Hedge Clippings | Friday, 22 January 2021

Bubble, Bubble, Toil and Trouble...

So the Donald has finally gone - or at least has left the White House - and thus a new era begins. History will judge both the man and his presidency, but he was, if nothing else, a paradox: Immensely divisive, yet at the same time he managed to unite those who believed him and his rhetoric as few others have been able to do.

Arnold Schwarzenegger compared his antics to those of Nazi Germany's Kristallnacht (or Night of Broken Glass) and maybe that provides an indication of his similarity with another with the same ability to unite, and divide, so comprehensively.

And so on to Joe Biden's term - the 46th President of the United States of America - however long that lasts at a time when "united" is hardly an apt description. In many ways his legacy will not only be how he manages to handle the medical crisis the USA faces, or the trillions poured into revitalising the COVID ravaged economy, but in how he manages to put the United back in to the States.

Sadly there are some Trump supporters who will never be a party to the unification, irrespective of how well Biden manages the health of the nation, or the economy.

Looking Forward, Looking Back

At this time of the year it is customary for Hedge Clippings to look back over the year just past, and forward to the next 12 months. Actually 11 months, as that's almost all that's left of 2021.

Looking back, it was a year that most will want to, but are unlikely to forget. At the same time as creating unforeseen challenges, there were undoubted winners, with actively managed funds being amongst them. While the ASX200 Accumulation Index did well to recover from the collapse of the market in February and March to close out the year just in the black, 1.40%, the average equity based fund in AFM's index returned just over 10% after all fees.

Full details are available here. We could spend significant time and space listing others who we would categorise as being on the positive side of the ledger, but Australia as a whole, thanks to some geographic good luck and swift action at nearly all levels of government, with the occasional hiccup, certainly did better than most in handling COVID.

Looking back is easy, so what about the future? There are warnings of an asset bubble, thanks to interest rates that are effectively zero, and the massive stimulation provided by governments the world over. Seeing as neither of these are going to change for the next 12-36 months at least, bursting the bubble is unlikely in the immediate future.

However, eventually inflation must rear its ugly head again, and as the era of easy money comes to an end that's when things will become interesting. Bubbles can't continue forever, and as we saw with the South Sea Bubble, 1929, 1987, the tech bubble of 1999, or the GFC, they normally end in tears.

The issue is the timing. Exit too early, and one is likely to miss out. Too late, and watch out. Diversification and keeping correlation between assets (including between funds) low should enable the middle "Goldilocks" course of not too much exposure to risk, and not too little to be navigated.

News & Insights

Video interview with Rob Hay from Collins St Asset Management

ESG Insights: Banks are putting the squeeze on fossil fuels by Nikko Asset Management

Hedge Clippings | Friday, 15 January 2021

Happy New Year, and welcome back to Hedge Clippings for 2021. Although it is still in that traditionally quiet time between Christmas and Australia Day, we hope you will excuse a briefer than usual commentary. You might even enjoy a briefer than usual commentary, but that would be a cruel comment this early in the New Year.

Whilst the world has been in turmoil since the last edition of Hedge Clippings, yours truly has been in slow motion, to say the least. A planned Christmas Day on the Northern Beaches was disrupted by the Avalon cluster, and planned visits to the beach or the golf course were disrupted by incessant rain. This left little choice but to watch in dismay at the antics of Trump and his supporters, and attempts by Boris to put a positive spin on the U.K.'s efforts to handle COVID.
 

It is difficult to use the words riveting or fascinating when describing either of the above, but at least the remote control allowed both to be switched off, with Twitter and Facebook each doing the honours as far as Donald's online exposure was concerned.
 

As such, plenty of time was spent reading. We can recommend Matthew Syed's "Black Box Thinking" (available as an audiobook), or for a different pace and a different era, the story of Edward John Eyre, the first European to traverse the coastline of the Great Australian Bight and the Nullarbor Plain by land in 1840-1841. Whilst Eyre's name is well known for his exploits in Australia, what is less well known is that in 1846 he was appointed Lieutenant Governor of New Zealand, and in 1861 he became acting governor of Jamaica. It's amazing how much time one has to discover such things when not engrossed in managed funds.
 

