The Markets

Date: 27/05/22

With the election over and Australians sending a clear signal to politician’s nationally that we really are fed up with them, hopefully we’ll begin to see change. But then I say that after every election. In my opinion the lack of respect they show each other generally, filters down to a lack of respect from us, for them. I actually feel like it was Mr Howard one minute then the next minute it was Kevin* and Joe on Sunrise and we just went downhill from there.

Rather than pushing self serving agendas and name calling (isn’t that a perfect example of workplace bullying and didn’t someone outlaw that with, I don’t know….legislation?), government needs to just pro-actively co-operate, professionally and efficiently with all factions of society. Any plan that falls short of this basic requirement will always be doomed to failure and unfortunately our economy and way of life will follow suit. Lets hope these guys get it right.

So, where are we with the markets?

There are some severe macro (big) events unfolding that I feel need addressing hence the reason for this email update. They’re nothing that your not already aware of but I just want to drill into the effects so you have a clear picture to reflect on.

Inflation – as you know I’ve been banging on about this for the better part of 10 months. I’m not going to dwell on the underlying causes as I’m sure I’ve already made that case. Instead lets think about what high inflation means to us. Rampant inflation isn’t great but if it’s kept to a manageable level it can have good knock on effects. I don’t mean good in the sense of lets go have a beer and chuckle over how wonderful life is cause it’s not. The old adage of having champaign taste on a beer income is history. We’re all on beer incomes now (low wage growth) and everything is costing a lot more. Even beer!! But, as the RBA increases interest rates things will eventually begin to catch up with inflation, including wages.

Interest Rates – these are going up but as with the cost of living, you already know this. Rising interest will effect 3 primary things,

  1. The cost of your mortgage and/or your ability to get one
  2. A reduction in property prices and
  3. A reduction in company profit

This last point is particularly important because it’s affecting you right now. Companies listed on the ASX borrow money to produce and operate and an increase in the cost of that money (bank interest) translates to a reduction in company profit unless, they pass on this cost to us (the consumer) by increasing the price of their product (inflation) and so it goes on. Some companies have low debt meaning they’re less affected by an increase in interest rates and some companies have strong pricing power meaning they can pass on a price increase and the market just accepts it. Some companies have both. BHP is a good example. They’re well managed, have low debt, are across multiple sectors of global industry and have very strong pricing power. This does beg the question though of “why has BHP dropped from $47 in April to $40 earlier this month?” ($43 today).

The answer is not simple but think of this – when the tide goes out, all boats in the harbour drop!
In this metaphor, the market is the harbour and BHP is a big boat. At the moment, for a multitude of reasons the tide is going out. Have we reached low tide? No! This isn’t a reflection in the quality of BHP as a company or their ability to earn money, they’re a boat so they’ll go up and down with the tide. The thing with markets is often that an overload of unresearched information can cause panic, overselling, overbuying or more generally an overreaction that we can sometimes take advantage of. The best way to deal with this is to always hold quality.

My core investment philosophy is pretty straight forward as you know. If we’re holding large, good quality, well managed companies with low debt relative to their price, that have certain price advantages in the market think CSL, Coles, Endeavour Group, James Hardy etc. you cannot go too far wrong. Of course they’re all boats in the harbour so will go up and down with the tide but they wont sink.

Some Specifics

  • Gold Miners – Not great at the moment unless your already holding it. The cost of production has gone up circa 20% and spot price for the metal hasn’t improved (remember what I said about company bottom lines?)
  • Banks – If holding, not bad but I’m still convinced increasing bad debt from future business and mortgage defaults will impact their share price because of the perceived fear.

If you’d like to have a more detailed conversation about any aspect of your portfolio/s don’t hesitate to reach out.
*Kevin Rudd and Joe Hockey were once regulars on channel 7’s Sunrise program. Being on opposite sides of politics they ribbed each other light heartedly before becoming Labour Prime Minister (Kevin 07) and Liberal Treasurer (Hockey – 2013)

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