Latest / ausbiz a.m / 06.10.26 Zach Riaz, Banyantree I.M
Transcript
- Andrew: Good morning. Welcome to your morning wrap from OSBIS. It is Tuesday, October the 6th, and we are expecting another positive start with ASX futures up around three-tenths of a percent. In a moment, we'll preview the day ahead with Zach Riaz. First, though, global markets on Wall Street. Gains in mega cap growth and tech stocks propelling the Nasdaq 1% higher to a new record. Well, the SP 500 rose around two-thirds of a percent, also nearing a record high, and the Dow was up a quarter of a cent. Investor sentiment Remained positive despite macroeconomic pressures, with the US 10-year bond yields rising to a 24-year high. However, pullback in crude oil prices provided some relief to equity markets among the commodities Brent crude down 2% to $100 a barrel, gold unchanged at $4,140 an ounce, Bitcoin trading around $85.50, and the Aussie dollar has edged higher to 69.7 US cents. Let's get across those market moves and what is ahead. Zach Riaz joining us from Banetary Investment Management. Zach, good morning. Zach: Yeah, good morning to you, Andrew. Andrew: ⁓ well it's pretty impressive ⁓ on Wall Street, isn't it? With ⁓ shaking off all those risks we're seeing at the moment to ⁓ hit new records. Zach: Yeah, look, it it is it is a very interesting ⁓ sort of market setup. ⁓ you know, I I'm looking at a chart ⁓ of the number of stocks on the New York Stock Exchange trading above their two hundred day moving average and it's below forty percent. ⁓ you know, that's fallen from about sixty four percent ⁓ only a couple of months ago to below forty percent. Now but when that indicator from a tech we're no we're not technical guys we're fundamental guys but when that normally falls to around current levels or approaches 30 it's a very good time to deploy cash but that has normally come with andrew some sort of a market correction but like you pointed out SP 500 all times high and NASDAQ up all times high ⁓ and then obviously investors are grappling with what these surging yields ⁓ mean for equities But as long as the E is still stacking up, ⁓ which is earnings, and and the and the growth in the market, ⁓ and with the broader economy, you know, I I think there's the the it's just gonna be stubbornly pushing higher. ⁓ so it's we're at a pretty interesting point. Andrew: Yeah, I mean the the the bond market is is telling us it's unsustainable. ⁓ yet equity investors don't seem to care. I mean as you point out, I guess they're looking at those forecasts. And of course we're about to enter earnings season again in the States. So it's gonna be fascinating to see, particularly in terms of guidance, whether they feel as though that growth can continue. Zach: Yeah, absolutely. And look, the c the concern is obviously higher yields ⁓ lead to a a a constraint of on growth because cost of capital is ⁓ rising and and then you know ⁓ all else being equal, you you worry about ⁓ debt that's maturing. In fact, there's a really interesting chart that shows ⁓ for the small caps index in the US Russell, ⁓ there's a fair bit of debt that's maturing over the next two to three years. Now yields spiking. To five percent, five and a half percent or above for a short period of time, you may be able to digest, but then staying there for an extended period of time, which what it seems like, because it's real yields that are jumping up right now. ⁓ you know, inflation expectations ⁓ will as per the five year break evens ⁓ is pretty well behaved. I I have I I put a little asterisk marks on the five year break evens, to be fair, Andrew. I'm not sure if they're telling you. ⁓ the real inflation story. ⁓ because if you look at consumer surveys, ⁓ you know, they're sh they're trending higher. So, ⁓ but anyway, all else being equal, that particular metric is showing you it's real yields that's ⁓ driving the bond yields higher. ⁓ all else being equal, that means economic growth is good. ⁓ and therefore, you know, all else is ⁓ good. But at the end of the day, at some point. ⁓ higher yields will bite some parts of the market. But yeah, as you stated, ⁓ the market seems to be ignoring it. But you know, look, ⁓ my final point there would just be, you know, if you just zoom out, ⁓ you know, zoom out US 10 year treasure yields to 30 years or last 40, 50 years, we're we're pretty much normalizing from ultra low to ⁓ an average of 5.8%. In fact, we're not even there. ⁓ so if you believe in that mathematical statistical phenomena of reversion to mean and you know you have a long enough horizon, you would argue the bond yields have a little bit higher to go. And so I I think you've got to continue to watch and be very mindful of where there's a bit of debt built up because higher yields will invariably flow through higher cost of capital. Andrew: Yes, then we look at the local market, Zach. ⁓ well in fact appears to be a story of fatigue all round, doesn't it, here? Because ⁓ market fatigue, economic fatigue, household fatigue, ⁓ we're just appearing to be struggling. W why are we seeing that ⁓ that significant ⁓ divergence ⁓ from here ⁓ compared with some of those global markets, particularly the U at the ⁓ Wall Street performance? Zach: Yeah, I I I think it's it's an interesting question. ⁓ you know, we we cover both markets obviously quite ⁓ you know, closely. ⁓ and and you, you know, we were discussing this the other day. It's funny you raise it. We're saying some very similar business models in Australia just do not get the same sort of focus ⁓ or don't see seem to get the same sort of investor interest as that you you may get in the US. I really give you a good example of ⁓ clean away waste management. ⁓ which has just recently got a ⁓ takeover bid that's a high quality company admittingly it's very boring ⁓ but you know it trades at a pretty cheap valuation I think the C the takeover bid is in the indication of that a similar company in the US waste management ⁓ you know trades on a much higher PE and and and its share price has done much better very similar dynamics ⁓ you know there are