Speaking of which, fund managers have a challenging year ahead, both economically, politically, and navigating a market which some believe to be in extreme bubble territory. From a price perspective that may well be. However relative to interest rates at zero, and the guarantee of trillions of dollars of government support globally distorting the normal economic indicators, there are those that believe the party is likely to continue for a while yet.
 

One caveat to that may be the emergence, or re-emergence, of inflation as a reaction to rising interest rates as an antidote to easy money.
 

More than ever before 2020 will go down as a year of two halves, or possibly quarters, and not only based on COVID and economic activity. Managed funds will be divided into those that made the most of opportunities in 2020 and significantly outperformed market indices, and those that failed to do so. We will include more details and examples of these in future editions of hedge clippings, so "stay tuned" as they say.
 

It won't be the last time that we mention "there has never been a more important time for investors to be fully informed".

Hedge Clippings | Friday, 18 December 2020

As Hedge Clippings wraps up for the Christmas break, on reflection it is probably the understatement of all understatements to say it has been an extraordinary year.

Obviously COVID has not only dominated the headlines, but created a new way of thinking about life, and how we live it. However even pre-COVID the year got off to a rocky start, dominated by bushfires, whilst towards the end of the year we had the spectacle of the US election, and Donald Trump's refusal to concede defeat.

The bushfires have thankfully (for the moment at least) gone, only to be replaced 12 months later with flooding on the east coast of Australia. Equally, Trump seems to have gone (for the moment at least) to be replaced by what might be termed a more "normal" or at least "presidential" President. We will obviously have to wait and see how that pans out, but for the immediate future, and we suggest for the next 6 to 12 months at least, the focus will remain COVID.

It has, if nothing else, been an interesting year. Fittingly it is a Chinese proverb - more normally referred to as a curse - which best describes 2020: "May you live in interesting times".

(And just to remind us, the breakout on Sydney's northern beaches is a stark reminder not to become too complacent.)

There will be plenty of time over the coming months, years and even decades to reflect on 2020, but instead of looking back, let's look forward: All the anecdotal, statistical and financial/market evidence we can see points to (subject to the successful rollout of a vaccine) a burst of economic activity. Some may see it as a rebound, but in Australia at least there does seem to be a genuine improvement in household savings and consumer confidence.

On a national basis our relationship with China remains a problem, and one which is unlikely to disappear in a hurry. However, as we have discussed previously, diversifying one's customer base, either on a corporate or national basis, will not be a bad outcome in the longer term.

Globally there is obviously still a long way to go, with the immediate and short-term future highly dependent on the much anticipated rollout of successful vaccines. However, once in place one would assume the recovery, buoyed by unprecedented global government stimulus, will also be significant.

Closer to home, in fact right here at Hedge Clippings, we are about to unveil a fresh new look for our website www.fundmonitors.com, albeit with the same core content of "Trusted, Targeted Research", with information and analysis of over 550 managed funds. Friday afternoon, particularly the last one before Santa slurps and slides down the chimney, is NOT the time, nor place for a promo, but we hope you will appreciate the changes we're about to make, and either way we will appreciate your feedback.

Which finally leaves me to thank all those - investors, advisors and fund managers, clients and suppliers - all of whom play a distinct and essential part in what we do. Importantly a special thanks to AFM's and OLIVIA123's hard-working and dedicated team who have made the year a success.

And on that note, have a great weekend, a happy holiday, and most importantly a safe and healthy 2020 to you and your loved ones. We'll be back in mid January, refreshed and no doubt raring to go back on the diet we started in February this year!

News & Insights

Equities: I can't live with you, I can't live without you by Darling Macro

Hedge Clippings | Friday, 11 December 2020

From Gloom & Doom in 2020, through to Zoom, and in 2021, Boom!

As we've mentioned previously, 2020 has been a pretty extraordinary year. However the icing on the cake (is that one metaphor too many?) would have to be The Westpac-Melbourne Institute's index of Australian consumer sentiment, which now sits at a 10 year high.

This is surely the snap-back to end all snap-backs, and one just hopes it's not like the proverbial bungee jump, where you never quite reach the previous level before going into a series of dips, and eventually coming to rest at rock bottom. But, as they say in the classics, "maybe this time it's different".

