7-Dec-2024: Excerpt from the MarcusToday Saturday email this morning:

The world is beginning to calm down about Trump’s tariffs, and it was interesting this week to hear Michele Bullock (who I think has been listening to The Rest Is Politics US podcast) saying that what Trump says is not necessarily what Trump does, and that all the central banks are waiting to see what happens rather than listening to what is said. It seems Trump’s election has paralysed most of the central banks, and the RBA meeting next week will doubtless provide evidence of that paralysis, although the weaker-than-expected GDP number this week had economists warming to the idea of a February cut again rather than a June cut. The headlines about the Australian economy (see The Australian today) are also doubtless creeping into the RBA boardroom. Running into an Election, there is not a lot to shout about and 'the earlier the better' is the assumption because the next budget in March is going to make ugly reading (bigger deficit than forecast). Australia goes nowhere unless resources are kicking goals.

There are lots of central bank meetings next week and the week after, with the FOMC on December 18. The chance of a rate cut is up from 66% a week ago to 88.8%. Inflation numbers are coming up this week. Powell said this week that the economy has been stronger than expected, and whilst a rate cut is almost a certainty in December the odds of future rate cuts are easing back. The equity market doesn’t seem to mind.

--- end of excerpt ---

Yeah, agreed, a lot of what Trump says is his version of "the art of the deal", i.e. all part of either negotiating or preparing people (and markets) for something almost inconceivable and then sneaking in something else entirely. Take Matt Gaetz as his Attorney General nom. Even Trump's fellow elected Republican law-makers were shocked by that one, and it was never meant to go through IMO, it was simply to take the attention off some of Trump's other department head nominations, which on their own were bad enough, but paled into almost insignificance alongside Gaetz as AG.

Further Reading: BBC: The rise and fall of Matt Gaetz in eight wild days [22-Nov-2024]

Looking back at the past week, the ASX 200 underperformed the whole world, except the DOW, but the DOW is only 30 US Companies, and the S&P 500, which is, strangely enough, made up of 500 companies, was up despite the DOW being down:

And the NASDAQ was well up - by +3.34%. As MP says (in the newsletter excerpt above), the "Australia goes nowhere unless resources are kicking goals" and with the notable exception of the Aussie gold sector, resources aren't kicking goals, and they're likely to face headwinds in the coming year if even half of what Trump says he's going to do gets done, particularly the tariffs part.

Unlike the USA, our IT sector does not dominate; the Aussie IT sector is actually one of our smallest sectors, whereas its the USA's largest sector and the main reason why their indices keep outperforming.

Here's a comparison from 2021:

Source: https://www.firstlinks.com.au/why-australias-skewed-stock-market-underperform [05-May-2021]

And here's what the S&P 500 looked like as at May 2024:

Source: https://www.wallstreetprep.com/knowledge/sp-500-index/ [updated in May, 2024]

Now the chart directly above is the USA's top 500 companies, whereas the side-by-side Aus/USA comparison charts from Firstlinks above that are showing the entire market, but in terms of the S&P 500 in 2024 compared to the entire US stock market in 2021, IT is larger in percentage terms, while materials and financials are smaller sectors. Our largest two sectors - which together dominate our market - are Materials and Financials (see below), while IT is one of our smallest sectors.

Here's the ASX 200 in 2021:

Source: https://www.forex.com/ie/news-and-analysis/what-is-the-asx-200-and-how-can-you-trade-it/ [2021]

And in 2023:

Source: https://www.ig.com/au/news-and-trade-ideas/asx200-mid-year-review-2023-230628 [2023]

In March 2024:

Source: https://www.livewiremarkets.com/wires/why-invest-in-asx-tech-stocks [Patrick Poke, 17-April-2024, chart accurate as at 28-March-2024]

I note that the ASX 200 Materials Sector, which includes mining, shrunk from 29.71% in 2021 to 23.8% in 2023, then further down to 22% in May 2024, whereas the Aussie Financials sector shrunk from 33.44% of the ASX200 in 2021 to 27.1% in 2023, but had increased to 30.3% by April 2024. This is reflected in the share prices of our big banks, particularly CBA having increased over the past year, but mining companies' share prices not doing so well, mostly because of lower commodity prices, particularly iron ore, which dominates the mining sector. Lithium and nickel were also smashed, so most nickel miners have put their mines on C&M, if they were able to, or else they went broke. Lithium miners have also been mothballing mines and deferring capex in the current low price environment.

