China Property: Has the "Grey Rhino" been tamed?

Ox Capital (Fidante Partners)

December 2022

Stabilization of property market in sight = Time to buy quality growth stocks in China.

Relative to most governments in the world, the Chinese authorities proactively controlled and deflated the property
market bubble to sustain a stable economy in the long run. Policy measures, including tighter lending standards and
house price restrictions, were put in place to dampen real estate speculation while containing escalating home and
land prices. Notably, latest statistics from China indicate signs of stabilization in the property market.

1. Policy measures have been effective: Measures put in place over two years ago have been effective and
authorities have started relaxing some policy measures given :

1) Property sales are down ~50% from 2021 levels (near 2015 levels).

2) Housing starts have declined over 60% from peaks to 2023 YTD. Urbanization rate in China is only ~60%,
much lower than that of developed countries, and the lack of new starts in the system will ultimately reduce
overall supply (less completions) in the next few years. As such, supply and demand dynamics will increasingly
tighten.

2. Affordable housing vs. other counties: China property prices are affordable relative to other EM/DM counties
while affordability will improve further as mortgages rates decline.

3. Stimulating growth: The Chinese authorities have started to stimulate the economy, showing an intention to boost growth, increase consumer sentiment and investor confidence. We believe further reforms are likely to mitigate risks to the broader economic recovery. Notably, our base case for China is that of continual policy easing and continued government stimulus, an environment ripe for improving economic activity.

Equity market correction provides entry point. Although we do not believe it is the time to buy China developer stocks given structural headwinds facing the sector (i.e. Lower household formation), and we believe the property sector is set to stabilize rather than a robust recovery.

However, we do believe this set-up of "stimulating growth" is a similar playbook to the GFC in USA and Europe in 2009 when it was a great time to own quality growth companies at deeply discounted valuations. As such, we view a similar set up for many quality growth stocks in China at inexpensive valuations now.

Funds operated by this manager:

Ox Capital Dynamic Emerging Markets Fund

Why government bonds remain a natural choice

JCB Jamieson Coote Bonds

November 2023

Funds operated by this manager:

CC Jamieson Coote Bonds Active Bond Fund (Class A), CC Jamieson Coote Bonds Dynamic Alpha Fund, CC Jamieson Coote Bonds Global Bond Fund (Class A - Hedged)

Investing Essentials: Diversification -

The shield against investment volatility

Bennelong Funds Management

November 2023

As any investor will tell you, investing can be a rollercoaster.

Not all investments behave in the same way - different types of investments behave differently under certain economic and market conditions. Some may go up while others go down. Some may be entirely negatively correlated.

This is where diversification comes in. Essentially, diversification means investing across a range of different investment types that behave differently across a full investment market cycle. While nothing will give you an absolute guarantee against loss, spreading your investments across different investment categories and types of assets limits your exposure to individual related risks.

Risks can be in the form of market risks, where the market may become less valuable for assets within a particular class due to external factors, like interest rate changes, war, or weather events. Or, they can be asset-specific risks, which come from the performance of investments or companies themselves, often dependent on management's performance, operational activities or competitor actions, for example.  

There are all sorts of ways to diversify your portfolio to mitigate these risks. Diversification can occur across asset classes (e.g. equities, property, cash), industries (e.g. telecommunications, agriculture, financial services), or regions (e.g. countries, markets, economies).

Diversifying by asset class
Different asset classes - like real estate, equities and bonds - generally behave differently under similar economic conditions. For example, if a market crash sends the stocks in your portfolio tumbling, the assets in other uncorrelated asset classes may not lose value at the same rate, or they may move in the opposite direction and increase in value, thus providing a stabilising impact.  

For example, commodities like gold may not have a correlation to real estate.

Diversifying by industry
Like asset classes, different industries often encounter different risks at different times based on a number of market factors. When one industry encounters a downturn, another might flourish. Diversifying your investments across sectors ensures that your financial wellbeing is not totally dependent on the fate of a single industry.

For example, if you decide to invest all your money into one type of agricultural crop such as wheat, then adverse weather conditions could wipe out the crop rendering your entire investment worthless. But if you had invested across other industries that aren't impacted by weather, such as healthcare or financial services, only a portion of your savings would be impacted by this weather event.