And all the indicators are that it is different this time. It was certainly the shortest, sharpest recession, and it elicited the fastest, most drastic, and financially dramatic government response that in any other circumstance would have been considered totally irresponsible. The same could be said of Victoria's lockdown, which while it attracted much criticism at the time, was in hindsight the only available option open to Daniel Andrews.

So, assuming Australia is not struck by a "second wave", we now have consumers and households who, having been the recipients of financial support they were not expecting, and not having much opportunity to actually consume, have built up their household savings (or raided their super), and now appear to have a pent-up, relief driven urge to spend it.

And while overseas travel is still a long way off, they only have one place in which to do so.

Many businesses meanwhile, depending on the sector they are in, have also benefited from the government's job keeper and other programs, or for the tradies, a renovation boom and the prospect of a massive infrastructure pipeline. The local tourism sector might be missing the overseas traveller, but they've been replaced by locals, many of whom will spend a lot more than some of the backpackers they replaced.

Enthusiasm and confidence is infectious, and will flow from consumers, through to business, and thus through to employment. Happy Days.

Of course trade with China remains a problem, and one that is unlikely to be resolved in the short or even medium term. It may be easy to say, but possibly there is a silver lining there in the long term as well.

Certain sectors, such as agriculture and education, had possibly become overly reliant on one dominant customer. So being forced to diversify their risk by having to seek out new markets, whilst painful in the short term, could lead to a more robust and broad customer base in the long-term. Paul Keating once famously said "this is the recession Australia had to have", and maybe there is an element of that logic in having to search out new markets.

The release of COVID vaccines will further boost consumer confidence, but is unlikely to see overseas travel - in or outbound - taking off (excuse the pun) in the short term. Not only will it take some considerable time to roll out vaccinations across a sufficient proportion of the US, Europe or the majority of the world's population, but one would assume that the depth and extent of the pandemic's grip will significantly delay a return to normal.

Which takes us to the great unknown in 2021, namely what sort of President will Joe Biden turn out to be, and how quickly will his presidency impact on both the domestic and international stage? 

The other question of course is how Donald Trump will behave at Biden's inauguration?

One would expect predictably!

News & Insights

Video interview with Rodney Brott from DS Capital

Hedge Clippings | Friday, 04 December 2020

It's been what one might call a Topsy-Turvey year. We understand that is not a very technical or well-recognised financial term, but from where we sit (or stand) it seems to sum it up. Topsy-Turvy it might have been, but compared with where we were in April or May, or where Victoria was during their winter lockdown, Australia seems to have fared relatively well all things considered.

We are certainly fortunate to be an island nation, tucked away down at the bottom end of the globe. We are fortunate not to have had the chaos that has enveloped Europe and North America, and seems likely to continue to do so for a while yet in spite of the recent announcements regarding the release of COVID vaccines.

In reality of course it's been a shocker of a year, thanks to COVID and its aftermath. The domestic economy has been battered, but has amazingly bounced back from one of its worst quarters of financial growth to record one of its best. There is a significant cloud on the horizon for the agricultural and education sectors as they struggle to deal with their largest trading partner, but the reality is probably that they became complacent and over-dependent in the first place.

If nothing else, both Australia and the world are now seeing the Chinese government's true colours. Exporters might as well get used to it and find new markets, even though in the short to medium term that will be a painful exercise.

While on the subject of painful exercises, sooner or later Australia's own government (of whatever hue) needs to bite the bullet and address the issue of our highly inefficient tax system. Yesterday the OECD released "Revenue Statistics 1965-2019" which showed that at 60% we have the second highest dependence on taxes raised from income and profits among 37 advanced countries.

This isn't even close to the OECD average of 34.3%. Equally, the GST makes up just 11.7% of total tax revenue, compared with the OECD average of 20.4%. Part of that issue of course is that the GST is only levied on less than half of Australia's overall consumption.

In spite of this, Australia's overall tax level is 28.7% of the economy, which is below the OECD average of 33.9%. This tells us two things: firstly that the major source of taxation revenue that the government relies on, whether it be company tax or personal income tax, is inefficient and in many ways counter-productive.

