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Can the economy justify a red-hot sharemarket? · The Money Puzzle

0:09
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirby. Welcome aboard everybody. Now, we've had a lot
0:16
Speaker 1: of shows actually devoted to the budgets. We had a
0:19
Speaker 1: couple of shows around the budget and then I suppose
0:21
Speaker 1: in recent weeks we had a couple of shows where
0:25
Speaker 1: we picked up what has really happened, what has been
0:28
Speaker 1: adjusted in the various amendments and those questions keep rolling,
0:31
Speaker 1: keep them rolling the Money Puzzle at the Australian dot
0:34
Speaker 1: com dot au. We'll also answer some today at the
0:38
Speaker 1: end of the show. But you know something we need
0:40
Speaker 1: to keep sight of in between all this is the
0:44
Speaker 1: underlying fundamentals of your investing right. So look, it's time
0:48
Speaker 1: for us to take a look at the economy as
0:51
Speaker 1: it matters to you the investor. And one of the
0:54
Speaker 1: best people I have found to do that is Tim Toohy,
0:58
Speaker 1: who's head of macro strategy at the Capital Partners. He's
1:01
Speaker 1: been on the show before. The last time we were
1:04
Speaker 1: talking about property and I bet it would come up today.
1:07
Speaker 1: But I also really want to have I want to
1:09
Speaker 1: talk to him about the markets where we're at just now.
1:13
Speaker 2: How are you Tim, Thanks Jams, good to be with you.
1:18
Speaker 1: Very nice to have you on the show again. I
1:20
Speaker 1: did a quick search. It's actually been two and a
1:22
Speaker 1: half years, which is much too long, but you've got
1:24
Speaker 1: a great opportunity enough to catch up. So look, one
1:28
Speaker 1: of the things I'm thinking of is, like for professional investors,
1:32
Speaker 1: they have investment committee meetings. And I've been on and
1:35
Speaker 1: off investment committees over the years. I was on one
1:37
Speaker 1: that used to meet very regularly on stage for a
1:39
Speaker 1: few years, like we definitely met every Monday, and that
1:43
Speaker 1: was quite active. More recently, I'm on an investment committee
1:46
Speaker 1: which has got to do with charities and philanthropy, so
1:50
Speaker 1: it's more passive. But one of the things I'm hoping
1:53
Speaker 1: you might give us a flavor of today is what's
1:56
Speaker 1: happening inside those investment committees, how people are saying to
1:59
Speaker 1: each other. I mean, maybe we might just start if
2:01
Speaker 1: you could give us a helicopter review of We know
2:04
Speaker 1: our listeners know where markets are at. Okay, we know
2:07
Speaker 1: markets are red hot.
2:08
Speaker 2: The US is just.
2:09
Speaker 1: Coming with a twenty percent return and that is just
2:12
Speaker 1: like that is extraordinary and it's had many good years
2:16
Speaker 1: in a row. The Australian markets way behind that.
2:19
Speaker 2: We know that, but.
2:19
Speaker 1: Global markets also have been very strong. How do the
2:24
Speaker 1: fundamentals of GDP across the major economies look against those markets, like,
2:31
Speaker 1: do they justify them? Or is that what I said
2:35
Speaker 1: at the start? Is there a gap forming between the two?
2:39
Speaker 2: Well? Thanks, just well, I think increasingly you have to
2:42
Speaker 2: try and separate the facts from the hyperbole. And I mean,
2:46
Speaker 2: contrary to the US President's claims that the US economy
2:49
Speaker 2: is running at its hottest ever and it's it's my
2:52
Speaker 2: far the strongest in the world, believe it or not,
2:54
Speaker 2: the Australian and US economies are actually growing and have
2:57
Speaker 2: been growing at the same pace over the last twelve months.
3:00
Speaker 2: So to your point, it's been very different experiences in
3:04
Speaker 2: terms of the way the equity markets have transpired, but
3:07
Speaker 2: in terms of the broad shape of the rate of
3:11
Speaker 2: growth in the economy, it's been quite similar. I think,
3:14
Speaker 2: if we're stepping it back and think, what, how's the
3:15
Speaker 2: global economy going? The different ways to try and measure it.
3:20
Speaker 2: My personal preference is to look at what's actually going
3:23
Speaker 2: on the global production cycle because it gives a truer
3:26
Speaker 2: measure I think, and it does tend to correline a
3:28
Speaker 2: lot stronger to the thing that you're talking about how
3:30
Speaker 2: asset markets perform equities versus bonds for instance, you know,
3:35
Speaker 2: remarkably track the shape of the global industrial cycle. And
3:38
Speaker 2: I think what's of particular interest is, despite everything that's
3:42
Speaker 2: been thrown at the global economy over the last twelve months,
3:45
Speaker 2: it's actually expanding about a two and a half percent pace,
3:48
Speaker 2: which is around about its average that it's been at
3:52
Speaker 2: since the early nineteen nineties. Now, so that's an okay
3:56
Speaker 2: global pace. It's pretty good, and part of the reason
3:59
Speaker 2: why we saw a bit of an uptick in inflation,
4:03
Speaker 2: just because you were a bit of a sickle coll upturn.