Diversifying by region
The same applies for regions. The landscapes of countries, markets, and economies are based on unique dynamics, and certain risks may affect some regions rather than others.

For example, one region may be in economic expansion while another is in contraction. Exposure to different currencies, and to different political and regulatory environments can have an impact on an investment.

Having your investment diversified across asset classes, industries and regions is important for investment success, and helps to ensure that your range of investments don't all perform in the same way at the same time. Therefore, overall investment returns may be achieved in a less volatile way, relative to holding only one or two different assets.

In determining the right asset allocation for your portfolio, you'll need to consider the overall risk and return of each asset, and how different assets correlate with each other.  It's also important to determine your own risk and return level that you are comfortable with and able to tolerate.

Diversification serves as somewhat of a safety net, capturing the potential benefits of various investments while mitigating the risks associated with market fluctuations.

It's always important to remember that any decisions you make should be in line with your own financial objectives, as each person's investment needs will be different.

For more insights visit www.bennelongfunds.com

Disclaimer

The content contained in this article represents the opinions of the author/s. The author/s may hold either long or short positions in securities of various companies discussed in the article. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the author/s to express their personal views on investing and for the entertainment of the reader.

The real risk of wildfires to US infrastructure investors

4D Infrastructure

November 2023

Funds operated by this manager:

4D Global Infrastructure Fund (Unhedged), 4D Global Infrastructure Fund (AUD Hedged), 4D Emerging Markets Infrastructure Fund

For more information about 4D Infrastructure, visit https://www.4dinfra.com/

^{The content contained in this article represents the opinions of the authors. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader.}

^{[1] https://earth.org/worst-wildfires-in-us-history/
[2] Forest Facts: 2020 Labor Day Fires: Post-fire challenges with invasive plants; Oregon Department of Forestry
[3] Assessing Wildfire Risk and What Utilities Are Doing to Adapt; Wells Fargo; 6 September 2023}

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The weight loss drug shaping-up as a gamechanger

Magellan Asset Management

November 2023

The world is awash with news that a drug designed to treat type 2 diabetes has also been approved to help achieve weight loss. Glucagon-like peptide 1 -- or GLP-1 -- is considered by some as a wonder drug and a new weapon in the public health battle against obesity. But what are the wider implications for the investment world? In this episode of Magellan In The Know, Portfolio Manager Nikki Thomas is joined by three Magellan Investment Analysts: Emma Henderson, Wilson Nghe and Tracey Wahlberg. Together they discuss the investment landscape surrounding GLP-1, looking at the pitfalls and potential financial benefits for sectors from healthcare, food retailing and restaurants to fashion, exploring which parts of the consumption landscape could be winners or losers. 

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund

Important Information: 

This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Magellan claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

Why are property prices surging as rates are rising?

Montgomery Investment Management

November 2023

In the thriving metropolises of Australia, the real estate horizon is gleaming brighter than ever. House prices have surpassed previous highs, putting a final nail in the coffin of those pessimistic forecasters who predicted 25-30 per cent declines.

The latest figures show a surprising twist in Australia's property market, as the largest and costliest city shatters its previous real estate records. Across the nation, we're seeing a similar trend, with the PropTrack home price index indicating a national median home value increase of 0.36 per cent in October, achieving a new high.

Sydney, once the face of declining values due to higher interest rates, has made a dramatic comeback. Home prices in the city are at an all-time high, with the median dwelling value reaching $1.07 million, marking a steady 11-month rise and a commendable annual rise of about 7.5 per cent.

Other capitals like Brisbane, Perth, and Adelaide have also hit record values, defying earlier expectations. Even as interest rates have climbed, these cities have witnessed robust growth, thanks to a mix of factors, including renewed migration, a limited supply of stock and tight rental markets.

Though Melbourne's and Hobart's prices are yet to surpass their previous highs, they're on an upward trajectory, while Perth boasts the most vigorous annual price surge, and Adelaide impressive growth year-on-year. Brisbane shares the spotlight with Sydney, with home values at all-time highs.

A month ago, in a blog post entitled Don't Sell! House Prices Must Go Up, I wrote; "At the same time the population is surging (thanks to government policy), a downturn in housing construction has gripped the country. Australia is witnessing a steep decline in new home sales, and ...the Housing Industry Association was recently reported to be predicting a slump in construction activity by 2024, intensifying existing housing shortages and making homeownership unattainable for many Australians."