Secondly, and the politicians in Canberra must know this, they lack the fortitude or ability to address the issue at the ballot box. Last week's Hedge Clippings had a whinge about Australia's superannuation system which, when all is said and done, is another arm of the taxation system.

So we are left with two highly inefficient and overly complex systems. One of our ongoing dreams is that the GST will be raised and expanded as a tax on consumption, such that the higher the consumer's level of spending, the more they contribute. That at least would lead to a simpler collection system.

Another is that there should be a strong incentive (or should that be a penalty) to encourage superannuation funds to invest long-term in infrastructure projects, thereby merging the opportunity with the need for investment into that sector.

Of course it's not easy for the government, when a logical and sensible plan to limit cash transactions to $10,000 (as is required in the banking and financial services sector) was this week dumped, or should we say torpedoed, by the cross benches. That luminary from Far North Queensland, Bob Katter, somehow described the proposed ban on cash transactions as representing a danger to Australian freedoms "greater than the danger to our lives through terrorism".

Meanwhile, One Nation Senator Malcolm Roberts claimed that the ban "criminalises the use of legal tender, cash, for everyday Australians".

What planet are these two on? If Katter and Roberts don't realise it, terrorism is financed through donations made in cash, simply because it's untraceable - or difficult to trace. And it is the criminals that use wads of cash greater than $10,000 to conduct their "business", not everyday Australians.

The mind boggles! But it's Friday. Where's that glass of pinot?

News & Insights

Staying Overweight Japan by Arminius Capital

Hedge Clippings | Friday, 27 November 2020

Australia's Superannuation System - Maybe not so "super" after all?

Regular readers of Hedge Clippings would know that we're big fans of Australia's compulsory superannuation system. In fact, it is admired around the world. However, that doesn't mean it's perfect by any means.

How do we know that? Well for a start, if it were perfect the government wouldn't have had to commission a Retirement Income Review to take a look at it. And again, if it were perfect the resulting report wouldn't have had to run to 650 odd pages, and it wouldn't have taken the government 5 months or so to "review the Review".

Bear in mind the Review itself was only produced on the recommendation of the Productivity Commission in its own report, "Superannuation: Assessing Efficiency and Competitiveness".

Put it all together, and that's a lot of paper. Thank goodness it's all online, so we don't contribute to global deforestation when reading (skimming?) through it. But we digress...

The Treasurer in his media statement (not surprisingly) leads with the statement that "the Australian retirement income system is effective, sound and its costs are broadly sustainable". It goes on to mention three over-arching observations about the system, the first of which is positive: "the system, being the Age Pension, compulsory superannuation and voluntary savings, continue to provide effective support to Australian retirees and are sustainable in the long term", while only then mentioning that "there is a need to improve understanding" and then "the system would benefit from a clear objective..."

Did we mention it was a media release and therefore no doubt written by a spin doctor? The government is going to use this to argue that the SGL doesn't need to - or should not for the time being - increase above the current 9.5%, partly due to the effects of COVID putting excessive stress on wages and other parts of the system.

That's not really our current gripe, which is that the super system is far too complex. The Treasurer notes that reducing fees and improving returns will lead to an extra $17.9 billion in the system over the next 10 years. Admittedly we have not done the maths, but simplifying the complexity such that the average person can understand it without needing an accountant or tax agent to unravel or explain it might also lead to considerable savings.

Next, back to the SGL of 9.5% - or 12% or whatever. This is essentially a "flat tax" levied at the same rate, irrespective of income. So a wage earner on $50,000 pa "pays" the same percentage rate as someone on $500,000. Like it or not, the wage earner is probably still going to end up on the pension on retirement and may not even own their own home, while the person on $500,000 will have accumulated significant assets, both in super and elsewhere, and have no doubt paid off the mortgage on a substantial home.

Having done so, the affluent don't spend their super or their other assets. They sensibly do everything they can to preserve their hard-earned wealth, which doesn't help the economy much. Meanwhile, the $50,000 wage earner would spend the 9.5% over their working life, tipping it back into the economy.

There are other examples of where or how the government could increase spending - HECS for example. Instead of graduates paying interest to the government on their student loans, why not forgive their debt? As young people they'd have more in their pockets, and as young(er) people they'd spend it at the time they need it - buying a house, shopping at 100 year old Gerry Harvey's stores, and starting a family for example.