nuances but I I think it's a flow of liquidity as well and look what are the ⁓ let me add another Point to your fatigue for the domestic market, it's very concentrated. ⁓ you know, we we we tend to be very focused on thinking credits here. ⁓ I get that for the retirees, and that gravitates people to a certain cohort of stocks, which is your large caps, dividend paying stocks. So there's a fair bit of fatigue, but at the end of the day, if you're running an Australian mandate, you've got to still look for ideas. And I think one of the ideas that we've been exploring and and actively investing through. ⁓ and we're starting to see that in funds flow as well from other institutional managers is taking money out of ⁓ the banks. And so there is a clear, very easy argument to make you want to be underweight the banks, despite the rising interest rates in Australia, because all else being equal, high interest rates should be good for margins. But obviously, from a demand side of perspective from mortgages could be a it could have an adverse impact. So we think. Insurance companies within financials may start to get a bigger slice of fund manager ⁓ portfolios. And we're already starting to see that. So, you know, likes of Suncorp, IGA, and even QBE, ⁓ I think ⁓ are interesting plays ⁓ within the financials ⁓ sector, which which makes up about 30 odd percent of the ⁓ total index. So yeah, look, there's fatigue ⁓ from a concentration perspective as well. ⁓ but I think there are still opportunities there. I think industrials are looking pretty good. ⁓ Andrew in Australia. And ⁓ they've they've they they did have the best in my view. Well, certainly the stocks that we follow did have the best ⁓ a reporting season in August. ⁓ but I I think there are and the whole investment in infrastructure, the whole investment in ⁓ you know, ⁓ critical minerals and supply chains, ⁓ Oureca, I would call out. I think that looks like a very interesting name. ⁓ it's also using tech and AI ⁓ to further improve the way it delivers its explosive businesses, ⁓ products and services to its end clients. So ⁓ I I think there's a different opportunity in Australia at the moment, but the issue is the next incremental buyer, who's gonna come back, who's gonna come around and then buy the oracas or the the insurance companies. ⁓ if we continue to have this very mindset of you know, the two big miners, the four banks and and CSL, ⁓ their incremental flow is very limited. Andrew: Well, there are also buyers ⁓ in terms of private equity. ⁓ you mentioned clean away. A a lot of action in MA space at the moment. Zach you've got you've got that, you've got ⁓ ingenio. Northern Star, ⁓ obviously on the slate with ⁓ Goldfields ⁓ looking at that one as well. Is that ⁓ what are you making of that MA activity at the moment? Zach: Yeah, it's time to come back. Yeah, look, I I think it's quite interesting. ⁓ I think there's capital on the side that needs to be deployed as well. Don't forget over the last four or five years, ⁓ private equity, ⁓ VC, a lot of these guys had raised a lot of funds ⁓ to be deployed. ⁓ and there are opportunities. And and so we are are seeing a lot of MA, we're seeing IPO. I Fermis is coming with one of the biggest IPOs. ⁓ know, often people talk about that as a ⁓ end of cycle indicator. ⁓ but I think that ⁓ from my perspective, I I think there is a lot of cash still sitting on the sideline that was raised in yester years that needs to be deployed and there are opportunities ⁓ that obviously ⁓ PEs and and firms themselves are finding ⁓ in terms of bolt on. ⁓ but yeah, look ⁓ from our perspective, you know, ⁓ Northern Star we're in that. That's a key gold pick ⁓ that ⁓ we've had in our ⁓ portfolios. And we think it's got a lot of great organic growth ahead of it. And I guess that's the other point. There are still companies with plenty of organic growth out there. And so I I would be a bit cautious of being in the acquirer, especially when Andrew, there is a lot of debt that's been taken on. Again, just a concern around ⁓ yields, interest rates staying elevated and potentially going higher. So you don't want too much leverage. ⁓ but in terms of ⁓ companies with good balance sheet. organic ⁓ growth ahead of them. I I I think with capital sitting on the side still, especially PE, ⁓ there are opportunities for more MA. Andrew: And so obviously you've got ⁓ elevated levels of cash yourself then, Zach, given ⁓ what you're saying. So w looking to deploy that potentially, but ⁓ overall are you expecting the market just to drift towards the end of the year? Zach: That is our expectations, ⁓ Andrew. And to be honest, ⁓ we have held that expectations since the start of this year. And and I know there is a lot of ⁓ frustrations in in in the sense from the bears. ⁓ and we, you know, we share some of those frustrations in the sense, you know, that th there are elements of the market that you're uncomfortable with. Obviously, AI has its own question marks over it. ⁓ but I I think we always expected things to sort of improve ⁓ grind higher. after first half volatility. ⁓ and I think there's enough that will come ahead of the midterms. ⁓ there will be a ⁓ a ⁓ a rally of sorts ⁓ post the midterms that we're just past the midterms I think ⁓ and next year will be a different story. So it's playing out that way. And and even overnight, I I think if you look at the data that's coming out of the macro data, the ⁓ I'd call out the employment data. I know there are some who reacted to it as ⁓ as a bit negative. And and but if you dig through the latest PMI data, ⁓ you know, one point I'd call out is ⁓ old vacant roles are now being filled in the US. So there's enough demand, there's enough happening in the economy to I think the to carry ⁓ this market drifting higher as you suggest, and that's our expectation. Andrew: Zach, great to get across your views. ⁓ enjoy the rest of your week. Thanks for joining us in Banion Tree Investment Management. And that is your Osbys Morning wrap. Hope you have a great day. I'm Andrew Gagan. Thanks for listening. Zach: Thanks, Andrew.