One month in since that blog was written, and prices are fast reflecting those circumstances.

And while there's no shortage of real estate agents willing to predict what property prices will do next, you can put them all away. A year 11 business studies student can tell you property prices have to rise, or at least remain elevated if they have already risen. And that's because when demand rises (immigration) and supply falls (construction has slumped) prices can only go one way.

So, what's ahead for home prices? While the threat of inflation could prompt further rate rises, the ongoing housing shortage is likely to offset keeping property prices resilient.

In essence, the sustained rise in property values across most of Australia's cities prompts a reflection: were the property bears too quick to predict doom? Current trends suggest they might have underestimated the market's resilience.

Author: Roger Montgomery

Funds operated by this manager:

Montgomery (Private) Fund, Montgomery Small Companies Fund, The Montgomery Fund

Why Europe is the region leading sovereign green

bond issuance and what we expect for the last three

Ardea Investment Management

November 2023

Funds operated by this manager:

Important Information

This material has been prepared by Ardea Investment Management Pty Limited (Ardea) (ABN 50 132 902 722). Ardea is the holder of an Australian financial services licence AFSL 329 828 and is regulated under the laws of Australia.
This document does not relate to any financial or investment product or service and does not constitute or form part of any offer to sell, or any solicitation of any offer to subscribe or interests and the information provided is intended to be general in nature only. This should not form the basis of, or be relied upon for the purpose of, any investment decision. This document is not available to retail investors as defined under local laws.
This document has been prepared without taking into account any person's objectives, financial situation or needs. Any person receiving the information in this document should consider the appropriateness of the information, in light of their own objectives, financial situation or needs before acting.
This document is provided to you on the basis that it should not be relied upon for any purpose other than information and discussion. The document has not been independently verified. No reliance may be placed for any purpose on the document or its accuracy, fairness, correctness, or completeness. Neither Ardea nor any of its related bodies corporates, associates and employees shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of the document or otherwise in connection with the presentation.

Investment Insights: The ups, the downs,

and the future of the economic cycle

Touchstone Asset Management

November 2023

This article looks at some of the current challenges faced by the consumer market and explores macroeconomic trends affecting the market.

As primarily bottom-up investors, we can often get an edge by talking to a company's customers, suppliers, and management teams to assess quality - which is not always done well in the market. And this bottom-up work often leads to the formation of strong top-down views. For example, in 2021 we were confident that inflation was strengthening and would come in above market expectations and lead to higher interest rates. Now, our view is that inflation has peaked, but will remain elevated for some time.

Along with inflation and its impact on consumer spending, there's a lot of global macroeconomic volatility impacting the market.

An update on consumer spending

Let's start with a quick recap of the most recent reporting season.

This brought about a wave of volatility in the stock market, with one in every eight stocks experiencing movements of over 10% in response to their results, which is twice the usual average. This period was characterised by price-to-earnings (PE) expansion, explaining much of the market's upward movement. Investors seemed willing to look through some of the soft results by cyclical companies and buy them regardless, leading to PE re-rating. But they also sold defensives that had earnings misses - which could be seen in the earnings revisions. The average earnings upgrade was only 2.7%, and the average downgrade was around 9%.

The reporting season proved to be a tough one for consumer stocks, marked as the worst in 13 years. More than half of consumer companies downgraded their earnings by over 10%. Several factors played a role in this underperformance, as we had expected.

A significant part of the impact can be attributed to the peak effect of the transition from fixed to variable mortgage rates. Additionally, the phase-out of low and middle-income tax offsets, which provided households with tax refunds, created headwinds. As households steadily deplete their savings buffers, the effects rippled through to earnings. The struggle was evident not just in the earnings reports, but also in high-frequency retail spending data from Kepler, which showed a drop as steep as 12% year-on-year and real per capita consumption plummeting by as much as -5%; an unprecedented decline.

In terms of categories, electricals were particularly weak, but there were some doing quite well, such as those that thrive in good weather conditions (e.g. Wesfarmers, thanks to Bunnings' results).

Inflation is staying high

While inflation may have peaked, it is expected to remain elevated for some time across the globe.