4:05
Speaker 2: Now the emerging markets we're doing all of the heavy
4:08
Speaker 2: lifting there By the way, you know, developed markets, which
4:10
Speaker 2: includes the US, actually you're only growing about one percent
4:14
Speaker 2: in terms of you know, again production. Most of the
4:18
Speaker 2: growth was actually still a story of China, India and
4:21
Speaker 2: South Korea. Now, the interesting thing about all of this
4:24
Speaker 2: is we're starting to navigate what we think is a
4:26
Speaker 2: bit of a peak in that. So, you know, I
4:29
Speaker 2: think to your point, you know, when you see you
4:31
Speaker 2: around an investment committee meeting at the moment you're trying
4:34
Speaker 2: to get some sort of signal we actually at a
4:37
Speaker 2: turning point for growth. Have we gone through the peak
4:39
Speaker 2: for inflation risk? And what's the Pulso reaction function going
4:44
Speaker 2: to be moving beyond this point? So we are a
4:47
Speaker 2: pretty interesting point right here now. And to me, I
4:49
Speaker 2: think you're right in saying that equity markets look hot,
4:52
Speaker 2: the economies looked okay, but we're probably now transitioning into
4:56
Speaker 2: a much slower or a slower trajectory, even include the
5:00
Speaker 2: US for that matter.
5:02
Speaker 1: If I knew nothing about investment markets and you said
5:05
Speaker 1: to me that growth is running at about two and
5:07
Speaker 1: a half percent and the share market brought in twenty percent,
5:11
Speaker 1: and that's in the US, right and the global market
5:16
Speaker 1: wasn't far behind, you'd say, well, that needs some explanation
5:20
Speaker 1: just before that on the markets and who's doing the
5:26
Speaker 1: heavy lifting. If the markets are being driven exceptionally and
5:32
Speaker 1: primarily by the AI and technology boom, and that includes
5:36
Speaker 1: the emerging markets, because as I understand, thirty percent of
5:40
Speaker 1: the emerging market return this year came from three or
5:43
Speaker 1: four companies being the semiconductor heroes in South Korea and Taiwan.
5:48
Speaker 1: But I just want to ask you, is it the
5:50
Speaker 1: case that the economy has been driven by the AI
5:53
Speaker 1: boom or is it just the markets.
5:55
Speaker 2: It's a really interesting point. I think that's one of
5:57
Speaker 2: the ones that is yeah, pretty heavily debated. I actually
6:01
Speaker 2: think a lot of economists and a lot of strategists
6:04
Speaker 2: are making a mistake on this. So if we break
6:08
Speaker 2: down the US market at the moment, and we looked
6:10
Speaker 2: at what the consensus is for those, you know, the
6:13
Speaker 2: hyper scalers, the megacap companies that we all talk about.
6:17
Speaker 2: I've got cacades plans in place for the next calendar
6:21
Speaker 2: year at about nine hundred and forty billion dollars. So
6:24
Speaker 2: what's interesting about that number, Well, that's almost three percent
6:27
Speaker 2: of US GDP, and three percent of GDP is actually
6:31
Speaker 2: at the top end of when you look at say
6:33
Speaker 2: the robo boom, all the wave, the automobile boom, they
6:37
Speaker 2: all picked out about just about two and a half
6:39
Speaker 2: to three percent, So we're kind of there at that
6:42
Speaker 2: sort of level. And of course that type of investment
6:46
Speaker 2: is phenomenal, but predominantly it's all important. So when you
6:50
Speaker 2: actually look at the contributions to economic growth, as an
6:54
Speaker 2: economists or a statistician, would measure it, it's far less
6:57
Speaker 2: exciting from a growth perspective. It's adding around about after
7:01
Speaker 2: you net off imports. It's adding around about zero point
7:04
Speaker 2: three percent to economic growth, rather than the idea that
7:07
Speaker 2: it's adding significantly to economic growth. And the same thing
7:10
Speaker 2: applied to Australia, only it's even more extraordin because we
7:13
Speaker 2: really don't have a manufacturing base in tech. You actually
7:17
Speaker 2: have to net it off now it does. Obviously it's
7:19
Speaker 2: good for the electricians are acquiring the data centers and
7:22
Speaker 2: the like, and there are to bill offs and wealth
7:24
Speaker 2: effects and the things that have been generated off the
7:26
Speaker 2: back of it. But from a purely economic accounting point
7:29
Speaker 2: of view, it doesn't actually have that material impact on
7:32
Speaker 2: the growth data as we measure it.