This all may seem far-fetched, but consider this: The government has kept the economy from completely tanking during COVID by (correctly in our view) showering the working population with helicopter money, and permitting the early withdrawal of super, all - or most of which - has made its way back into the system. Except from the wealthy or retirees, who have probably used it to shore up their savings - or to make up for the reduction in dividends from the likes of Westpac.

We could go on, as there are many, many aspects of the super system which could - and hopefully will - be introduced following the government's "careful consideration" of the Review, including allowing a portion of one's super to be used as a deposit by first home-owners, but time and space doesn't permit.

News & Insights

Video interview with Charlie Aitken from Aitken Investment Management

Video interview with Alex Lee from Laureola Advisors

Australia's Banks Are On The Road To Recovery by Arminius Capital

Hedge Clippings | Friday, 20 November 2020

It would seem that with the recount over in Georgia that Donald Trump will finally have to concede, although he's still fighting hard to have the result in Pennsylvania overturned and let the Republican controlled legislature choose the winner instead of the electorate.

And guess who they'd presumably choose?  One can't accuse the Donald of being a defeatist or giving up early, irrespective of the cost and damage done on the way out of the White House.

Back to reality, as opposed to Reality TV politics.

While the US and Europe (and most of the rest of the world) are entering a dangerous winter as COVID cases surge, Australia and South Australia in particular, appear to have worked out that if you strike hard enough, and early enough (perhaps not early enough in Victoria's case, but hindsight's a wonderful thing) then the chances of things getting out of control are significantly diminished. 

Irrespective of the timing of a release of an effective vaccine, it's going to be well towards the end of 2021 that life returns to semi normal, and that's without factoring in how the economy, both here and overseas, will respond and recover.

Meanwhile in China, there's another potential storm brewing - and not one of name calling and rhetoric, at least not yet. Rather, defaults by three state owned companies (SOE's), a chipmaker, car manufacturer and a coal company, have sent jitters through China's credit markets. As Bloomberg reports, "the big questions when it comes to SOE's is whether they are happening with the blessing of Beijing as authorities try to reform the bond market, or whether they're happening outside of government control".

In a controlled economy (and state) such as China, it's difficult to determine, but if it's the latter and more SOE's default on their debt repayments, then it will be a case of "Beijing, you have a problem". How the government will react is anyone's guess, but based on past performances they're unlikely to 'fess up and admit making a mistake, or being at fault.

Bloomberg is suggesting that if it is being controlled, - by deflating a massive debt balloon slowly rather than letting it pop suddenly, then using friendly (controlled) Chinese credit rating agencies would be one way of doing it. However, Chinese ratings agencies aren't that good at doing their job.  The coal company, that was one of the three defaulters mentioned above, was issued with a triple-A rating just a few weeks before defaulting.

Either way it's potentially a risky environment - as anything is when dealing with China. Just ask Scomo! And don't you dare mention where COVID-19 originated!

And on that note have a great week-end!

News & Insights

Video interview with Dean Fergie from Cyan Investment Management

4 Answers to the RBA's Toughest Questions by Nikko Asset Management

Hedge Clippings | Friday, 13 November 2020

Hedge Clippings is at a loss for words (not a frequent occurrence, as some might understand) when it comes to the US election - or at least to Trump's reaction to his loss. Come to think of it, is seems the Donald himself is also at a loss for words as well, as his public statements have been few and far between. There's an underlying concern about the state of democracy in the US, and the turmoil his refusal to accept the result is creating.

Of course, The Donald has never been shy when it comes to controversy, whatever the expense. Sadly his legacy is one victim of his personality, however one might view his achievements over his single term. The other, more concerning issue is the potential damage done between now and the 20th January, and the opportunity it provides to other powers - China and Russia in particular - to take advantage of the vacuum.

Meanwhile back to business! In the managed fund sector, or the broader equity market, and for that matter in financial markets as a whole, we are constantly faced with "averages" which although technically accurate, can be highly misleading.

