View the slides from our Investment & Economic Strategy presentation.
September 2023
Investment & Economic Strategy Lunch
Investment & Economic Strategy Lunch Cameron Harrison
© 2023 Cameron Harrison Pty Ltd
2
September 2023
Investment & Economic Strategy Lunch
Speakers
David Clark, Partner - Investment Management
Gerard Minack , Principal - Minack Advisors
© 2023 Cameron Harrison Pty Ltd
September 2023
Investment & Economic Strategy Lunch
Cameron Harrison Strategy The Lucky Muddling Country
© 2023 Cameron Harrison Pty Ltd
4
September 2023
Investment & Economic Strategy Lunch
Reason #1: Monetary Policy isn’t what it used be…
Normally a rapid increase in interest rates by 4% in a short period of time would cause a recession, however this time it hasn’t. Why?
1. Higher proportion of fixed rate mortgages
© 2023 Cameron Harrison Pty Ltd
5
September 2023
Investment & Economic Strategy Lunch
Reason #1: Monetary Policy isn’t what it used be…
Normally a rapid increase in interest rates by 4% in a short period of time would cause a recession, however this time it hasn’t. Why?
1. Higher proportion of fixed rate mortgages
2. Declining home ownership rates by age
© 2023 Cameron Harrison Pty Ltd
6
September 2023
Investment & Economic Strategy Lunch
Reason #1: Monetary Policy isn’t what it used be…
Normally a rapid increase in interest rates by 4% in a short period of time would cause a recession, however this time it hasn’t. Why?
1. Higher proportion of fixed rate mortgages
2. Declining home ownership rates by age
3. Mature superannuation system
© 2023 Cameron Harrison Pty Ltd
7
September 2023
Investment & Economic Strategy Lunch
Reason #2: Population Growth provides sugar hit to GDP
The Big Australia policy is in full force with COVID catch-up and more, adding significantly to the workforce size. ‒ Net migration 6x higher per person than the United States. ‒ Total Employment nearly a quarter higher than a decade ago. ‒ Supports aggregate demand, a positive for government revenue.
© 2023 Cameron Harrison Pty Ltd
September 2023
Investment & Economic Strategy Lunch
What Comes Next?
© 2023 Cameron Harrison Pty Ltd
9
September 2023
Investment & Economic Strategy Lunch
#1 China: The Other Hard Landing
A bumpy reopening is giving way to deeper economic concerns for this growth miracle.
‒ Youth unemployment is now 21%
‒ An ageing population and pending property collapse may mean another ‘lost decade’
‒ Military expansion remains unchecked.
© 2023 Cameron Harrison Pty Ltd
10
September 2023
Investment & Economic Strategy Lunch
#2 Inflation will be Structurally Higher
Globalisation and the rise of China as manufacturer to the world suppressed the cost of goods for developed economies.
‒ Stagnating globalisation due to the strengthening of supply chains and onshoring of manufacturing will be inflationary.
‒ The outcome will be structurally higher inflation and interest rates than pre-pandemic.
© 2023 Cameron Harrison Pty Ltd
11
September 2023
Investment & Economic Strategy Lunch
#3 Fiscal to Dominate Monetary Policy
‒ Social welfare and healthcare program costs are escalating with wages and scope creep.
•
NDIS, Jobseeker, etc.
‒ After 50 years of a peace dividend, the bill has arrived.
• Nuclear Submarines, Helicopters, etc.
‒ Energy Transition to achieve Net Zero by 2050
• Renewables, Transmission, etc.
© 2023 Cameron Harrison Pty Ltd
12
September 2023
Investment & Economic Strategy Lunch
Implications for Financial Markets & Investors?
‒ Australia is on a pathway to return to the pre-pandemic mixture of underemployment, anaemic wage growth and low productivity but with greater government intervention and weaker Chinese demand. ‒ Interest rates will eventually settle at higher levels than pre-covid as de-globalisation raises the baseline inflation rate.
‒ For 2024:
• Core inflation (ex. Energy) will continue to moderate to the target range.
• Weak growth – The RBA will pivot monetary policy before global counterparts
© 2023 Cameron Harrison Pty Ltd
13
September 2023
Investment & Economic Strategy Lunch
Asset Class
CH View
End 2024
Short term defensive characteristics, offset by higher levels of inflation ‘eating’ away at purchasing power.