7:34
Speaker 1: So to that extent, that's the gap, is it. That's
7:37
Speaker 1: the reality gap, if you like, between the economic growth
7:41
Speaker 1: and the market growth, investment market growth.
7:45
Speaker 2: I think to be fair, right, I mean, these companies
7:47
Speaker 2: are have been generating exceptional profits. It's also true that
7:52
Speaker 2: it's the bastion of where tech is sitting globally, so
7:55
Speaker 2: there's an aggregator effect here going on. It's very deep
7:58
Speaker 2: capital markets, so if you're looking at large pension funds
8:02
Speaker 2: and our own industry funds for instance, wanting to gain exposure,
8:05
Speaker 2: they are all going to go to that marketing size.
8:08
Speaker 2: And yeah, just to put it in context, like the
8:09
Speaker 2: US equity market is about almost two thirds now of
8:13
Speaker 2: global equity markets. It's GDP way in the economy is
8:18
Speaker 2: globally is about twenty four percent, so you know it
8:23
Speaker 2: absolutely it's equity market is essentially two and a half
8:26
Speaker 2: times the size, and it's global share in the economy.
8:29
Speaker 1: But the actual economic power that's very interesting.
8:33
Speaker 2: Yeah, and just to put and if you take the
8:35
Speaker 2: next step, who's the next one in line, Well, Japan's
8:38
Speaker 2: the next big is equity market, but it's it's less
8:41
Speaker 2: than five percent share, so you know, the gap is enormous.
8:45
Speaker 2: And because you're all aggregating into the same you know,
8:49
Speaker 2: the same capital market there to get the exposure. It's
8:51
Speaker 2: the same theme. It's a really concentrated exposure.
8:54
Speaker 1: It's a constituted exposure, and it's something that you know,
8:58
Speaker 1: unlike money economists, I like the way you do deep dives.
9:01
Speaker 1: I've done deep dives into the residential property market regularly.
9:04
Speaker 1: You did deep dive into smsfs and we talked about
9:08
Speaker 1: that recently, and that exposure, of course, which the big
9:11
Speaker 1: super funds had, the SMSs did not have, and that
9:15
Speaker 1: is why the smsfs are going to be beaten out
9:19
Speaker 1: the door this year by the big funds primarily because
9:22
Speaker 1: of that US exposure. But put that on the table
9:25
Speaker 1: for a moment. So that's our backdrop, if you like.
9:30
Speaker 1: So if I was if I was new to your
9:33
Speaker 1: investment committee and I said to you the first morning,
9:36
Speaker 1: what are the main risks? Then with that economic backdrop
9:39
Speaker 1: that you've pictured, and I didn't know that the US
9:42
Speaker 1: economies powery do like are waiting in no way and
9:47
Speaker 1: reflex it's investment market power. What are the main risks
9:53
Speaker 1: and opportunities do you think are there for investors? Which
9:56
Speaker 1: took risks for us because we should.
9:58
Speaker 2: Well, I mean, obviously there's a risk there in terms
10:00
Speaker 2: of what we just talked about. There's a risk, for instance,
10:03
Speaker 2: that it's competing aggressively, this Capex build out. It's happening
10:08
Speaker 2: principally in the US, but we're actually indexed well above
10:11
Speaker 2: our peer group as well in terms of how much
10:13
Speaker 2: we're doing in terms of the data center buildouts. This
10:15
Speaker 2: Kapex boom is actually competing with feel like government. So
10:19
Speaker 2: they're also issuing debts in markets because it's not just
10:22
Speaker 2: you know, the capex have traditionally been funded up until
10:25
Speaker 2: this point really in terms of their cash flow from
10:28
Speaker 2: these hyperscalars. But now they're leaning the debt markets aggressively.
10:32
Speaker 1: Now they're going in and they're doing IPOs, and they're
10:35
Speaker 1: going into the barn market right big time, big time.
10:39
Speaker 1: And what does that, tim could you just explain what
10:41
Speaker 1: that means? What risk does that introduce?
