After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
While known for being the flagbearer for financial product providers, the Financial Services Council is now making serious inroads into the financial advice sector.
Investing beyond the pandemic
“Recession? Who knows? We’re not bearish, especially with our value style of investing. It’s bit of war like scenario. After the war’s over, we get inflation and that’s what we’re in. It’s the transitory talk that is the problem. We think for various reasons, this inflation isn’t transitory,” says James Holt who spoke about investing beyond the pandemic at the Financial Standard’s Exchange Traded Products forum. Holt touches on many of the issues prevalent in markets today.
Instead of picking inflation as being one or the other, Holt tends to say inflation will come and go. Looking back at the 70s, when the first and second oil shocks came, people blamed oil. When president Lyndon B Johnson was in power, his war on poverty saw inflation rise. When Nixon won, he spent like crazy to get elected and launched the family assistant package. Inflation was already rising by the time the first oil crisis occurred. And it occurred due to policy mistakes. Inflation hit 7-8.5 percent by the time Nixon was in power. Oil simply added to the second inflation peak and the third peak. But it wasn’t the cause. Policy error was the cause.
“The Fed said inflation was transitory and RBA said they weren’t raising rates till 2024. They’ve had to eat their words and move quickly because they were both wrong,” says Holt.
Holt adds, “We’ve always had these crises, but they also give rise to opportunities and bargains. I can’t remember the last time we’ve had a housing bubble. The price of housing is high and should come down, but the structural issues aren’t there as they were in the GFC. Wage expectations have been drifting up. Is higher inflation the new normal?”
Holt goes on to agree that some inflation is transitory. Globalisation is dying for various reasons and what we’re seeing is the transition back to deglobalisation in some forms. Trade to GDP is lower now than it has been for 12 years in a row. It has been shrinking. Add in the supply chain disruptions from the pandemic, and trade to GDP is even lower. The only other time in history it has shrunk was before 1914-45 – during and after the war.
Holt says, “I think this deglobalisation theme is going to get worse and worse. But more and more inflationary pressures look structural such as:”
- Trade war – that is reversing 30 years of globalisation
- Covid stimulus – QE was the main driver of inflation, it may become addictive
- Follow on inflation – Rent of shelter yet to be fully reflected
- Geopolitics – Big change in Europe and Asia. If ever we have a war over Taiwan, it will happen this decade.
- Demographics – Costs of ageing and healthcare on the system, lower savings and higher bond yields
- De-carbonisation – Will raise the cost of many products. Applying the European carbon tax, the price of cement goes up 70%. We have carbon throughout our economy and will cost a fortune, in the short term
- Inflation expectations & wages – If this starts to change then inflation becomes the new norm over 5 years
- Stagflation risks – Risks rising as economies falter
The Covid stimulus package was brilliantly successful. Consumers responded to Covid stimulus more so than traditional QE used during the GFC. It achieved nothing, whereas the Covid stimulus did its job in just three months.
In Australia, the RBA’s forecasting hasn’t been good. Spending is out of control with the budget and that presents a real challenge. The inflation number is likely to be a lot higher than the RBA projects and the knock-on effects are real. The recent rise in inflation triggered a bond market sell-off, which then moved onto global share markets and into the cryptocurrency space. Investors offloaded risk assets such as technology stocks and Bitcoin. All the meme stocks are down 90%.
And it makes sense. “Uber says in their PDS that they may never achieve profitability. It defeats the purpose of being a company in the first place. But that’s how the market is, people forget, the market forgets. Keep in mind the 5-year rule. In 5 years, we will have forgotten what bit us five years ago and we will buy again. The GFC is gone and forgotten. People are ready to pump money into risk assets despite the dangers,” says Holt. On a PE basis, the deflation in PE ratios isn’t complete yet. If the US slips into recession, there will be more of a compression. Microsoft fell 75 percent in the tech wreck, and it didn’t get back to its 2000’s share price until 2015.
China’s Covid zero strategy appears to be similar to the “Sparrow” era China went through. Covid zero seems to be a no end corner they’ve put themselves in and can’t get out. On the flip side, Australia is in a great position. If the US engine weakens, then China comes in and saves us or vice versa. Yes the path for monetary policy is a little more difficult but the commodity boom is looking a lot like 2007. The other big thematic to keep an eye on is India, which is about 13-14 years behind China. Australia will one day wake up, and India will suddenly be booming in the same way China was when its GDP hit 8-9 percent.
And lastly, where will interest rates finish? The futures market has overestimated rate hikes. From a bond perspective, it’s not a bad time to be buying duration. From a credit point of view, there’s no reason we’d see a recession. Spreads have risen by a reasonable amount. If the 10-year bond gets to 3.5%, that might be the new normal.