Cash
In preparation for an RBA pause and eventual easing, we have been selectively adding some highly rated (AA/AAA) fixed bond (duration) to the Interest-Bearing strategy. • With maturities between 3 to 7 years, we are locking in the current attractive yields for highly rated securities. Infrastructure spending, general fiscal intervention and energy transition are long-term tailwinds for cyclicals, but short-term recessionary risks are elevated. • Adding opportunistic, attractively valued cyclicals to equity portfolios. Return to higher immigration, onshoring, supply shortage will increase the demand for warehouse/logistics assets. • Moderating long bond rates and growth in face rents will support asset prices.
Bonds
Equities
Property
© 2023 Cameron Harrison Pty Ltd
September 2023
Investment & Economic Strategy Lunch
Minack Advisors The cycle will get worse before it gets better
© 2023 Cameron Harrison Pty Ltd
The cycle will get worse before it gets better But there will be great opportunities in the next cycle!
Cameron Harrison Investment & Economic Strategy Lunch Wednesday 27 September 2023 ǀ Park Hyatt Melbourne
25 September 2023
15
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Outline
1. The cycle ending: hard or soft?
2. What happens to markets as growth slows
3. Opportunities in the next cycle
16
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Outline
1. The cycle ending: hard or soft?
2. What happens to markets as growth slows
3. Opportunities in the next cycle
17
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Policy makers focused on controlling the biggest inflation breakout in 40 years
OECD CONSUMER PRICE INFLATION
16
16
14
14
12
12
HEADLINE CPI
10
10
8
8
6
6
4
4
CORE (EX FOOD & ENERGY)
2
2
0
0
-2
-2
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: OECD, NBER
18
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
The nub of the inflation problem is now service sector prices (US)
CONTRIBUTION TO US CPI INFLATION
0 1 2 3 4 5 6 7 8 9
0 1 2 3 4 5 6 7 8 9
SERVICES GOODS
HEADLINE CPI
-3 -2 -1
-3 -2 -1
00 02 04 06 08 10 12 14 16 18 20 22 24
1
Sources: BLS, NBER
19
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
The nub of the inflation problem is now service sector prices (Australia)
CONTRIBUTION TO AUSTRALIAN CPI
8
8
HEADLINE CPI
7
7
6
6
GOODS SERVICES
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
1
Sources: ABS, NBER
20
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Wages are normally the key to service sector inflation (US)
CORE SERVICE INFLATION & WAGE GROWTH
8
8
7
7
CORE SHELTER & SERVICES INFLATION†
6
6
5
5
WAGES*
4
4
3
3
2
2
1
1
* ECI WAGE & SALARIES. † SHELTER & SERVICES EX -ENERGY SERVICES.
0
0
1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: BLS, NBER
21
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Wages are normally the key to service sector inflation (Australia)
AUSTRALIAN SERVICE SECTOR INFLATION & WAGE GROWTH
7
7
SERVICE SECTOR INFLATION†
6
6
5
5
4
4
3
3
2
2
1
1
WAGE PRICE INDEX*
0
0
-1
-1
* ALL SECTORS, EXCLUDING BONUSES. † CPI ALL GROUPS SERVICE COMPONENT. ADJUSTED FOR GST.
-2
-2
99 01 03 05 07 09 11 13 15 17 19 21 23 25
1
Sources: ABS, NBER
22
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
How far will unemployment need to rise to slow wage growth?
R² = 0.87 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 3 4 5 6 7 8 9 1011121314 UNEMPLOYMENT RATE (%) US UNEMPLOYMENT RATE AND WAGE GROWTH R² = 0.44 WAGE MEASURE IS EMPLOYMENT COST INDEX WAGES & SALARIES. RED DOT IS LATEST QUARTER, SEASONALLY ADJUSTED ANNUAL RATE. 2009-2019 1994-2008 FROM Q2 2020
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5
1
Sources: BLS
23
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Wages are starting to slow without unemployment rising!
R² = 0.87 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 3 4 5 6 7 8 9 1011121314 UNEMPLOYMENT RATE (%) US UNEMPLOYMENT RATE AND WAGE GROWTH R² = 0.44 WAGE MEASURE IS EMPLOYMENT COST INDEX WAGES & SALARIES. RED DOT IS LATEST QUARTER, SEASONALLY ADJUSTED ANNUAL RATE. 2009-2019 1994-2008 FROM Q2 2020 QUARTERLY SAAR FROM Q2 2022
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5
1
Sources: BLS
24
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Wage/unemployment trade- off hasn’t changed in Australia
R² = 0.75 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 9 101112131415161718192021 UNDERUTILISATION RATE % WAGE GROWTH AND LABOUR UNDEREMPLOYMENT RED MARKER IS LATEST OBSERVATION. R² = 0.87 UNDEREMPLOYMENT RATE VERSUS PRIVATE SECTOR WAGE PRICE INDEX (INCLUDING BONUSES). DATA FROM 1998. DATA FROM Q2 2020 2014-19 Q2 '20 DATA TO Q1 2020
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
1
Sources: ABS
25
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Rising labour supply will help damp wage growth in Australia
POPULATION AND WORKING-AGE POPULATION GROWTH
3.5
3.5
3.0
3.0
WORKING-AGE POPULATION
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
TOTAL RESIDENT POPULATION
0.5
0.5
QUARTERLY DATA. INTERPOLATED ANNUAL DATA PRIOR TO 1978.
