark about history not exactly repeating itself but having a propensity to rhyme is often invoked about financial markets - the implication being that we are unlikely to repeat exactly the same mistake twice but we might get close. Maybe in the world of high-frequency trading and social media, 20 years, give or take a couple of months, is long enough to forget everything.
The other thought that the above graphs might provoke is that such speculation will have dragged the whole market higher. If that is the case then maybe just steering clear of tech stocks might not be enough to generate decent returns amidst a bursting bubble and possible recessionary scenario. Indeed the trajectory of the Dow Jones looks like it was flat in the graph above but was actually down 15% after dividends three years later and by 40% at its worst point. So why bother investing at all? It might be safer and less painful just to stay in cash until the storm passes. But then there is the uncomfortable thought that the storm may never happen. And again cash and bonds are both yielding nothing, especially after the effects of likely inflation.
At this point a little local history is useful. In the lead up to 2000 Australian value stocks came to be seen as the dullest companies in the dullest market in the world. Resource stocks were the most hated of all and the rest of the market was all but forgotten (apart from News Corp and OneTel). Local value manager, Maple Brown Abbot, had doggedly maintained a hopeless portfolio of bricks and mortar stocks that ranged from boring to structurally challenged, and been roundly criticised for doing so from all quarters. Absolute performance was OK but when the rest of the market had just risen by 30% that seemed to be missing the point. The interesting thing was that when the winds of sentiment changed those boring stocks didn’t just stand still while the world fell around them, they proceeded to jump higher - there were significant gains to be made from the rotation into these supposedly ‘structurally challenged’ stocks. Reasonable dividends and high single-digit promised returns were suddenly an attractive proposition for fund managers that needed to invest somewhere.
Source: FE
The graph above shows not only the stellar performance of Maple-Brown Abbot’s stalwart holdings over the next three years compared to the local index but also the degree to which the local market was relatively unaffected by the Dot Com bust. This time around there is scant evidence that the whole market has been left behind to the same degree. In fact, two decades of superannuation flows may well have made our shares just as expensive, or more so, on a like for like basis. At any rate, there is nothing particularly hated about many of our current market darlings but we have been actively looking for pockets of the market that could benefit in the same way and they tend to be smaller companies, especially in Australia. Overseas they tend to be in industries that share the same structurally challenged or forgotten characteristics in unfashionable places like Europe, Japan and parts of Asia as well as the industrial backwaters of the US.
A word of caution: It may turn out that there is nothing that rhymes with Dot Com bust in the current market and if there is a bubble it might be a long time before its bursts. The market always, by construction, surprises us and if Warren Buffet had been an advisor he would have lost his business several times over by swimming against the prevailing current. However, he is stoic and he runs a close-ended vehicle with a long-term value style - people can say that he has lost his edge all they like but he can’t have outflows. Soros on the other hand fully recognised the behavioural element of markets and famously exploitedgreater fool theory through several boom and bust cycles in several asset classes. He also had an incredible sense of timing, part of which was reliant on indicators like his own back pain (a spasm in his back would often preempt a crash).
Our approach is a little more mundane than either or those investors - from a valuation point of view, we aim to ensure that the investments we hold are coherent with the objectives of the portfolio in question. But there is also a limit to how much we will second guess a market that is usually approximately right and so, like everyone else, we still have a reasonable exposure to the large tech companies that dominate world indices as well as the ‘quality’ healthcare stocks that have also done so well. At a point like this though, when the greater fool starts to become more visible through the market mist, we will start to focus our research on areas where mere high single-digit returns can be reasonably expected, just in case someone’s back starts playing up. And if, in the future, someone decides to pay more for those kinds of investments because they come back into vogue then so much the better.
In this episode they discuss:
We just had a seven year business cycle in 6 months - are we moving into ‘exponential time’ again?
If uncertainty has increased in the last few weeks but directionality remains difficult to divine - what might give us a clue about market direction?
Why the Fed action, finally, is now ‘just printing money’.
What might the 2020’s like when we look back from the 2030’s?
Why the Fed action, finally, is now ‘just printing money’.
What might the 2020’s like when we look back from the 2030’s?
In this podcast they discuss:
-
Timing a move down the market cap spectrum
-
Making the most of volatility - do your homework first
-
Letting go of COVID winners
-
Where is the value now? Where are the risks?
-
Fundamental investors vs passive retail whose eating whose lunch now?
In this episode they discuss:
-
Three time horizons, three investment narratives
-
A very short term monetary drought
-
Some more pre US election bazookas
-
Constraints in the medium term
-
Make hay in value stocks while the sun-shines
-
And what of the long-term? A new multi-currency regime?
Government bonds - safe haven or hot potato?
In this episode they discuss:
-
Why markets are not reflecting the economic impact of COVID.
-
What other unintended consequences are the Fed’s efforts to stimulate the US economy having?
-
Persistent negative real (after inflation) bond rates have not been seen the Seventies - does this presage a new and different monetary and currency regime in the future?
-
Growth stocks seem to have benefitted from lower interest rates as well as operational leverage but where does that leave unloved value stocks and traditional industrial companies if there is indeed change in the air?
In this podcast they discuss:
-
Why you REALLY do have to buy before the good news arrives
-
Are there still bargains out there after the bounce?
-
What are markets telling us? “Sometimes markets tell you nothing, just what price desperate people are willing to sell at”
-
Emerging markets why now, when COVID is hitting many economies with less developed healthcare systems?
-
What lasting impact might this be having on consumer trends ?
-
Could a a framework for dealing with consumer behaviour be useful for advisers? React, Reflect, Re-evaluate, Respond
In the episode the panelists cover the following issues:
- Whether we have we reached a point where partisan politics, trust in government and media bias are having an impact on economic outcomes?
- Will reopening happen soon enough to avert a self-fulfilling economic disaster?
What are the economic implications of reopening in different economies or bubbles ?
- Will monetary stimulus be enough to bridge the gap?
- How are the different approaches to fiscal stimulus working in the real economy?
This is also available as a video here.
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss:
Is the v-shaped rally just a financial phenomenon? Is there any medium term basis for that in the real economy?
How big was the latest round of monetary stimulus? What does the equivalent of 5% of GDP cash injection into the US economy really do?
Where does the money end up? Who gets the funding and who doesn't?
Could there be a ‘crowding out’ effect in the private sector?
The financial system seems to have weathered the initial crisis just fine but are we fighting yesterday’s battle?
Continental Europe, the UK, the US, Asia and Australia/New Zealand all have very different COVID experiences - what are the implications for their economies and companies?
Join InvestSense Director Jonathan Ramsay and Andrew Hunt of Hunt Economics in this podcast as they discuss:
-
The 4 stages of the economic response
- Providing Liquidity to the banking system - tick
- Getting money into the real economy - work in progress
- Getting Dollars out into the global ‘system’ - patchy progress and room for slip-ups
- The new world of modern monetary theory by default
- The implications for economies and markets
- How to invest in this environment - probably the tip of the iceberg and the start of a year long conversation
Join InvestSense Director Jonathan Ramsay and Trinetra Investment Management’s CIO Tassos Stassopoulos in this podcast as they discuss:
- How might different cultures react differently to COVID-19 and do we need to interpret the data in light of that? (2mins)
- How do we start working out the investment implications of the WHO data that we are all watching so closely? (7 mins)
- What is Trinetra buying now and why? (12.45 mins)
- How do you model the impact of the support for business recently announced by many Governments? (18.40)
- The importance of liquidity in these markets. (23.45)
- How do you manage your own psychology in these kinds of markets? (27mins)