10:44
Speaker 2: Well, it means it's no longer just a if you
10:46
Speaker 2: think it's a bubble, and we can debate that in
10:48
Speaker 2: the moment, but if you think it's a bubble, it's
10:50
Speaker 2: no longer just an equity bubble. It's now spreading into
10:53
Speaker 2: other asset classes. And in broad terms, there's in the
10:58
Speaker 2: end of twenty twenty five raised about six hundred and
11:01
Speaker 2: fifty billion dollars in debt in the debt markets in
11:05
Speaker 2: the US just purely investment grade debt, or in terms
11:09
Speaker 2: of private credit, they were all just going in and assetbacks, financing,
11:13
Speaker 2: the data centers just all going into finances cap extent,
11:16
Speaker 2: that's a lot. It was actually up one hundred percent
11:18
Speaker 2: over the prior year. It goes up even more again
11:20
Speaker 2: by the end of this year, we think it gets
11:22
Speaker 2: close to a trillion dollars, right, so, and then this
11:25
Speaker 2: it goes up again the next year. So increasingly these
11:28
Speaker 2: debt markets are becoming essentially the primary funding source of
11:34
Speaker 2: this really concentrated bit. Now, the interesting thing about this
11:39
Speaker 2: is actually pretty aggressive spend being deployed at rapid speed,
11:45
Speaker 2: and there's going to be some business cases that simply
11:48
Speaker 2: just don't stack up. The issue with it in debt
11:51
Speaker 2: markets is some of these things in private credit in particular,
11:53
Speaker 2: you got locked in there. So you know, if you
11:57
Speaker 2: just have to be holding the paper or more of
11:59
Speaker 2: the paper for one of the business plans that don't
12:02
Speaker 2: actually come to fruition, then that's going to be a
12:04
Speaker 2: bit of a problem. So it's can you can think
12:08
Speaker 2: of moving in and out of the theme. I actually
12:10
Speaker 2: I have sold my exposure to say semiconductors, and you think
12:14
Speaker 2: you're out of it, but you might still be loaded
12:16
Speaker 2: into the thematic in a different asset class than you
12:19
Speaker 2: just want aware of. And this is happening at such
12:21
Speaker 2: spad and such scale. But I think it will catch
12:24
Speaker 2: a few people.
12:24
Speaker 1: Out, so the person is so basically Lehman's version of that,
12:29
Speaker 1: tell me if I'm wrong to him, is that the
12:32
Speaker 1: risks so obvious in the share market are percolating through
12:39
Speaker 1: private credit and seriously and as well of concern the
12:43
Speaker 1: bond market, which means if this goes off the board,
12:46
Speaker 1: they all go off the boil at the same time.
12:49
Speaker 2: Yeah, potentially, And mean the sprints in this sector are
12:51
Speaker 2: incredibly tight, so you know, they're raising this credit I
12:55
Speaker 2: would say, very cheaply, and they're raising a lot of it,
12:59
Speaker 2: so you know, there keep doing it until those spreads
13:02
Speaker 2: wipen out, or until such time as the kapexperm itself
13:07
Speaker 2: peers out. Now, the rate of growth in that capex
13:10
Speaker 2: actually starts to slow this next financial year, the actual
13:14
Speaker 2: peak in it might be a twenty seven or twenty
13:16
Speaker 2: eight type story. But at such point what happens then?
13:19
Speaker 2: I mean you mentioned South Korea. It's largely loaded into
13:22
Speaker 2: the semiconduct or a hardware space into this thematic It's
13:26
Speaker 2: been an exponential movement in this year for US, and
13:30
Speaker 2: I would suggest that the corrector phase would actually start
13:32
Speaker 2: at that point, would ever start to anticipate the peak
13:34
Speaker 2: in the capex cycle, so you know there will be
13:37
Speaker 2: elements at peak. First, I'm not necessari saying that the
13:40
Speaker 2: hyperscalas themselves are super expensive, but there's going to be
13:45
Speaker 2: some problems with who actually wins in the end, and
13:48
Speaker 2: not all of them.
13:48
Speaker 1: Will I make a top financial advisory Yes to the
13:55
Speaker 1: aubsolute tipity top one one of the very highest rated
13:58
Speaker 1: models in the country. We meet regularly. His disposition is
14:03
Speaker 1: optimistic always and as they say in investing, as long
14:07
Speaker 1: as you're consistent, right, he's consistently optimistic that it's always useful.
14:12
Speaker 1: But I said to him, it's like we were talking.
14:13
Speaker 1: I said, Okay, let's say that that there is this
14:16
Speaker 1: spreading risk in in the major asset classes chairs bonds,
14:21
Speaker 1: private credit. Then where does the investor go or you
14:28
Speaker 1: when you're at your investment committee and someone says, well,
14:30
Speaker 1: how do we offset these risks? What are the acid
14:33
Speaker 1: classes that can offset these that can in some way
14:38
Speaker 1: offset these risks? If bonds, the traditional offsetter is not
14:43
Speaker 1: as good as it used to be, and it hasn't
14:45
Speaker 1: been good for Vidal Hind.