0.0
0.0
50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: ABS, Melbourne Institute
26
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Temporary support for growth #1: excess savings
US EXCESS SAVING BY MONTH & CUMULATIVE SAVING
3.0
6
CUMULATIVE EXCESS SAVING
2.5
5
2.0
4
1.5
3
1.0
2
0.5
1
EXCESS SAVING* (RHS)
0.0
0
-0.5
-1
* SAVING RELATIVE TO THE 2019 AVERAGE SAVING RATE.
-1.0
-2
2019 2020 2021 2022 2023 2024 2025
1
Sources: BEA, NBER
27
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Temporary support for growth #2: unusual long rate behaviour
US 10 YEAR BOND AND FED FUNDS TARGET
10
10
9
9
8
8
7
7
6
6
FED FUND TARGET
5
5
10 YEAR TREASURY
4
4
3
3
2
2
1
1
10YR YIELD PEAKS
0
0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24
1
Sources: Bloomberg, NBER
28
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Temporary support for growth #3: unusual consumer behaviour
US REAL CONSUMER SPENDING, JAN 2019=100
150
150
140
140
DURABLE GOODS
130
130
PRE-COVID TREND
120
120
110
110
100
100
90
90
SERVICES EXCLUDING IMPUTED RENT
NON-DURABLE GOODS
80
80
70
70
2016 2017 2018 2019 2020 2021 2022 2023 2024
1
Sources: BEA, NBER
29
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Temporary support for growth #3: unusual consumer behaviour
LEADING INDICATORS & REAL GDP GROWTH
10
20
REAL GDP (LHS)
8
15
6
10
4
5
2
0
0
-5
-2
-10
LEADING INDEX*
-4
-15
* CONFERENCE BOARD LEI, LEADING BY 3M.
-6
-20
60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: BEA, Conference Board, NBER
30
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Temporary support for growth #3: unusual consumer behaviour
PRIVATE HOURS WORKED AND PRIVATE GDP GROWTH
10
12
8
10
6
8
PRIVATE HOURS WORKED†
4
6
2
4
0
2
-2
0
-4
-2
PRIVATE GDP* (RHS)
-6
-4
* GDP EXCLUDING PUBLIC CONSUMPTION & INVESTMENT. LEADING BY 3M. † 3MMA.
-8
-6
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: BEA, NBER
31
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Temporary support for growth #4: unusual fiscal policy
US FISCAL THRUST: CHANGE IN THE BUDGET BALANCE
15
15
10
10
FISCAL TIGHTENING
4 QUARTER FISCAL THRUST*
5
5
0
0
-5
-5
FISCAL EASING
-10
-10
* CHANGE IN 4 QUARTER BUDGET BALANCE FROM BUDGET BALANCE 4 QUARTERS PRIOR.
-15
-15
55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: BEA, NBER
32
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Monetary policy is now tight, so growth will slow
REAL FEDERAL FUND RATE
8.5
0 1 2 3 4 5 6 7 8 9
0 1 2 3 4 5 6 7 8 9
† LAUBACH -WILLIAMS ESTIMATE. * TARGET/CEILING RATE DEFLATED BY CLEVELAND FED EXPECTED 5 YEAR CPI. PRE-1982 FUND RATE DEFLATED BY 5 YEARS TRAILING CPI.
7.2
5.5
5.3
REAL FED FUND TARGET*
3.5
3.5
2.9
NEUTRAL RATE†
0.9
-2 -1
-2 -1
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: Federal Reserve, BLS, Cleveland Fed, New York Fed, NBER
33
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Australian income growth slumps
REAL HOUSEHOLD DISPOSABLE INCOME GROWTH
12
12
DISPOSABLE INCOME
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
PER CAPITA INCOME
-6
-6
60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: ABS, Melbourne Institute
34
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Running down the saving buffer
'EXCESS' SAVING: FLOW & LEVEL
24
300
CUMULATIVE EXCESS SAVING $BN (RHS)
20
250
16
200
CUMULATIVE EXCESS SAVING % OF INCOME (LHS)
12
150
8
100
* ACTUAL SAVING VERSUS 2019 AVERAGE SAVING RATE (6½%). QUARTERLY DATA AT AN ANNUAL RATE.
