FREE WHELAN: Keep a little powder dry and stay long agri-dips ‘cos I can feel it coming in the air tonight, oh lord
In this Stockhead series, investment manager James Whelan from VFS Group offers his insights on the key investment themes and trends in domestic and global markets. From macro musings to the metaverse and everything in between, Whelan offers his distilled thoughts on the hot topic of the day, week, month or year, from the point of view of a professional money manager.
You can feel it: Spring is just days away.
The gloom of August is nearly behind us and onwards to the end of the year!
I took the time to relax and wash the windows of my home on Sunday and reflect on some of the big moves we’ve just seen and what we’ll see ahead.
Which led me back to this this chart showing what happened in the US market at this time of the year and thought maybe I should have gone to more cash last week.
I said last week I wasn’t going to talk about the Fed and Jackson Hole because that’s been all the chat over the weekend and Monday. However Powell did basically say that they’ll be doing whatever it takes to get inflation down, which means rates need to go up.
The good thing is that the market is the most efficient pricing mechanism in the world and it immediately repriced those comments.
Credit where it’s due – the messaging was clear and concise. I like it when Central Banks just say what’s required and leave.
Also note that there’s cash on the sidelines for a reason. Why carry full risk at this time?
Remember August and September are historically bad months in mid-term years. I’m still advising to keep a little powder dry in the lead-up to mid-September then get set into the end of the year.
But that’s all to be played out and every week pay attention to make sure nothing major has changed.
Locally we still have the strife ahead of us.
I had CBA head of Aussie Economics on the podcast on Friday and he told quite a tale of where we are headed. If you put all the data together we see an OK move to the end of the year and then it could be a very ordinary start to 2023, economically speaking. The “mortgage cliff” could have some delay but it’s clear what’s ahead (should nothing change that is).
Listen here: it’s naturally a bloody cracker.
One of the key ideas to emerge from the podcast was a long bonds position if you think the market has overdone rate expectations locally. If you think the RBA has overshot (or the market has overshot the RBA) then a long bonds position would be the way to go.
For that I’m recommending AGVT or VAF.
AGVT: Betashares. 7-10 years Aussie govt bonds. Running yield of 2.24%, avg maturity of 8.94 years.
So it’s a little longer out in the curve. As a general rule if yields drop then longer dated stuff does better.
.22% mgt costs. Not bad.
VAF: running yield 2.8%, cheap as chips at 0.15% mgt fee because it’s Vanguard. Shorter duration though – so won’t move as much on a turn of rates.
Either one is fine, and I’m happy to accumulate this week. No change.
What has changed is just how bad Europe is going at the moment.
Putting it lightly, things are pretty bad. Just on the same page of the FT over the weekend were two striking articles alongside the other:
“Britons braced for 80% rise in energy bills”
“(European) luxury retailers stung by lack of Chinese tourists”
So, yeah… it’s all going terrifically well on the Continent.
And fund flows are matching that. 28 weeks straight outflows from European equities.
There’s more to this story of how bad it’s going to get in Europe though.
Great podcast on the subject of the USD was put together by the MacroVoices team and I managed to listen to it while doing the windows. The guest they had on basically ran the case as to why the USD has further to go, especially against the Euro.
This makes me feel better about avoiding European luxury, not only because of another few months of Chinese weakness but mostly because of the fact there was no way to own the idea without being long Euros. There’s an inverse ETF to buy if you want to go short Euros called EUO and that’s worth a look if you’re into that kind of thing.
The downstream effects continue of this crisis. Fertiliser will become near impossible to find. Stay long agriculture on dips.
If you needed further proof of how bad it’s getting look no further than this. The world’s third largest river has pretty much dried up.
Shocking pictures from China: World’s third-largest river dries up in drought 👇pic.twitter.com/1rXKa01quq
— Daniel Moser (@_dmoser) August 23, 2022
All the best and stay safe,