14:46
Speaker 2: Yeah, I'd probably challenge that notion a little bit though,
14:49
Speaker 2: I mean bonds, you know, had certainly had their challenges
14:53
Speaker 2: in the last five years or so, and part of
14:55
Speaker 2: that story was really the miscalculation by markets that the
15:00
Speaker 2: US had any interest and other central other large countries
15:03
Speaker 2: had any interest in actually preparing their fiscal positions. So
15:07
Speaker 2: bond markets really had to repress for the video that
15:11
Speaker 2: debt was actually going to government are going to be
15:14
Speaker 2: raising a lot of debt. Now what you've got, of course,
15:16
Speaker 2: is the private sector raising a lot of debt and
15:18
Speaker 2: it's competing for the same sort of pool of fund
15:20
Speaker 2: so it's driven up real interest rates. And that's now
15:23
Speaker 2: what's interesting about the starting point now is you've actually
15:26
Speaker 2: got if I'm looking at equities from relative to the bonds, well,
15:30
Speaker 2: yields on equities are actually at the lowest percentile if
15:34
Speaker 2: I'm going to call them that over the last fifteen years,
15:38
Speaker 2: and bonds are actually towards the top. So just purely
15:41
Speaker 2: on a relative yield basis, you'd be happier going there.
15:44
Speaker 1: Corporate bonds or government bonds.
15:45
Speaker 2: Government bonds their relative to listed equity yields. And secondly,
15:51
Speaker 2: what else is driven to say, so you actually have
15:53
Speaker 2: competed real bond yields have driven real bond yields have
15:57
Speaker 2: risen as this investment capex for AI has come through
16:02
Speaker 2: the market. If you think that's going to peak out
16:04
Speaker 2: at some point, then bonds actually wouldn't be such a
16:06
Speaker 2: bad hedge because real yours will fall in that environment,
16:10
Speaker 2: and if growth becomes at risks, then of course, you know,
16:13
Speaker 2: bonds would rally as well. If you also think, for instance,
16:16
Speaker 2: if you also think, for instance, James, so that all
16:18
Speaker 2: process of you know, which I've obviously fallen sharply, will
16:22
Speaker 2: also help these inflation pressures, then I would actually be
16:25
Speaker 2: having that conversation and invested community at the moment that bonds,
16:28
Speaker 2: for the remainder of you are actually not such a
16:30
Speaker 2: bad place to be.
16:32
Speaker 1: Okay, Okay, all right, I want to just leave it
16:35
Speaker 1: there because I want you to take a break. We'd
16:37
Speaker 1: be back in a moment, folks, and we're going to
16:38
Speaker 1: focus in on you, the Australian Investor. Hello, Welcome back
16:49
Speaker 1: to The Australian's Money Puzzlive podcast. James Kirby here with
16:52
Speaker 1: Tim Towhey, the head of macro strategy at Yarra Capital. Now, Tim,
16:58
Speaker 1: looking at our own market and a lot of the
17:00
Speaker 1: issues that we've just been talking in the first segment.
17:03
Speaker 1: Are they broadly pertinent to our market too? I mean
17:08
Speaker 1: our market isn't as overheated, i'd like to think as
17:11
Speaker 1: the US. Certainly it isn't returning as well, that's for sure.
17:14
Speaker 1: What would how would you view our market against the
17:17
Speaker 1: against this conversation we just had in the first segment.
17:20
Speaker 2: Well, I think that's certainly true. The market's not as
17:22
Speaker 2: either valued. It's still a little bit on the expensive
17:25
Speaker 2: side in aggregate. But I think when you break down
17:27
Speaker 2: our market, it's you know, there's some really interesting sector
17:30
Speaker 2: stories that are still sort of playing out, so you
17:34
Speaker 2: need to be a little bit careful. I think when
17:35
Speaker 2: you look at our market at the moment, to break
17:37
Speaker 2: it into banks or financials, resources, our own IT sector
17:41
Speaker 2: for instance, and really everything else and those components, you know,
17:45
Speaker 2: we're somewhat through a bit of a devoting in the financials.
17:48
Speaker 2: I think that's got a lot further to go. Personally,
17:51
Speaker 2: we've had a bit of a devoting our IT sector,
17:54
Speaker 2: which is more software sort of heavy, I guess, but
17:56
Speaker 2: it's still screens on the expensive side. And after a
18:00
Speaker 2: pretty dramatic year for resources, you know, they're more ruandom
18:04
Speaker 2: fair value market at the moment rather than screamingly cheap
18:08
Speaker 2: or screamingly expensive. I personally would be suggesting to people
18:13
Speaker 2: at the moment, if you have the view that growth
18:15
Speaker 2: is slowing, which I do, you've got some yarnies risk
18:18
Speaker 2: out there that we do you be learning to some
18:21
Speaker 2: of the more defensive sectors at the moment. And I
18:24
Speaker 2: don't include staple to that at the moment, because I
18:26
Speaker 2: do think they're screwing incredibly expensive.