There's an old saying regarding averages: "When your head is in the freezer, and your toes are in the oven, your temperature is average." So it is with managed funds, particularly with actively managed funds. And even with ETFs and index tracking funds the reality of course is that the index itself is an average. In the case of the ASX 200 made up of 200 stocks, each of which perform significantly differently to produce the average or index return.

At www.fundmonitors.com we frequently quote a whole range of averages, but behind those there is a wide distribution of returns from individual funds. As can be seen from the chart below which just singles out Australian Long Short funds (including Equity Market Neutral, and 130/30 funds) the performance over 12 months to the end of October ranges from -50% through to +20%.

However even the headline returns of individual funds can be misleading - or at least need to be investigated as shown by the results for best and worst month highlighted by the green and red dots. While there are a number of other key performance indicators that need to be looked at such as volatility, Sharpe ratio and up-and-down capture, the best and worst month can give a good indication. Risk and return varies from investor to investor and whilst all investors seeking good return many of also wanting to do so without access volatility or risk.

What is also interesting from the chart below is that, in spite of the big variances between the best and worst months, the majority of Long Short funds, which are often considered to be more risky and more volatile than the market, have in fact outperformed the ASX 200 accumulation index (shown in orange) which has fallen just over 8% over the 12 months to the end of October.

The above chart is interesting: the bars clearly show the majority of funds out performed the ASX200 Accumulation Index, generally accepted as the relevant benchmark, although some may argue that as long/short or absolute return the appropriate benchmark is anything above 0%. However, equally telling are the red dots representing each funds worst month, and to a lesser degree the corresponding green dots.  Simply put it is much easier to perform well over the longer term (even though we have only focussed on 12 months in this instance) if you can avoid the market's worst months. Protection of the downside is a vital aspect of performance, and depending on the investor's risk appetite, an important KPI when evaluating any fund.

News & Insights

Video interview with Garry Rollo from Montgomery Investment Management

Amazon, Volatility, and the Virtue of Patience by Aitken Investment Management

Hedge Clippings | Friday, 06 November 2020

"It has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time...." So said Winston Churchill on Armistice Day in 1947.

But Churchill's quote also included:

"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise."

Isn't that the truth!

And while we accept that the US system is democracy in action, one would have thought it is not what George Washington and his fellow founding fathers quite had in mind way back when they created the Constitution. They obviously hadn't allowed for Donald Trump, who, irrespective of one's liking or disliking of his policies, seems to be playing by his own rules.

It's been wall to wall, and minute by minute on the news channels, and if nothing else has pushed COVID, record low interest rates, and a record loss by the Wallabies to the inside pages. In the case of the Wallabies, thankfully so.

Amongst all the commentary and humour, we think this one sums it up best:

"A new analysis by some guy on Twitter has found that Donald Trump would have been re-elected with an overwhelming majority if none of the votes for Joe Biden had been counted."

You can read the full text here.

So there's nothing much that Hedge Clippings can really add to our comments of last week - namely that the polls might be incorrect, the result seemed to be up in the air, and that a tie or contested result wasn't out of the question. The sad reality is that whatever the result, the USA, as "leader" of the democratic world, will be at best divided, and at worst...

Back to interest rates, but more importantly to their "QE" program - namely buying $100 bn. of government bonds ($80bn Federal, $20bn State) over the next six months. While the new ultra-low rates won't make much difference to borrowers once the banks do/don't pass all the savings on, from the perspective of a depositor there doesn't seem to be much of a case for leaving any money in the bank. Unless of course you're worried about loss of capital.

While caution is required when reading glitzy ads (for example Mayfair 101 as reported by the AFR's Jonathan Shapiro) there are good opportunities to get both a reasonable return with acceptable risk. Check out www.fundmonitors.com.

We're living in strange times, and a strange economy. Major exports are under threat from China, who seem intent on punishing Australia for not kow-towing when told to, and having the temerity to have an independent opinion.

Domestic and regional tourism however seems to be going gangbusters, and with the opening up of state borders (more or less) likely to make up for much of the loss of overseas tourists.

Meanwhile Europe, and much of the rest of the world, continues to suffer with little end in sight to a long (indoor) winter.

As the old Chinese curse goes, "May you live in interesting times".