4
50
0
0
'EXCESS' SAVING $BN AR* (RHS)
-4
-50
2019 2020 2021 2022 2023 2024 2025
1
Sources: ABS
35
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Some of the excess saving was used to pre-pay mortgages
MORTGAGE PAYMENTS IN EXCESS OF SCHEDULED MINIMUM
4.5
4.5
'EXCESS' EXCESS PAYMENTS 9½% OF INCOME
4.0
4.0
3.5
3.5
3.0
3.0
PRE- COVID AVERAGE
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
2009 2011 2013 2015 2017 2019 2021 2023 2025
1
Sources: RBA, ABS, APRA
36
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
What were excess payments are now required payments
HOUSING-RELATED DEBT REPAYMENTS
12
12
AVERAGE
10
10
EXCESS PAYMENTS
8
8
PRINCIPAL PAYMENTS
6
6
4
4
INTEREST PAYMENTS
2
2
0
0
2009 2011 2013 2015 2017 2019 2021 2023 2025
1
Sources: RBA, ABS, APRA
37
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
The mortgage cliff: the re-setting fixed rate mortgage schedule
1
Sources: RBA * Loans expiring beyond 2024 not available monthly. ** Value of fixed-rate housing loans outstanding as at end December 2022.
38
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Outline
1. The cycle ending: hard or soft?
2. What happens to markets as growth slows
3. Opportunities in the next cycle
39
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Equities and downturns
S&P500 DECLINE FROM 5 YEAR PEAK
0
0
-10
-10
-20
-20
-30
-30
-40
-40
-50
-50
-60
-60
50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: Standard & Poor’s, NBER
40
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Equities and downturns: equities always sell off in a recession
S&P500 DECLINE FROM 5 YEAR PEAK
0
0
-10
-10
-14
-20
-20
-15
-17
-20
-21
-30
-30
-27
-34
-40
-40
-36
AVERAGE DRAWDOWN 31%
-50
-50
-48
-49
-60
-60
-57
50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: Standard & Poor’s, NBER
41
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Equities and downturns: sometimes equities sell off without a downturn
S&P500 DECLINE FROM 5 YEAR PEAK
0
0
-10
-10
-20
-20
-22
-30
-30
-25
-28
-33
-40
-40
-50
-50
-60
-60
50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: Standard & Poor’s, NBER
42
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Equities and downturns: equities are not very far-sighted
S&P500 DECLINE FROM 5 YEAR PEAK
0
0
-10
-10
4
-20
-20
6
0
0
2
-30
-30
6
NUMBER OF MONTHS PRIOR TO THE RECESSION START
0
-40
-40
12
WHERE THE S&P500 WAS WITHIN 2% OF ITS CYCLE PEAK. MEDIAN=4
-50
-50
11
6
MONTHS. EX-1970s MEDIAN=2 MONTHS.
-60
-60
1
50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: Standard & Poor’s, NBER
43
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
The landing – soft or hard – matters for equities
S&P500 AROUND FIRST FED RATE CUT
120
120
* CYCLES SINCE 1953. EXCLUDES 1980 AND 2019. DAY ZERO IS FIRST DAY OF THE MONTH THAT THE FED FIRST EASED POLICY.
FIRST FED CUT
115
115
110
110
SOFT LANDINGS
105
105
100
100
95
95
HARD LANDINGS*
90
90
-200 -150 -100 -50 0 50 100 150 200 250 DAYS AROUND FIRST FED RATE CUT
1
Sources: Bloomberg, IBES/DataStream, Standard & Poor’s, NBER
44
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
This year’s rally is pricing in next year’s soft landing
LEADING INDEX & RELATIVE EQUITY/BOND DM RETURNS
80
9
* 12 MONTH RETURN ON GLOBAL EQUITIES (MSCI DM) LESS 12 MONTH RETURN ON GOVERNMENT BONDS. † OECD LEADING INDEX FOR G7 ECONOMIES.
60
7
LEADING INDEX† (RHS)
40
5
20
3
0
1
-20
-1
-40
-3
EQUITY/BOND RELATIVE RETURN*
-60
-5
1987 1991 1995 1999 2003 2007 2011 2015 2019 2023
1
Sources: MSCI, Bloomberg, OECD, NBER
45
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Outline
1. The cycle ending: hard or soft?
2. What happens to markets as growth slows
3. Opportunities in the next cycle
46
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
What changes – More capex #1: more resilience
INVESTMENT SPENDING SHARE OF GDP
34
34
US RECESSIONS SHADED. INCLUDES IMF FORECASTS FOR NEXT YEAR.