18:28
Speaker 1: For the every day listener. You're suggesting there aren't ideally defensive.
18:34
Speaker 1: And you also say that bank de rating hasn't finished yet.
18:37
Speaker 2: What's left There is certainly plenty of other stuff out there.
18:41
Speaker 2: I mean, I understand that you can't fit everything if
18:45
Speaker 2: you're going to I'm not saying you have to be
18:46
Speaker 2: selling all your banks, for instance, but I do suggest
18:49
Speaker 2: that they've got a challenging period ahead of them. I
18:51
Speaker 2: mean there are areas like, for instance, you know, we
18:54
Speaker 2: do have a view that bonds will rally a little bit,
18:56
Speaker 2: so there'll be some sectors around that. Utilities and particular
18:59
Speaker 2: the roots will do better in that environment. I mean,
19:01
Speaker 2: healthcare has had a horrendous day writing, absolutely rufal day writing,
19:06
Speaker 2: but The virtue of that, if you don't hold it
19:09
Speaker 2: is that it's probably as chief as you're ever going
19:11
Speaker 2: to get exposure to it, So selectively in that pocket
19:15
Speaker 2: as well would be okay. But in terms of that,
19:18
Speaker 2: and you know, again, I'm happy with the resource exposure,
19:21
Speaker 2: so there is still okay exposure to be had there.
19:24
Speaker 1: I find that very interesting, tim because the resource has
19:27
Speaker 1: been damn good, right. I mean, if we look at
19:28
Speaker 1: the market, it was resources to the extent that we
19:32
Speaker 1: were carried across the line, staggered across the line, the AESX,
19:35
Speaker 1: overall the turns, it was resources, HP and real obviously
19:39
Speaker 1: being the big wasting I think remarkable returns that is
19:42
Speaker 1: sixteen seventy percent in a year where the whole market
19:45
Speaker 1: went up three But do you think just tell us
19:48
Speaker 1: a little bit more about your views on resources then?
19:50
Speaker 2: Yeah, So, I mean right here, right now, of course,
19:52
Speaker 2: you've got this scenario where commodity processes have come off
19:56
Speaker 2: the peaks a bit, so the market has been sort
19:59
Speaker 2: of putting through the those brass adjustments. But what's what
20:04
Speaker 2: you know in terms of the first part of the
20:06
Speaker 2: commentary said that the global backdrop is still pretty robust,
20:08
Speaker 2: China and India and our major training partners are actually
20:12
Speaker 2: still looking at reasonable sort of demand levels. There's not
20:16
Speaker 2: an obvious signal to me, at least at the moment,
20:19
Speaker 2: that they're about to roll over in a major way.
20:21
Speaker 2: So there is that element. I would also sort of
20:24
Speaker 2: suggest that rightly, right now, the reason why people have
20:29
Speaker 2: gone to resources is partly because they don't want to
20:32
Speaker 2: be in the alternative when our market that is actually banks,
20:35
Speaker 2: and secondly because there's still somewhat fearful about how persistent
20:39
Speaker 2: inflation would be, and it's still a reasonable headshoe against
20:43
Speaker 2: inflation is to be that in that part of the
20:45
Speaker 2: market now we probably lean into some of the more
20:48
Speaker 2: future facing type of resources, you know, the coppers and
20:52
Speaker 2: lithiums more so than and elsewhere. But even elsewhere in
20:55
Speaker 2: the major bulks have actually been pretty resilient, so they're
20:58
Speaker 2: still generating good cash flow. This or generating you're actually
21:02
Speaker 2: screening his yield stocks, believe it or not.
21:04
Speaker 1: I'm not that that doesn't surprise me. I mean that
21:07
Speaker 1: that seems maybe they've been d stocks for a while time. Yeah, okay,
21:13
Speaker 1: so that's the miners. I'm just I hope this is
21:15
Speaker 1: helpful listeners that I'm putting team along on this one.
21:19
Speaker 1: So that's Miners on healthcare again, I would have thought
21:24
Speaker 1: healthcare looks great value because CSL fell through the floor,
21:30
Speaker 1: cock Clear fell through the floor, pull the whole sector
21:33
Speaker 1: with it. Is it better than that? It must be
21:36
Speaker 1: if you're saying.
