There’s much to learn from history, but every time is different when it comes to markets. Inflation in the 2020s was very unlike that of the 1970s. The inevitable recession that did not occur was likely prevented by unprecedented fiscal stimulus. Going forward, short-term interest rates will likely fall, but long-term rates might rise. Equities are unlikely to revisit the frothy heights of 2021 and market breadth should widen. As cyclical inflation subsides, structural price pressures driven by reglobalisation and the energy transition will collide with the deflationary force of AI. The backdrop for investing will require investors to identify how the outlook today intersects with our experiences of the past and where it differs. This time is different because every time is different.
The COVID pandemic was a natural disaster, yet the two-pronged stimulus response of monetary and fiscal policies was designed for an economic crisis worse than the GFC. The combination of the pandemic and the policy response resulted in a surge in economic and inflation volatility from 2020 to 2023. We are now entering a new phase where this economic cycle will mean revert to a traditional business cycle - a cycle that may not exactly repeat but will rhyme with prior inflation cycles. Opportunities exist in global bonds in 2024 and 2025 no matter hard or soft landing outcomes – including US Treasuries, US Agency MBS passthroughs and select local currency emerging market bonds in Latin America.
It seems likely that history will indeed repeat, with Donald Trump and Joe Biden the likely nominees for the 2024 US presidential election. The result will have ramifications that extend well beyond America’s borders. Second term presidents tend to be more ideologically aggressive, since they are freed from the need to face voters again. At a minimum, a Trump 2.0 administration would likely boost traditional energy, defence, and financial services, among other sectors which would benefit from lighter regulation. Meanwhile, Trump’s “America First” trade policies could be inflationary and further increase US tensions with China, given Trump’s promise to revoke China’s Most Favored Nation trade status it has enjoyed since 2001. Investors globally need to think through the implications of a second term for either candidate.
Every day we are inundated with bold macroeconomic and geopolitical prognostications about the year ahead. While investors need to be mindful of the potential risks posed by different stress events, they should largely ignore macro and geopolitical predictions when it comes to selecting companies to invest in. Indeed, almost every consensus forecast for 2023 turned out to be wrong, from a resurgent China to Tech valuations being pummelled by the most aggressive rate hiking cycle in a century. A disciplined, bottom-up approach that guards against “black swan” events is a surer path to success. History does however provide a powerful guide for the performance of investment styles, and Quality, Sentiment, and Value are well poised.
The term “BRICS” was coined in 2001 and, since then, BRICs nations’ share of Global GDP (PPP) has surpassed that of G7 nations. Today, certain developing economies (Vietnam, Indonesia, India and Brazil) are set to continue the trend of economic catch-up. These economies are still on low levels of income per capita, and growth is driven by sound economic policies, strong balance sheets and a reconfiguration of the global supply chain. A declining US dollar and interest rates has also been a boon to EM equities. Equity valuations are at attractive levels for most emerging markets but the lack of interest in emerging markets in general has led to extraordinarily attractive valuations even though the top companies are growing persistently. History may not repeat, but often rhymes. Historically, such extreme valuations have led to outperformance over the longer term - for example, coal a few years ago, US equities during the GFC, and banks when the consensus believed that interest rate was staying at zero forever!
Private Credit has experienced tremendous growth, becoming a US$1.4 trillion asset class that is expected to scale to US$2.3 trillion by 2027. Despite 8% to 12% annualised returns, outpacing traditional fixed income and even exceeding long-run equity returns, some commentators argue that Private Credit represents emerging systemic risk. That is a fundamental misunderstanding of Private Credit. There are lending verticals where banks are not efficient capital providers or cannot lend economically, due to structural changes, regulation and changing prudential standards. Credit funds can capitalise on this dynamic by providing tailored lending solutions to borrowers, earning a premium in secured, asset-backed and defensive loans, often the ones banks provided historically. It is a generational opportunity for outsized returns per unit of risk - a structural evolution, not risky business.
The top 20 stocks comprise 63% of the ASX200, and the index is heavily skewed towards banks (20.9%) and iron ore miners (14.8%). Given the expected negative growth in the banking sector and the vulnerability of iron ore prices due to a weak demand outlook, Australian equity markets could well be anchored by the ‘dinosaur seven’. With inflation at a two-year low but still well above the RBA’s target rate of 2% to 3% and rate cuts still uncertain, the outlook for Australian equity markets continues to look volatile. Investors seeking diversification, reduced volatility, and higher unique alpha over the long term should explore opportunities beyond the ASX20, focusing instead on the Ex-20 index. This index provides exposure to Australia’s future rather than its past and is forecast to have 7.8% EPS growth pa over the next three years.
It’s the year of the vote. A record-breaking 40-plus countries - some two billion people (more than 40% of the world’s population) representing over 60% of global GDP - will hold national elections in 2024, more in a single year than ever before. Yet authoritarianism and illiberal ideas are on the march globally, driven by the rise of strongman autocrats such as Vladimir Putin and Xi Jinping, and identity politics in the West. In such an environment, deglobalisation of the world economy, which accelerated during the Covid-19 pandemic, seems set to continue, exacerbated by supply chain challenges that echo past lessons unlearned. In the context of a challenging environment for liberal democratic societies, investors must understand the geopolitical, social and economic forces influencing the outlook for investment markets. This panel session features three investment experts, each offering and debating a high conviction thesis on a long-term, deep rooted structural change impacting markets over a decade or more:
Global REITs have been overwhelmed by the rapid rise in interest rates, headlines about the demise of the office, and concerns over bank lending to commercial real estate. However, history is not repeating. These issues mask the reality of an industry in strong shape. With lower financial leverage, well-laddered debt maturities and diversified sources of debt, GREITs’ capital structures are well positioned. The office sector has shrunk to less than 10% of the global REIT benchmark and in its place are sectors such as data centres, healthcare and logistics that are benefiting from long-term secular growth trends. Rising construction costs and lower risk appetite have curtailed new construction volumes while demand remains focused on modern, sustainable buildings. As a result, economic rents needed to justify new construction are rising and many segments of the commercial real estate market could face undersupply conditions in the medium term. Consequently, GREIT valuations are relatively attractive, trading at a discount to private market real estate values and, in some cases, below replacement costs. Hence, as a store of wealth with a growing income stream, GREITs now warrant more allocation.