32
32
EMERGING ECONOMIES
30
30
28
28
26
26
24
24
22
22
ADVANCED ECONOMIES
20
20
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: IMF, NBER
47
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
What changes – More capex #2: more defense
DEFENCE SPENDING, % OF GDP
14
14
* GDP-WEIGHTED AVERAGE.
12
12
10
10
UNITED STATES
8
8
DEVELOPED ECONOMIES
6
6
4
4
2
2
DEVELOPED ECONOMIES EX-UNITED STATES*
0
0
50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: SIPRI, NBER
48
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
What changes – More capex #3: climate mitigation
INVESTMENT TO ACHIEVE NET ZERO EMISSIONS BY 2050
FUEL PRODUCTION
ELECTRICITY GENERATION
6000
6000
INFRASTRUCTURE
INDUSTRY
TRANSPORT
BUILDING
5000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
0
2016-20
2020-30
2030-40
2040-50
AVERAGE SPEND PER YEAR, US$BN
1
Sources: IEA
49
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
What changes – More capex #4: more infrastructure
US PUBLIC INFRASTRUCTURE NET INVESTMENT, % OF GDP
2.4
2.4
2.1
2.1
1.8
1.8
1.5
1.5
1.2
1.2
0.9
0.9
0.6
0.6
0.3
0.3
50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: BEA, NBER
50
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
What changes – More capex #5: more labour-replacing investment
US CORPORATE PROFITS & NET INVESTMENT, % OF GDP
12
12
10
10
PROFITS*
8
8
6
6
4
4
2
2
NET INVESTMENT†
0
0
* AFTER-TAX PROFITS, CCA/IVA ADJUSTED. † BUSINESS INVESTMENT NET OF DEPRECIATION.
-2
-2
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: BEA, NBER
51
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
What changes – More fiscal, which means V-shaped cycles
TIME FROM THE RECESSION END TO THE FIRST HIKE
20
20
PRE-1985 AVERAGE: 9 MONTHS <= => POST-1985 AVERAGE: 42 MONTHS
18
18
16
16
PRIOR TO 1987 ACTUAL FED FUNDS RATE, ROUNDED TO THE NEAREST ¼%. THEN THE FED TARGET RATE. NOW THE FED FUND CEILING. NUMBERS SHOW NUMBER OF MONTHS FROM END OF RECESSION TO THE FIRST FED HIKE.
14
14
12
12
10
10
3
8
8
15
6
6
4
4
28
7
34
2
2
32
0
0
1 2
78
24
55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: Federal Reserve, NBER
52
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #1: lower safe asset returns
10 YEAR TREASURY 10 YEAR REAL ANNUAL RETURN
12
12
9
9
10 YEAR AHEAD RETURN BASED ON HISTORICAL DATA.
6
6
3
3
0
0
-3
-3
1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: Bloomberg, BLS, NBER
53
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #2: equity-bond correlation flips
US EQUITY-BOND CORRELATION
0.8
0.8
EQUITIES FALL WHEN BOND YIELDS RISE
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
-0.2
-0.4
-0.4
EQUITIES RISE WHEN BOND YIELDS RISE
-0.6
-0.6
ROLLING 36 MONTH CORRELATION BETWEEN THE 1 MONTH TOTAL RETURN ON S&P500 AND 1 MONTH RETURN ON 10 YEAR TREASURIES.
-0.8
-0.8
00 10 20 30 40 50 60 70 80 90 00 10 20
1
Sources: Standard & Poor’s, Bloomberg, GFD, NBER
54
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #3: financial leverage will be much less attractive
US TOTAL FINANCIAL LIABILITIES, % OF GDP
1000
1000
ALL SECTORS GROSS FINANCIAL LIABILITIES RELATIVE TO US GDP. NO SECTOR NETTING.
