Market Commentary - January

Glenmore Asset Management

February 2024

Funds operated by this manager:

Glenmore Australian Equities Fund

Hedge Clippings | 16 February 2024

Hedge Clippings copped some flak from some quarters recently when we suggested moving Australia Day from the end of January to somewhere nearer the beginning of the month. Our comments were nothing to do with the celebration - or commiserations - that are normally associated with the arrival of the First Fleet, but all about getting workers off the beach, out of the bar, or away from the back-yard barbie and back to work. To put it bluntly, Australia is largely a "no-work" or "no-deal" zone from at least mid-December (and post Cup Day in Melbourne) through to the beginning of February.

This was reiterated (but not quite so bluntly) by the ABS this week when releasing January's unemployment data, which came in at 4.1% - the first time for two years that it has been above 4 per cent. For the past 3 years, the January unemployment rate has coincided with a higher-than-usual number of unemployed people who said they were expecting to start work in the next four weeks.

One can argue that this was not their choice - there may have been fewer jobs on offer - or that they had chosen the beach/bar/barbie option or a combination of the two. Either way, if the holiday season ended three weeks after Christmas instead of five, Australia would be a whole lot more productive. Of course, the likelihood of that happening is about the same as politicians voting themselves a pay cut, or come to that, a longer working year. 

For the record, Federal politicians leave Canberra at the end of November, not to return until early February. Of course, that generally keeps them out of the news, or in some cases off the streets - Barnaby, please note!

Back to the unemployment numbers, the economy, and inevitably the outlook for interest rates:

While employment has been steadily rising (excluding a slight hiccup in the 3rd quarter of 2021) since March 2020 (when all we could think or talk about was COVID), the number of hours worked has been much more volatile, and has been steadily falling since April last year.

There are a whole range of statistics around employment - unemployment, underemployment, the participation rate, and employment to population ratio, and even the NAIRU (or 'non accelerating inflation rate of unemployment') - which collectively leave Hedge Clippings with a headache, but the bottom line, according to the ABS, is they "all point to a slowing labour market during 2023-24, although this follows a particularly tight market in 2022-23."

This shouldn't upset RBA Governor Michele Bullock, given she was on the record in a speech she gave in June last year while Deputy Governor, saying the RBA was forecasting unemployment to hit 4.5% by late 2024, with employment growth still intact, and (and at that time) inflation returning to target by mid 2025. Under these circumstances, she said, "the economy would be closer to a sustainable balance point."

Not wanting to fall into the same ditch as her then boss Philip Lowe had done, she was careful not to make any predictions on interest rates, but did cover herself by adding "Of course these forecasts are subject to a considerable amount of uncertainty."

However, at this stage it looks as if she's on track with the employment forecast, and provided she doesn't ease rates too quickly, she may even get inflation back to the 2.5% target by mid (or late) 2025. At her most recent press conference, she sensibly covered all bases on the next move in official rates - possibly up, possibly down (but don't get excited), or (more likely) on hold for a while longer while waiting for more data, all aiming for the happy space of a "soft landing".

Across the Pacific in the US it's much the same, as Fed Chair Jerome Powell also disappointed the market by dampening expectations for an early easing, in spite of falling inflation, 3.7% unemployment, and solid economic growth. Having faced, and to date turned, the direction of inflation with 11 rate rises, he'd rather keep them where they are, and things going as they are, until the gains are locked in.

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Murray Ackman: Ignore the billionaires -

diversity, equity and inclusion are good for investors

Pendal

February 2024

AMERICAN billionaires seem to be picking fights with big brands and civil rights groups over whether corporate diversity, equity and inclusion (DEI) policies are discriminatory.

Or even whether they cause aircraft malfunctions.

If you've been following the "woke backlash", you'd be familiar with recent flash points such as the campaign against Harvard's first Black female president Claudine Gay.

Tesla's Elon Musk, hedge fund manager Bill Ackman and Lululemon founder Chip Wilson have all been engaging in civil discourse on social media recently, expressing anti-DEI views.

Musk went as far as suggesting that Boeing, fresh from having a fuselage panel fall off mid-flight last month, was prioritising diversity over safety. That drew a swift rebuke from civil rights groups.

"DEI must DIE," Musk said recently on his X social network. "The point was to end discrimination, not replace it with different discrimination."

This week the Tesla CEO erased mention of DEI in the electric vehicle maker's corporate filings.

Do DEI critics have a point? And what does that mean for investors and companies?

What are the concerns about DEI?

Musk's criticism of Boeing centred around the impact and unintended consequences of connecting executive pay to diversity targets and ESG metrics.

At the start of 2022 Boeing altered its bonus scheme, rewarding executives who hit certain climate and DEI targets.

Boeing is certainly not alone here.

In 2011, just 1 per cent of listed companies had such a policy. By 2021 it was 38 per cent, and the trend continues.

Supporters argue this is positive for companies and shareholders.

The idea is that such policies safeguard future economic results from risks while aligning the managerial objectives with shareholder interests.

Sharemarket analysts look for such policies as a sign that a business cares about a particular issue.

Who's right?

Does linking executive pay to diversity improve a business? Or are such corporate DEI policies a sign of excess?

There are plenty of studies - including from Pereptual's Regnan sustainable investing business - suggesting DEI can drive business outperformance.

A 2021 study from sustainable investing leader Regnan found that DEI - and especially equity and inclusion - can drive business outperformance.

A series of McKinsey & Company reports found "not only that the [DEI] business case remains robust but also that the relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time".

Yet Regnan also found many businesses think about diversity and inclusion in a flawed way. For example, DEI policies often focus on the needs of minority groups, while majorities are not always adequately considered.

For investors and companies alike, we believe organisational settings should allow all talent to flourish - including 'majority talent' as well as talent that is traditionally under-represented.

These are essential pre-requisites for an equitable and inclusive workplace. Businesses benefit from fair employment practices, supportive cultures and open decision-making.

What it means for investors

While there is now a lot of ESG measurement going on inside companies, it's fair to say there could be a deeper discussion about how inclusive culture can be good for a business.

But is Elon Musk right to say there is undue focus placed on DEI?

The billionaire's complaints could make sense in the context of a boot-strapped start-up operating from the proverbial garage.

But it feels provocative coming from the CEO of a business with one of the highest market caps in history.

Based on our experience at Pendal, businesses clearly demonstrate what they care about by what they report.

And that is useful for investors.

Investors should expect to see comprehensive DE&I plans from companies. And take caution with companies that ignore these responsibilities.

And they should look beyond the reported diversity numbers to understand if a business has the right structure to allow for diversity and growth.

While it's entertaining to see billionaires argue among themselves, investors must understand how a company thinks about diversity and inclusion if they want to understand whether it is managing risks.

Author: Murray Ackman

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