21:36
Speaker 2: So, well, I'm really saying, I mean, obviously, that's certainly
21:39
Speaker 2: what's happened. I would argue that a company, I mean,
21:42
Speaker 2: I'm not trying to give investment advice or stop advice,
21:44
Speaker 2: but just as a as an economist looking looking at
21:48
Speaker 2: the sector, I mean stops like Bristmed. They're still performing
21:52
Speaker 2: very well operationally, but that been taken down by essentially
21:56
Speaker 2: fear around JLP ones and order they writing US healthcare
21:59
Speaker 2: to be frank and in the background biotechs going for
22:03
Speaker 2: a run. So you know, there's been this derating of
22:05
Speaker 2: large healthcare, traditional healthcare, and a bit of a rerating
22:09
Speaker 2: of the biotech base. So but the issue is everything
22:13
Speaker 2: has a price, how far as it fall, and these stocks,
22:16
Speaker 2: as you sort of pointed out, being well loved and
22:20
Speaker 2: somewhat over owned, and I think everyone's kind of like
22:24
Speaker 2: cleaned out their positioning on that so I would argue that, yeah,
22:28
Speaker 2: I wouldn't visit again. I sit there and look at
22:32
Speaker 2: things from the perspective is what are you paying for it?
22:35
Speaker 2: Is it cheap? Has it derated? And what are the
22:37
Speaker 2: prospects that that's actually stacking up as reasonable value over
22:41
Speaker 2: a meeting term investment. And I would argue, as a
22:43
Speaker 2: space it's actually looking a bit more reasonable. Okay.
22:47
Speaker 1: One thing on one other sector which captures a lot
22:51
Speaker 1: of things is gold. I mean we can put gold
22:53
Speaker 1: in and we can just say, well, gold miners, what's
22:56
Speaker 1: your view on gold? Is an asset location for the
23:01
Speaker 1: everyday investor? And if I can also push it out
23:06
Speaker 1: and see what's your view on broad miners?
23:08
Speaker 2: Yeah, I mean talking about gold is almost talking about
23:10
Speaker 2: religion to some people. It seems very emotional as to
23:13
Speaker 2: how people take.
23:13
Speaker 1: This sure and then maybe doubting their religion just at
23:18
Speaker 1: the moment because it's not being great time, but it
23:21
Speaker 1: was don good for a long time. Yeah, that's right.
23:24
Speaker 2: I mean it's off about twenty five percent I think
23:26
Speaker 2: from the peaks, but after a stellar run, and yeah,
23:30
Speaker 2: you have to ask what was the coursal factor of that?
23:32
Speaker 2: What part of that was moving through the peak risk
23:35
Speaker 2: around the Iran conflict. But why do people actually go there?
23:39
Speaker 2: I think they went partly there because they could see
23:41
Speaker 2: massive central bank buying, but they also went there because
23:46
Speaker 2: real interest rates had been moving lower, and I think
23:49
Speaker 2: the combination of people with fear for about inflation, the
23:52
Speaker 2: fear about war risk, and they could see this diversification
23:55
Speaker 2: from basically the US dollar by central banks buying gold.
23:59
Speaker 2: We're all goods, solid fundamental reasons. I think it got
24:03
Speaker 2: very hot as an investment, and there's been an element
24:07
Speaker 2: of money crowding in there that has been rotating back
24:09
Speaker 2: into other stories, particularly as the war risk want. But
24:13
Speaker 2: I would also suggest, and we talked about it earlier
24:15
Speaker 2: on about the reason why real interstrudge for risen partly
24:18
Speaker 2: around the AX the AI capex boom. That's been one
24:22
Speaker 2: of the features that I think is saying gold derated
24:24
Speaker 2: over the last a few months. And so you know,
24:29
Speaker 2: I wouldn't necessarily be calling for an immediate reversal in
24:32
Speaker 2: real interest rates back down or give gold support, but
24:35
Speaker 2: that's kind of what you'd be looking for at this
24:37
Speaker 2: point in order to go there. So if you thought,
24:41
Speaker 2: for instance, that you know the concerns you have around
24:43
Speaker 2: the AI bubble are about to burst and the investment
24:46
Speaker 2: will try up. Then, yes, that would be a good
24:48
Speaker 2: thing to do now, but I don't think that signal
24:50
Speaker 2: is quiet upon us. But you would need to kind
24:52
Speaker 2: of see that, I think for gold to give its
24:54
Speaker 2: next sort of re rating to the upside.
24:57
Speaker 1: Okay, all right, one naice thing before we good questions you.
25:03
Speaker 1: I think you said something like banks who are derated
25:06
Speaker 1: and the de rating isn't.
25:07
Speaker 2: All for yet?
25:09
Speaker 1: Can I ask you what's your view on banks? And
25:12
Speaker 1: to what extent there are the banks exp what extend
25:15
Speaker 1: is that view informed? But the outlook for residential housing.
25:20
Speaker 2: Well, banks are pretty much mostly you're almost like building
25:23
Speaker 2: societies these days. That's all right, So it really does
25:27
Speaker 2: come down to your view on on housing the credit markets.