900
900
800
800
TOTAL FINANCIAL LIABILITIES
700
700
600
600
500
500
400
400
300
300
200
200
...of which FINANCIAL SECTOR
100
100
0
0
45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: Federal Reserve, NBER
55
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
The nuanced relationship between rates & equity valuation
CAPE VERSUS BOND YIELD
40
40
35
35
DEVELOPED MARKETS EX-US
30
30
25
25
20
20
15
15
US PRIOR TO 2014
10
10
R² = 0.52
R² = 0.38
5
5
-101234567891011 GOVERNMENT BOND YIELD %
1
Sources: MSCI, Bloomberg
56
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Japanese equities de-rated with zero rates
JAPAN CAPE VERSUS JGB YIELD
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
<0 0<1 1<2 2<3 3<4 4<5 5<6 6<7 7<8 8<9 >9 10 YEAR JGB %
1
Sources: MSCI, BLS, DataStream
57
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
The essential bubble ingredient: high EPS expectations
NASDAQ CAPE & LONG RUN SPX IT SECTOR FORECAST EPS
100
35
90
32
80
29
70
26
S&P500 IT SECTOR FORECAST LONG RUN EPS GROWTH (RHS)
60
23
50
20
40
17
30
14
20
11
NASDAQ CAPE
10
8
0
5
1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 2025
1
Source: BLS, IBES/DataStream, Bloomberg, NBER
58
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
15 years of no gains for global equities (ex-US)
GLOBAL EQUITIES: US VS THE REST
350
350
300
300
250
250
S&P 500
200
200
150
150
100
100
50
50
MSCI ALL COUNTRY EX-US
0
0
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1
Sources: Standard & Poor’s, MSCI, NBER
59
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Post-GFC US out-performance driven by EPS, not rates (or QE)
TRAILING EPS (INDEXED TO JAN 2007)
260
260
ROLLING 12M EPS. OPERATIONAL EARNINGS.
240
240
220
220
200
200
US MSCI
180
180
160
160
140
140
120
120
100
100
80
80
MSCI ALL COUNTRY EX-US
60
60
2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
1
Sources: MSCI, IBES/DataStream, NBER
60
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Post-GFC US out-performance driven by EPS, not rates (or QE)
TRAILING SALES PER SHARE (INDEX TO JAN 2007)
220
220
US$ EPS SERIES. MSCI INDICES. † MXWDU INDEX. US RECESSIONS SHADED.
200
200
180
180
US (MSCI)
160
160
140
140
120
120
100
100
MSCI ALL COUNTRY EX- US†
80
80
2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
1
Sources: MSCI, IBES/DataStream, NBER
61
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
US EPS growth was narrowly based
TRAILING EARNINGS, US$, 2008=100
1400
1400
* MANAMA = META (FROM 2012), ALPHABET, NVIDIA, APPLE, MICROSOFT, AMAZON & TESLA (FROM 2010). † S&P500 EX -MANAMAT.
1200
1200
1000
1000
800
800
PRE- PANDEMIC TREND
MANAMAT STOCKS*
600
600
400
400
S&P493†
200
200
MSCI ALL COUNTRY EX-UNITED STATES
0
0
08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1
Sources: DataStream, Bloomberg, MSCI, NBER
62
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
The US was the valuation exception over the past cycle
CYCLE ADJUSTED PE (CAPE) RATIOS
50
50
45
45
DEVELOPED MARKETS EXCLUDING US
40
40
35
35
US (MSCI)
30
30
25
25
20
20
15
15
10
10
EMERGING MARKETS
5
5
US$ EPS & US CPI USED. MSCI INDICES. US RECESSIONS SHADED.
0
0
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: MSCI, BLS, NBER
63
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #4: equity leadership change
US VERSUS GLOBE EX-US RELATIVE EQUITY PERFORMANCE
320
320
160
160
80
80
40
40
20
20
LOG SCALE. US$ TOTAL RETURNS. US RECESSIONS SHADED.
10
10
25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25
1
Sources: MSCI, GFD, NBER
64
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #4: equity leadership change
REAL S&P EPS (LOG SCALE)
128
128
95
NUMBERS ARE THE PERCENTAGE GAP BETWEEN ACTUAL AND TREND EPS.
64
64
32
HISTORICAL TREND GROWTH IN REAL EPS (1.8% PA)
12
32
32
8
95
16
16
11
45
61
8
8
4
4
2
2
1
1
1870 1890 1910 1930 1950 1970 1990 2010 2030
1
Sources: Shiller, Standard & Poor’s, NBER
65
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #4: equity leadership change
EQUITY VALUATION & EPS DEVIATION FROM TREND
20 40 60 80 100
20 40 60 80 100
FROM 2021
R² = 0.16
-100 -80 -60 -40 -20 0
-100 -80 -60 -40 -20 0
CAPE VERSUS REAL EPS DEVIATION FROM LONG RUN TREND. RED DOT IS LATEST OBSERVATION.
0 5 101520253035404550 CYCLE ADJUSTED PE (CAPE)
1
Sources: Shiller, Standard & Poor’s, BLS
66
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #5: blessed are the goods makers
HI-BETA GOODS PRODUCERS RELATIVE INDEX & EPS
130
130
* HI-BETA GOODS PRODUCERS (ENERGY, MATERIALS, INDUSTRIALS) VERSUS MSCI DEVELOPED MARKETS. † RATIO OF GOODS PRODUCER/ MXWO ONE YEAR AHEAD FORECAST EPS. US RECESSIONS SHADED.