The US market doesn't have those commodity price impacts because the US is not a commodities-based economy (and share market):

Here's a breakdown of the entire S&P 500, compiled last year (2023):

Source: https://www.visualcapitalist.com/complete-breakdown-of-sp-500-companies/

[If that image above is too small to read, you can usually click on the image to make it larger, or click on the link to view the source]

Just as an aside, the above charts are concerned with the broader Sectors, however many of those sectors includes a number of different industry groups. Here are the main ASX industry groups (sometimes referred to as sub-sectors):

Source: https://www.marketindex.com.au/asx-sectors and https://files.marketindex.com.au/files/asx-sectors/gics-industry-table2.png [2021]

Past performance isn't a reliable indicator of future performance of course, but it's one possible source of inspiration. I see greater tailwinds for IT in 2025 than I do for Materials. With Materials, and within Materials more specifically Mining, I instead see headwinds. And I am avoiding ASX Financials (our big banks in particular) due to stretched valuations - i.e. they look too expensive and ripe for a share price "correction" at some point, possible soon, possibly not so soon, but at some point, and the dividend yields of the big 4 ain't what they used to be, so if there is no value there and also not a heck of a lot of income - compared to other options which should also exhibit more growth - then I fail to see the attraction of our financials sector at this point in time.

The US Market is likely to be choppy, and anything could happen during Trump 2.0, and I don't invest directly in companies outside of the ASX myself, but I do have some direct exposure to WAM Global (WGB), a WAM Funds LIC that specialises in undervalued global growth companies, and I'm avoiding Australian resources companies for now, other than gold miners.

I think there are still plenty of individual companies on the ASX that will do well over the next 1, 3 and 5 years (for a start), and I'm around 80% invested right now (so around 20% of my investable capital is in cash at this point), but I don't expect the ASX200 to do well as an index against its global peers over the next year or two.

So I'm not investing in any ASX 200 index trackers, just individual (mostly smaller) ASX-listed companies. I think it's really going to be a stock pickers' market in 2025.

28-Nov-2024: Still on risk, here's a couple of smallish excerpts from Marcus Padley ("MarcusToday.com.au") today:

• US PCE Price Index (inflation numbers) bang in line with expectations - the YoY number up from 2.7% to 2.8% as expected. The chances of a rate cut on December 18 rose from 59.4% to 70% despite newswires describing inflation as 'stubbornly strong' on the back of solid consumer spending numbers.

• After the Trump Tweets on Wednesday about 25% tariffs on Mexico and Canada (unless they halt immigration) and another 10% on China (unless they halt fentanyl exports) Goldman Sachs says tariffs will slow the progress towards the 2% target inflation. The Fed Minutes this week made it clear the Fed are presuming nothing amidst the uncertainty of Trump policy. Chinese state media has already commented his moves could drag the two countries into a 'mutually destructive tariff war'. Also saying the 'fentanyl' remark is nothing more than a far fetched excuse. China currently sells over $400bn annual to the US in finished products. More again from seperate components.
• Mexico has said the 25% tariffs will kill ~400k US jobs and drive up prices. Retaliation has been promised in the way of tariffs of their own. The Mexican president called the news a 'shot in the foot' and would be in violation of the USMCA trade agreement. Vehicles were singled out as one of the most sensitive. Estimates have prices of new vehicles made in Mexico (by US companies) and sold in the US becoming $3000 more expensive on average. Side one of Trump we are currently getting (see Tuesday's piece on the two sides of Trump if you missed).
• A few mid-cap (in US terms) tech stocks reported yesterday. All missed expectations dragging the Nasdaq down. Dell (US$100bn M.C) down 12.3%, CrowdStrike (US$91bn M.C) down 4.6% and HP (US$37bn M.C) down 11.4%. Dell and HP fell on third quarter results that missed expectations. Dell’s traditional PC segment recorded earnings of $12.13bn, not that far from $12.43bn expected. The share prices were hit on commentary that PCs embedded with AI features haven’t been flying off the shelves as expected. Consumers not willing to pay extra for the features which Dell and HP spent big to acquire and develop. The segment isn’t expected to really take off until next year. On the positive side Dell recorded ‘booming demand’ for its AI-optimised servers. CrowdStrike (held in the FANG ETF) beat profit and earnings estimates on strong cyber security demand yet fell on lower Q4 guidance. They called the software glitch a few months ago that crippled certain companies using Microsoft around the world the ‘July 19th Incident’. Commentary was positive, the CFO said customers have chosen to ‘deepen their relationship’ with the company.

• If everything that's wrong with the US is someone else's fault then there are going to be a lot of tariffs handed out in the next four years.