We are particularly concerned about the situation in the US, where fiscal spending continues at an unsustainable rate, and is contributing to higher bond yields. While those yields are rising, it is not solely due to inflation. There's a shortage of demand for bonds, which propels interest rates upward.

The current conflict in the Middle East, while socially devastating, also has strong financial impacts. Tensions lead to higher oil prices globally, further increasing cost of living. We were already positive on oil because we thought supply would be under pressure, but again, that just gives us confidence with a higher oil price that inflation will remain elevated.

So, what does this mean for Australia?

We believe wages growth will remain strong here, because of our relatively rigid wage setting mechanism. We also believe energy prices are expected to remain high, so we're in a similar situation where inflation, while it may have peaked out, should remain quite high. And as we saw recently, the RBA implemented another rate hike.

At the household level, the pressure is at its peak, with the transition from fixed to variable mortgages and the depletion of savings buffers taking its toll. Approximately 60% of households have already exhausted their savings, a figure expected to rise to 80% by the year's end.

Overall, as we expected, we saw a per capita recession but not an outright recession, and we can hopefully look forward to better conditions as we move through 2024.

A bit on banks

For a while, we've held the view that the banks' margins were too high and would come down. The recent  reporting season appeared to confirm this view, with pre-provision operating profits broadly disappointing as bank margins were squeezed. Offsetting this, credit costs continued to surprise positively, resulting in earnings that mostly met expectations.

We still see a lot of competition in the sector and rising costs impacting in the year ahead. We also forecast an increase in bad debts, as losses begin to normalise from its current very low levels. This will likely result in lower earnings for the sector over the next 12 months.

We have owned NAB, and we think that's the pick of the bunch - relatively less exposed to some of the concerns we have and looks more reasonable. But if anything, across our portfolio, we make a lot of being index unaware, and this is a great time where we think there's more opportunity out of sight of the major sectors of banks and resources, into some of the other areas where we see more quality on offer at better value.

The end is near (for the economic cycle)

Despite the challenges, there are still opportunities in the market for investors who choose wisely. And while it's felt like a long, volatile cycle, we are nearer to the end than the beginning.

For some time, we've been talking about our expectations for earnings downgrades. In mid-late 2022, the market had 12 months forward EPS growth of around plus 8%. That's fallen by 14%. Expectations are now for EPS to decline in 2024 by around -6%.

Notably, the downgrades have been largely due to resources. Industrials have actually been surprisingly resilient, so we still think there'll be further modest weakness in earnings, perhaps low to mid-single digit downside. But what will be different is that the downgrades are likely to come from the industrials.

How we're positioning the portfolio

Our approach is to own the higher quality cyclicals - preferably those that have used the period of weakness over the past couple of years to improve their businesses, in anticipation of rates peaking and the next cycle commencing. For example, we invested in James Hardie this year, which has been a good call. While we knew the company could be impacted by higher US interest rates, those rates now mean less building. So, if anything, there's more of an undersupply of housing in the US as we move through the next cycle - a little bit of pain now, but potentially more upside later.

Another sector we are overweight in is energy, with companies like Ampol showing strong performance due to our positive outlook on oil.

There's been a lot of talk recently about the impact of GLP-1 drugs like Ozempic on healthcare stocks. It's meant that some of the healthcare stocks, which are in the bucket of defensives and are high quality companies, are now particularly cheap. We think in some instances they've been dealt with too harshly. In the longer term, we don't think health care stocks will be impacted by GLP-1 drugs, and therefore, oddly enough, it's actually the defensives that are quite often looking attractive now.

CSL, for example, is the top ranked stock in our universe on our quality value matrix. Even if we take the extreme view as to the uptake and adherence to all correct protocols by people that take GLP-1 drugs, CSL may see some competition in parts of its portfolio, but there'll be minimal impact. At a recent investor day, CSL's management forecasted double-digit earnings growth, with increasing return on capital. So, there's still positive feedback from the industry.

Overall, the market looks relatively reasonably valued, perhaps even marginally overvalued. So, when you put all that together, given we know the market will look through the last part of the earnings downgrades, we're now starting to think about what we want to own for the next cycle.

Funds operated by this manager:

Touchstone Index Unaware Fund

The content contained in this audio represents the opinions of the speakers. The speakers may hold either long or short positions in securities of various companies discussed in the audio. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the speakers to express their personal views on investing and for the entertainment of the listener.

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