Market cycles show there is a clear anomaly in the Senior Secured Loans space with record setting yields and compelling risk-adjusted returns. High interest rates may be testing company balance sheets potentially increasing defaults, but sitting a-top the capital stack the risk-adjusted proposition from loans exceeds that available across the debt spectrum. While interest rates will likely remain elevated over the next 12 months, even as they fall, lower yields from loans will be offset by a moderation in future defaults, supporting the case for loans’ superior risk-adjusted returns through the upcoming cycle, much like prior cycles – as sung so memorably by the great Shirley Bassey “…it seems quite clear that it’s all just a little bit of history repeating”.
US investment banker J Pierpont Morgan over a century ago gave a stock market forecast which remains as accurate today as then. “I can tell you exactly what it will do for years to come. It will fluctuate,” he famously said. History shows investors should always expect the unexpected – which simply underscores the benefits of adding private debt to a portfolio. It can deliver a consistent yield with lower volatility than other asset classes to help smooth the inevitable cyclical returns of a diversified portfolio. Without it, investors are more vulnerable to the market vicissitudes that can up-end bond and equity strategies with little notice.
For the last two decades, private equity has consistently outperformed the public market, through market cycles and with less volatility. Private equity has won the debate in the minds of institutional investors, with the majority allocating an overweight position. However, an even greater opportunity for alpha exists in the mid-market, where there is comparatively less capital competing for a broader set of investable opportunities. In 2023, private equity continued to show the superior opportunity for returns in the mid-market. Looking forward, the outlook for private equity is stronger, powered by intergenerational wealth transfer, a stabilising macro environment, a large universe of investable opportunities, and the declining number of public companies.
With Australia’s residential vacancy rate at a record low and net overseas migration at a record high, it has never been more apparent that Australia needs a long-term housing solution to help expand supply. With rigorous capital provisioning models placed upon major banks following the GFC, the banks can no longer participate in the market like they used to, providing greater opportunity for real estate private credit lenders to fill the gap. This all combines to help generate attractive risk-adjusted returns for investors in the asset class.
Higher than desired inflation is now structurally embedded in the global economy, driven by the ‘Four D’s of Inflation’ – Decarbonisation, Deglobalisation, Demographics and, new for 2024, Deficits. Critically, the boom-bust inflation cycle of the 1970s gives a useful historical parallel, providing investors insight into the coming decade. Such an environment of whipsawing volatility and low real returns provides opportunity for those prepared, with Australian equities - by virtue of its make-up - standing to provide a natural hedge to ongoing volatility and structural high inflation ahead. But beware, understanding ‘who is in the Chair’ at the Fed, RBA and RBNZ is now more important than ever.
The Magnificent 7 drove markets higher in 2023, accounting for roughly 60% of the S&P500’s 26% return last year. These seven stocks now account for a record 33% of the S&P500’s total market capitalisation. Their market cap is roughly equivalent to the combined value of the UK, Japanese, and Canadian equity markets. The technology sector has now eclipsed its all-time high relative to the S&P 500, exceeding its dot.com bubble highs. So this begs the question – is this a bubble and what is the risk of another tech wreck? In fact, this is not a case of history repeating itself. Stock performance has largely been driven by earnings growth, and valuations are at reasonable levels, vastly different to the dot.com era. And, the outlook remains positive with AI driven spending likely to support earnings growth over the next few years. In short, the technology sector remains an attractive investment opportunity over the next three to five years.
The bulls are back in charge of markets, as investors dream of a happy ending to the seismic dislocation following the global pandemic. Yet, for those willing to look beyond the headline economic data, a more uncertain outlook emerges. In the US, the disconnect between real GDI and real GDP rhymes with the period preceding the Global Financial Crisis. And, there’s the very real chance that history will in fact repeat and deliver a second Trump presidency later this year. Along with heightened global geopolitical risks, the Axis of Autocracy, reduced fiscal support from governments, a deflating Chinese property bubble, and an ongoing US commercial real estate crisis, 2024 is a year for investors to be nimble and tactical. There will be sensational trading opportunities for those able to navigate the risks hiding in plain sight.
Our diverse panel of experts debate which of the high conviction propositions they heard during Markets Summit 2024 they most strongly agreed with and why, including identifying investment opportunities not yet fully priced into the market, and which they disagreed with most and why - and the portfolio construction implications of both…
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The Investment Management Analyst Certificate (IMAC) advances investment management analyst knowledge, skill and expertise in a definitive set of competencies necessary for building and/or advising on quality multi-manager portfolios. It is both a structured post-graduate certificate course in its own right, and the Australian-based Registered Education Program for the global Certified Investment Management Analyst® (CIMA®) program.
What a difference a year makes. In February 2023, investors were preoccupied by the risks of rising inflation, monetary tightening and recession. This year, the focus is on disinflation, monetary easing and economic growth.