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.
We’ve been running this column for a few weeks now and I’ve been procrastinating on opening the mailbag. So let’s have a look:
Samples include “Jimmy, enough with the boot sinking on Cathie Wood.”
“James, seriously no more Ark stuff the dead horse is flogged”
This piece will not be about Ark or the holdings within, suffice to say that every cycle has a investor to suit that time.
Ark’s time ended last year and it’s all because of the magic number — 2.3%. But we’ll get to that later.
First…
The Metaverse.
Anyone who knows me knows I’ve been banging the table on the metaverse for about a year now.
I’m early, but I’m ready.
I’ll be wrong on the trade once and maybe twice but I’ll get it right eventually.
Building an investment case for, and investing in, something that doesn’t actually exist yet is hard.
Everyone has a view on what the metaverse will look like. Everyone is wrong.
However, my job is to explain these things and for now I have two phrases that serve me well:
1. Whatever it becomes will be of a size we can’t yet comprehend.
2. The metaverse will be awful but everyone will have to be there.
What is real?
The metaverse doesn’t really exist yet.
I can paint a beautiful picture of what it may look like, but it’ll be wrong.
Everyone’s Metaverse experience will be different and it will evolve.
It’s like handing someone a Nokia 3210 in 1999 and getting them to describe what 2022 telecommunications devices will look like.
Even if they were right, they’d still sound crazy.
My best guess?
It’ll be something like a mate’s bucks party (or hens) and the groom/bride really wants to go to a pub they absolutely love — even though it’s only frequented by Navy guys because it’s near their base.
The girls are there because they’re into Navy guys and the Navy guys are there because they know the girls will be there. No one is really there because they want to be, it’s all manufactured.*
Imagine the Navy guys are Adidas and the girls who like the Navy guys are Nike and the bride/groom is a keen shopper and you’re just there to buy drinks and make sure no one gets killed.
It won’t be that bad actually — VR headsets all round and 11 rum and cokes for the lads.
Right now, the big problem is that Facebook wants to run the bar.
And Facebook (or Meta or whatever they call themselves now) ruins everything.
Worse still, the bar manager is in some serious trouble with the cops, and they’re not making as much money as they were last quarter. And they have significant headwinds.
Getting meta
Funny story about Facebook (Meta) is that on the earnings call following the results last, week the chief financial officer (David Wehner) said the word “headwinds” 25 times.
You don’t invest in Meta if you think they’re going to keep making money the old way.
They can’t make money on targeted ads anymore. From here on in it’s Metaverse or Bust. Invest accordingly.
If you want a safer exposure to what may or may not be a real thing, I’d recommend digital infrastructure.
Because when you describe your idea of the metaverse any sane person will stop you and say “wait… there’s no way you can get that amount of detail into that many headsets running live”.
No. No you can’t.
Data will be at a premium. Picks and shovels is the play for now.
The cloud is really just a room full of computers all over the world. Own that. And own the things that get data from those computers to other places.
Now, about that magic number…
Late last week, a great jobs print in the States brought a fresh wave of bond selling.
And now, a 2-handle on the most-watched (and all-important) 10-year US Treasury suddenly looks very real.
As much as I don’t trust round numbers, this one is significant and recalled for me a question posed in the BofA Fund Manager Survey in April last year.
47% of surveyed fundies (from a total pool of half a billion AUM) agreed that a +2% yield on the 10-year would cause a 10% correction in “the market”. Interesting.
Also, (and this might be the magic number): On average, BofA FMS investors “believe that the 10-year Treasury yield at 2.3% makes bonds attractive relative to stocks.”
That’s really significant. At a point in time last year, “the market” told us exactly at what point they start really shifting money from higher risk/same return assets into treasuries.
Effectively, it’s the point you can start generating the same return for zero risk — and that move won’t be nothing.
The other rotation occurring from this shift is out of growth, and into value (obviously).
The value trade is still in its infancy. However, it may be time to look to China for some deep value.
Here are some big calls for 2022:
1. Regulatory risk in China is pretty much done.
2. China goes into hyperdrive when the flame goes out on the Winter Olympics. Production will ramp back up to 110%.
3. (And this is the big one). At some stage this year — fairly soon — China will start to roll back its Covid-Zero policy. Slowly and with little ceremony. No face will be lost but I have a hunch things loosen up in China.
Invest accordingly.
*To be fair I just summed up 95% of Sydney nightlife so maybe I’m being harsh.