• Chinese GDP downgrades - I’m not sure we should take too much notice of Trump’s Tweets, but the market does so we have to. Economists are downgrading Chinese GDP numbers after the Trump tweet about adding an extra 10% tariff on all Chinese imports unless they do something about fentanyl trafficking. Chinese state media has said “There are no winners in tariff wars” warning Trump not to make them the scapegoat for a fentanyl problem in the US and not to take their goodwill for granted. One economist has downgraded their 2025 and 2026 GDP growth forecasts for China to 4.1% and 3.8% as they factor in higher tariffs. Trump imposed tariffs of 7.5% to 25% in his first term but is threatening 60% this time around and this time around the Chinese economy is far more vulnerable than it was. Hopes for stimulus are fading and are seen as unlikely before there is certainty on tariffs, and even after they are introduced, it will be seen as a loss of face in the victory to Trump. The appointment of Jamieson Greer as Trump’s trade lawyer is another negative, he is a veteran of Trump’s first term with a history of toughness in trade negotiations against China. All this points to another reason not to buy resources. The Chinese economic risk is heightened by Trump’s appointment and without stimulus commodity prices are at risk as is the Australian dollar. Note that if international fund managers assume the Chinese economy is going nowhere, they will assume the Australian dollar is going nowhere as well and exit anything priced in Australian dollars (our stock market). Australia and the Australian government have every reason to fear Trump’s tariffs and their impact on the Chinese economy.

--- end of excerpts ---

A few things to consider. Also, "Ceasefire in Israel. Won’t help an Energy sector already in downtrend." ...was another dot point from their mid-day newsletter. I've thought about offloading the Santos (STO) shares from my SMSF however thinking about the investment thesis, risks of an escalation of middle east tensions was just one reason for me to hold Santos, a company I wouldn't usually want to hold, but there are others, including their new capital allocation framework that will target returns to shareholders of at least 60 per cent of all-in free cash flow from 2026, following a period of major capital investment to bring significant new production online from their Barossa and Pikka projects - see here: https://www.santos.com/news/santos-announces-updated-capital-allocation-framework-and-carbon-storage-growth-target/

I also hold Amplitude Energy (AEL), formerly known as Cooper Energy (was COE.asx) in my SMSF, and both AEL and STO are a good way to play future increased east coast gas demand. Actually, that part of the thesis is not even about increased demand, it's about future demand being greater than reducing supply, as gas plays a large role in the Australian clean energy transition over the next 10 years, as a minimum. So while a ceasefire in the middle east is welcome, and will likely have negative impacts in the short term on the share prices of traditional energy (oil/gas) companies, it doesn't change the overall investment thesis, so no moves from me today. I'm not looking to increase my STO or AEL positions on further share price weakness, because I have greater conviction in my other positions and want to keep my remaining powder dry for those companies for future top-up opportunities.

I note that Trump is still talking tariffs as a negotiating tactic, like with Mexico (not unexpected) and Canada (wow!) saying he'll introduce tariffs if they do not "halt immigration" into the USA, however I would be surprised if he does NOT ultimately introduce tariffs in 2025, on Chinese imports as a minimum, but likely on more countries than just China. He's talked tariffs up so much it's almost inconceivable that he would not go down that road at all as POTUS in the coming year.

My thoughts remain that 2025 is likely to have more than its fair share of market volatility / turbulence, and I can't imagine that being bad for gold, so I'm still long gold, even at these lofty levels.

20-Nov-2024: 12:30pm:

Come on Mr Market! Are we risk ON or risk OFF?

Utilities up on a day when the only other sectors that are up mid-day are metals & mining, materials, resources and gold?

Gold is rising due to current geopolitical tension / risk plus the usual drivers - plus people thinking about what Trump's administration is going to look like and do - just one example: Vivek Ramaswamy - who along with Elon Musk are going to head Trump's new Department of Government Efficiency (DOGE) which - according to Trump - will “dismantle Government Bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies" - said a couple of days ago that the US Department of Education will be ‘deleted outright’ by DOGE. Perfect! Plenty of logic-based long-term thinking there.

Source: https://www.yahoo.com/news/vivek-ramaswamy-suggests-department-education-194452226.html plus various other news reports and videos of that interview.

Oh yeah!

2025 is going to be a great year!

16-Nov-2024: The following is an interesting excerpt from todays's MarcusToday Newsletter:

A WORD ON RESOURCES, THE AUSTRALIAN DOLLAR AND THE STRATEGY PORTFOLIO

We sold our resources exposures this week (WIRE and QRE) - at this point the sector resurrection that was kicked off by the Chinese stimulus announcements month or so ago has not followed through.

The initial announcements happened a little bit on the fly in response to the FOMC cutting rates by 50bp (instead of the 25bp expected) but their promises of action have so far disappointed with their lack of guts. They could announce something meaningful at any moment of course, and we take that risk, but for now, the Chinese are seemingly focused on stabilisation rather than stimulation with last week's US$1.28 trillion package aimed at shoring up local government balance sheets rather than being put into something that would stimulate the economy like infrastructure or the property market.

That saw BHP drop 7.7% last week, RIO 7.8% and FMG 9.3% with most of the other resources stocks also taking a dive. Apart from the lack of convincing Chinese stimulus measures the Trump election has also rather killed the party with the risk of 60% tariffs on China which would further send their economy into a hole.