GOODS PRODUCERS EPS/ INDEX EPS RELATIVE†
120
120
110
110
100
100
90
90
80
80
70
70
GOODS PRODUCERS/INDEX PRICE RELATIVE*
60
60
50
50
95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25
1
Source: MSCI, IBES/DataStream, Bloomberg, NBER
67
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #5: blessed are the goods makers
HI-BETA GOODS PRODUCERS RELATIVE INDEX & EPS
130
130
* HI-BETA GOODS PRODUCERS (ENERGY, MATERIALS, INDUSTRIALS) VERSUS MSCI DEVELOPED MARKETS. † RATIO OF GOODS PRODUCER/ MXWO ONE YEAR AHEAD FORECAST EPS. US RECESSIONS SHADED.
GOODS PRODUCERS EPS/ INDEX EPS RELATIVE†
120
120
110
110
100
100
90
90
80
80
70
70
GOODS PRODUCERS/INDEX PRICE RELATIVE*
60
60
50
50
95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25
1
Source: MSCI, IBES/DataStream, Bloomberg, NBER
68
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #5: blessed are the goods makers
HI-BETA GOODS PRODUCERS RELATIVE INDEX & EPS
130
130
* HI-BETA GOODS PRODUCERS (ENERGY, MATERIALS, INDUSTRIALS) VERSUS MSCI DEVELOPED MARKETS. † RATIO OF GOODS PRODUCER/ MXWO ONE YEAR AHEAD FORECAST EPS. US RECESSIONS SHADED.
GOODS PRODUCERS EPS/ INDEX EPS RELATIVE†
120
120
110
110
100
100
90
90
80
80
70
70
GOODS PRODUCERS/INDEX PRICE RELATIVE*
60
60
50
50
95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25
1
Source: MSCI, IBES/DataStream, Bloomberg, NBER
69
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #5: blessed are the goods makers
BASIC RESOURCES INVESTMENT & RETURN ON ASSETS
0.20
20
NET INVESTMENT AS SHARE OF GLOBAL GDP (LHS)
0.15
15
0.10
10
0.05
5
0.00
0
RETURN ON ASSETS (RHS)
-0.05
-5
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: DataStream/Worldscope, IMF, NBER
70
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #5: blessed are the goods makers
US EQUITY TOTAL RETURNS
9000
9000
8000
8000
TOBACCO STOCKS
7000
7000
6000
6000
5000
5000
4000
4000
3000
3000
TECHNOLOGY
2000
2000
1000
1000
S&P500
0
0
1990 1995 2000 2005 2010 2015 2020 2025
1
Source: Standard & Poor’s, Bloomberg, NBER
71
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #6: it may pay to be active, not passive
60:40 EQUITY-BOND TOTAL REAL RETURN INDEX
512
512
TOTAL REAL RETURN ON 60/40 EQUITY-BOND PORTFOLIO. EQUITY IS S&P500. BOND IS 10YR US TREASURY. DEFLATED BY US CPI.
256
256
128
128
64
64
32
32
16
16
8
8
4
4
2
2
1
1
00 10 20 30 40 50 60 70 80 90 00 10 20
1
Sources: Bloomberg, GFD, Standard & Poor’s, NBER
72
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #6: it may pay to be active, not passive
60:40 EQUITY-BOND TOTAL REAL RETURN INDEX
512
512
TOTAL REAL RETURN ON 60/40 EQUITY-BOND PORTFOLIO. EQUITY IS S&P500. BOND IS 10YR US TREASURY. DEFLATED BY US CPI.
256
256
128
128
64
64
32
32
16
16
8
8
4
4
2
2
1
1
00 10 20 30 40 50 60 70 80 90 00 10 20
1
Sources: Bloomberg, GFD, Standard & Poor’s, NBER
73
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle #6: it may pay to be active, not passive
60:40 EQUITY-BOND TOTAL REAL RETURN INDEX
512
512
TOTAL REAL RETURN ON 60/40 EQUITY-BOND PORTFOLIO. EQUITY IS S&P500. BOND IS 10YR US TREASURY. DEFLATED BY US CPI.
256
256
128
128
64
64
32
32
16
16
8
8
4
4
2
2
1
1
00 10 20 30 40 50 60 70 80 90 00 10 20
1
Sources: Bloomberg, GFD, Standard & Poor’s, NBER
74
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle
What should investors expect in the next cycle?
1. Lower safe asset returns
75
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle
What should investors expect in the next cycle?
1. Lower safe asset returns
2. Equity/bond correlation flips from negative to positive
76
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle
What should investors expect in the next cycle?