News & Insights

Video interview with Richard Ivers from Prime Value

ESG INSIGHTS Biden's most critical investment by Nikko Asset Management

Hedge Clippings | Friday, 30 October 2020

Next Tuesday - well, it will actually be Wednesday in Australia - the world as we've known it for the past 4 years or so will have changed, or not as the case may be. In any event, the US election will be all over bar the shouting, and there's been plenty of that.

Or will it? While the polls are pointing to a Biden victory, we all know that polls can be misleading, (just ask Bill Shorten). However in the US there is a greater chance of the polls getting it wrong (refer Hilary Clinton) partly as voting is voluntary, and partly due to the "system", whereby whoever wins in each State effectively receives 100% of that State's vote.

As such, from what we understand of it, Florida could hold the key to the White House, although an interesting spectacle may arise if Trump decides he does not want to hand the keys over. Further complicating the pollster's task is the record level of pre-election day voting, and further complicating that is the complexity of the pre-polling rules and regulations.

A result that seemed clear cut a few weeks ago would appear to be up in the air with just three or four days to go, so Hedge Clippings is going to hedge our bets, and predict it could go either way, with a tie, or at least a contested result, not out of the question.

This week we had the opportunity to run a webinar to canvass the views of three fund managers, namely Rodney Brott from DS Capital (Australian equities), Robert Swift of Delft Partners (Asia), and Chris Wheldon from Magellan (US/Global). The discussion was not so much on the politics and personalities behind the election (although that's difficult to avoid), but on the economic and market effect of the outcome - win, lose or "draw" - to either side.

What was interesting was that, in spite of the different strategies involved (or at least their geographical focus), while there were different views, there was also a broad overall consensus. A Trump win would mean more of the same, Biden would see a marginal move to the left, particularly given the hard left views elsewhere within the Democrats, and a "draw" would lead to uncertainty, and markets hate uncertainty.

Other key themes to emerge were that, whoever wins, the US is waaaay overdue increasing spending on infrastructure, and that the race for the White House is only part of the issue, with predictions that the Senate could well change to Democratic hands, potentially giving them the trifecta of the Presidency, Senate and the House of Representatives which they already control.

Whichever way, possibly excluding a Trump victory and a Republic Senate victory, volatility was expected to increase. To the average investor volatility is a negative, but as Chris Wheldon from Magellan pointed out, to a fund manager volatility can create opportunity - namely to buy stocks that are oversold, that were previously overpriced.

Another theme to emerge was that even though Trump's persona (narcissistic personality disorder) alienates many of his countrymen and women, and seemingly a majority of Australians, from a policy perspective (up until COVID) he had some significant achievements: No war on his watch (in fact, troop withdrawals), increased employment, reductions in taxation.

Meanwhile in the foreign policy sphere: Standing up to North Korea (and Iran), confronting China's threats to security (and particularly  IP theft), moving the US embassy to Jerusalem, leading to the recognition of Israel by the UAE.

If you have the time (45 minutes) you can watch the recording here. 

One other topic canvassed was the recent move upwards in US 10-year bond yields, as highlighted last Friday in Longview Economics' weekly report, headlined "Bonds - the BIG SHORT?". As Longview's research states, "Bond yields dictate and determine key big picture sector allocations. Getting bond yields right, therefore, is critical for most money managers/investors."

Longview point out that having made a record low on 4th August, 10-year bond yields have been edging higher, and more recently accelerating such that they have broken the 50 day moving average and have now reached their 200 day moving average, a key technical resistance level.

Longview conclude that the level of stimulus in the pipeline is especially large, and the case for a global economic boom is growing - assuming a vaccine can be successfully developed and released. And finally, the potential for further fiscal stimulus post US election (and presuming increased infrastructure spending) could see an increase in medium term US inflationary pressures, and thus higher bond yields.

Watch out!

Of course, also in the diary next Tuesday is the Melbourne Cup, which this year will be spectator free and therefore presumably silent. At least Victorians will be able to party, even if not at Flemington itself. Congratulations to all Victorians for their patience (even though we've heard a few grumbles from some quarters) while under lockdown.

News & Insights

Webinar: Fund Manager Roundtable on the US Election

The Presidential Volatility Kink by Arminius Capital