Trump's policies are also expected to be inflationary (imposing tariffs and tax cuts), and that has driven the expectation that inflation will return and interest rate cuts will be delayed and that has led to higher bond yields and a higher US dollar. It is the US dollar rise that should be scaring Australians.

The A$ has dropped from 69.42c to 64.55c since the beginning of October. A currency reflects the strength of an economy and a clear message from the currency markets is that Australia’s economic outlook is highly correlated to China's economic fortunes and the Chinese economy is at risk.

If you are thinking of buying a European car or going on a European holiday you might get on with it before the Aussie dollar goes to 50c, which is where it was before the 2000 resources boom.

If the Chinese economy goes into a long-term malaise the Australian dollar is going down, and the Australian economy with it.

This is a big story for Australia. This is also a big story for investors. Sentiment is turning against the Chinese economic trend and if the Chinese don’t do something material to stimulate the economy before Trump gets appointed in January and starts to cut into China with penal tariffs, then Australia is going to become a backwater economy and stock market. The only time the rest of the world has ever taken an interest in Australia, the only time the Australian stock market has outperformed the rest of the world, was during the resources boom. This is the opposite.

During the resources boom overseas fund managers were buying BHP and RIO and were not only making money on the stocks, but they were making money on the rise in the Australian dollar as well. It was called “double bubble”. Share prices were going up and the Australian dollar was going up. An irresistible opportunity for international fund managers.

Now consider what happens when the opposite happens. When the Chinese economy goes nowhere, commodity prices fall, the Australian government has no money, and the Australian dollar drops. Particularly if the Australian dollar drops. International fund managers will exit Australia because they are getting the opposite of a double bubble.

The good news is that the Strategy Portfolio is going to make a fortune. We will be earning “double bubble” in the other direction by investing in international ETFs which would not only outperform the Australian stock market but being priced in US dollars and flying in Aussie dollar terms if the US dollar is going up against the Australian dollar.

Bottom line - If (if) the Chinese economic miracle ends you don’t want to be investing in Australia at all. Thankfully we have the ability to invest in US dollar-denominated stocks and markets in Australia through ETFs (unhedged ones!) in this portfolio.

This is all a bit doomsday of course, and is unlikely to unfold quickly, and could be rescued by Chinese stimulus or a change in tariff policy, but for now, there are signs that it is beginning. We really need the Chinese to backstop their economic growth. We could also do with Trump backing off his tariff threats. Until then, we’ll stay out of resources and continue to focus on the international markets in the Strategy Portfolio.

--- end of excerpt ---

Paints a gloomy picture for the Aussie sharemarket if China doesn't significantly stimulate their own economy. While I remain bullish on copper, albeit with a little less conviction, I'll not be investing directly in pure-play copper companies just yet. My direct copper exposure remains through Evolution Mining (EVN) who mine gold and copper. The wider implications however are more across impacts to Australian economic growth and sentiment, and whether the Australian sharemarket seriously underperforms overseas sharemarkets like the US and European sharemarkets which are driven more by technology and healthcare, including big pharma. Our technology companies, like Wisetech and Xero, are likely to outperform in that scenario, and ProMedicus (PME) is both healthcare and technology, and they still have a huge growth runway and they are executing very well, so I expect PME to also continue to outperform.

An Australian dollar that continues to fall against other currencies is likely to favour ASX-listed companies who earn most of their revenue overseas, as profits made overseas are worth more in Australian dollar terms. That benefits Australian companies with international operations, and that includes commodity producers, so our big miners should benefit, however I wouldn't be looking to play it that way unless China gets really serious with their economic stimulus, because the downside of our ASX-listed global miners is that if Chinese demand remains subdued commodity prices will stay low or fall further, and in that scenario a falling Australian dollar will help other companies - like PME, CSL, even MQG - more than it will help the miners.

In 2019, Macquarie Group (MQG) earned 66% of their revenue overseas, Corporate Travel (CTD) earned around 72% of their revenue from outside of Australia and New Zealand (ANZ), Treasury Wine Estates (TWE) generated 79% of their net sales revenue outside of ANZ, and Resmed (RMD) is another company that should also benefit from a falling Australian Dollar. RMD generates the majority of its revenue in the United States, with 54% of revenue coming from America Sleep and Respiratory Care and 13% from subscription software in 2019. Interestingly, Europe, Asia and Other (which is where Australia sits) accounted for only 33% of total revenues. This gives the ASX investor great exposure to overseas economies.

Those percentages were apparently correct in 2019 anyway (5 years ago) according to this: https://www.fool.com.au/2020/01/10/5-asx-200-companies-for-global-income-exposure/ [10-Jan-2020] Those companies are mostly bigger now, so you'd expect those overseas earnings numbers to have only increased in the past 5 years.

Just some thoughts. Not planning to make any major changes to my portfolios on Monday, but I'm thinking about making some soonish.