1. Lower safe asset returns
2. Equity/bond correlation flips from negative to positive
3. Leverage will be less attractive
77
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle
What should investors expect in the next cycle?
1. Lower safe asset returns
2. Equity/bond correlation flips from negative to positive
3. Leverage will be less attractive
4. Equity leadership will change
78
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle
What should investors expect in the next cycle?
1. Lower safe asset returns
2. Equity/bond correlation flips from negative to positive
3. Leverage will be less attractive
4. Equity leadership will change
5. Blessed are the goods makers
79
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Investing in the next cycle
What should investors expect in the next cycle?
1. Lower safe asset returns
2. Equity/bond correlation flips from negative to positive
3. Leverage will be less attractive
4. Equity leadership will change
5. Blessed are the goods makers
6. Be active, not passive
80
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Key point #1: there will be a landing, soft or hard, but no landing makes no sense
PRIVATE HOURS WORKED AND PRIVATE GDP GROWTH
10
12
8
10
6
8
PRIVATE HOURS WORKED†
4
6
2
4
0
2
-2
0
-4
-2
PRIVATE GDP* (RHS)
-6
-4
* GDP EXCLUDING PUBLIC CONSUMPTION & INVESTMENT. LEADING BY 3M. † 3MMA.
-8
-6
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
1
Sources: BEA, BLS, NBER
81
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Key point #2: equities are pricing in a soft landing
LEADING INDEX & RELATIVE EQUITY/BOND DM RETURNS
80
9
* 12 MONTH RETURN ON GLOBAL EQUITIES (MSCI DM) LESS 12 MONTH RETURN ON GOVERNMENT BONDS. † OECD LEADING INDEX FOR G7 ECONOMIES.
60
7
LEADING INDEX† (RHS)
40
5
20
3
0
1
-20
-1
-40
-3
EQUITY/BOND RELATIVE RETURN*
-60
-5
1987 1991 1995 1999 2003 2007 2011 2015 2019 2023
1
Sources: OECD, MSCI, Bloomberg, NBER
82
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Key point #3: equity leadership is set to change
HI-BETA GOODS PRODUCERS RELATIVE INDEX & EPS
130
130
* HI-BETA GOODS PRODUCERS (ENERGY, MATERIALS, INDUSTRIALS) VERSUS MSCI DEVELOPED MARKETS. † RATIO OF GOODS PRODUCER/ MXWO ONE YEAR AHEAD FORECAST EPS. US RECESSIONS SHADED.
GOODS PRODUCERS EPS/ INDEX EPS RELATIVE†
120
120
110
110
100
100
90
90
80
80
70
70
GOODS PRODUCERS/INDEX PRICE RELATIVE*
60
60
50
50
95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25
1
Sources: MSCI, IBES/DataStream, NBER
83
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Minack Advisors
Postal PO Box 284, Mosman NSW 2088, Australia
Phone +61 419 247 981
Email info@minackadvisors.com
Web www.minackadvisors.com
Authorised Representative No. 443937
Minack Advisors Pty. Ltd. ABN: 84 163 503 044
©2023 Minack Advisors Pty Ltd. This presentation is for the sole use of the addressee and is privileged, confidential and exempt from disclosure. If you are not a client of Minack Advisors, copying, dissemination, or distribution of this presentation is strictly prohibited. In publishing research, Minack Advisors Pty Ltd is not soliciting any action based upon it. Minack Advisors Pty Ltd publications contain material based upon publicly available information, obtained from sources that it considers reliable. However, Minack Advisors Pty Ltd does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Minack Advisors Pty Ltd publications only. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither Minack Advisors Pty Ltd nor its partners can be held responsible for any failure of those judgments to prove accurate. It should be assumed that, from time to time, Minack Advisors Pty Ltd and its partners will hold investments in securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the future presented in this document do prove to be accurate. Minack Advisors Pty Ltd is not liable for any loss or damage resulting from the use of its product. Minack Advisors Pty Ltd is registered in Australia, ABN number 84 163 503 044. Minack Advisors Pty Ltd is regulated by the Australian Securities and Investments Commission (ASIC), Authorised Representative number 443937.
25 September 2023
84
@2023 Not to be reproduced without permission from Minack Advisors, info@minackadvisors.com
Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52 Page 53 Page 54 Page 55 Page 56 Page 57 Page 58 Page 59 Page 60 Page 61 Page 62 Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Page 73 Page 74 Page 75 Page 76 Page 77 Page 78 Page 79 Page 80 Page 81 Page 82 Page 83 Page 84Made with FlippingBook interactive PDF creator