25:30
Speaker 2: So look, I have viewers that the credit cycle was
25:34
Speaker 2: slowing anyway, because we could already detect prior to the
25:36
Speaker 2: budget at housing turnover had fallen dramatically and credit growth
25:40
Speaker 2: always follows that. You must say, clocked by that, But
25:43
Speaker 2: it's just been turbocharged in terms of the outlook for
25:47
Speaker 2: a downswing in the credit cycle by those changes and
25:52
Speaker 2: then by the tax changes. So yeah, no, one wants
25:57
Speaker 2: to put themselves in their condvctary scenario of a residential
26:00
Speaker 2: property investor anyway, So falling house for us will help
26:03
Speaker 2: EXPEDEDATA a slow down the credit cycle. But one in
26:07
Speaker 2: twenty homes or sorry, twenty percent of homes are held
26:10
Speaker 2: by an investor property owner. That a third of the
26:13
Speaker 2: loans in terms of the backbook goes to investor properties,
26:18
Speaker 2: and fort of new loans or the moogie was going
26:22
Speaker 2: to the lending before the budget exactly. So it has
26:27
Speaker 2: a long way to fall. And I think if you
26:29
Speaker 2: just when we do the economics on it and the
26:31
Speaker 2: maths on it, this clearly went be much going into
26:35
Speaker 2: the established for residential investment going forward, and we just
26:39
Speaker 2: don't think the substitute ability of it going to where
26:42
Speaker 2: you can still use negative gearing will also be very much.
26:46
Speaker 2: So we are expecting a pretty sharp fall in that
26:50
Speaker 2: part of the market, and it's more reportant. It's more
26:53
Speaker 2: about the front book and new lending rather than big
26:56
Speaker 2: falls in the conditions of the backbook. But we're also
26:59
Speaker 2: expecting the unemployment rate to be trending up simultaneous, and
27:03
Speaker 2: we can I think we've got some reasonable leading decatas
27:05
Speaker 2: that are telling us that it's already occurring, and that's
27:08
Speaker 2: just going to see the banks having to take out
27:10
Speaker 2: their insurance essential provisioning, which really affects their earnings outlooks.
27:14
Speaker 2: So there's really no earnings growth from the banks to
27:17
Speaker 2: chase even on current sort of consensus expectations. And if
27:22
Speaker 2: the credit cycles deteriorating by more, the unemployment rate is rising, businesses,
27:27
Speaker 2: some businesses may also be struggling a little bit. In
27:30
Speaker 2: that environment, banks can actually continue to deraye And that's
27:35
Speaker 2: really a view. I mean, they are quite cyclical by
27:37
Speaker 2: their nature. Even though a lot of people think of
27:39
Speaker 2: them as being somewhat defensive, they are actually quite a
27:41
Speaker 2: cyclical business.
27:44
Speaker 1: What do you think? Just one last saying, what do
27:45
Speaker 1: you think of the forecast? Which, interestingly it's always global banks.
27:52
Speaker 1: We're more negative on Australia than local banks, always so
27:56
Speaker 1: Morgan Stanley and it just b see you're talking and
27:59
Speaker 1: ten percent drop from top to bottom basically on the
28:03
Speaker 1: residential housing. What's your view?
28:07
Speaker 2: Yeah, I think that's actually pretty reasonable forecast. To be honest,
28:10
Speaker 2: I think the falls that it has seen already are
28:12
Speaker 2: probably know more than what you're seeing in the official
28:14
Speaker 2: data because of the way that they do those adjustments,
28:16
Speaker 2: the way they series are put together. You know, we're
28:19
Speaker 2: auction clearance rates that are at the moment of telling
28:21
Speaker 2: us there's obviously falls in the immediate term, but just
28:24
Speaker 2: the changes to the negative gearing component really impacts the
28:30
Speaker 2: borrowing capacity of lenders as well. So that alone reduces
28:36
Speaker 2: the a now that people can borrow in the order
28:39
Speaker 2: of ten to fifteen percent. So I think that's that's
28:42
Speaker 2: a big deal. I think the idea around capital gains
28:45
Speaker 2: tax as well as taking the sting out of it
28:47
Speaker 2: as an asset class at the moment as well. And
28:50
Speaker 2: in many ways, this is a bit of a shame,
28:52
Speaker 2: right because we're only just starting to see investment.
28:55
Speaker 1: We're just starting to see it's starting to kick, yeah.
29:00
Speaker 2: Litly, and we needed to build around about two and
29:02
Speaker 2: two hundred and twenty five thousand times a year just
29:04
Speaker 2: to aiding to that under supply of homes and yeah,
29:07
Speaker 2: so it's a bit of a it's a little bit
29:09
Speaker 2: of an own goal in that sense. I'm not going
29:11
Speaker 2: to quibble too much about, you know, the idea of
29:13
Speaker 2: removing negative gearing and established property, but combined it's the
29:17
Speaker 2: combined impact with the capital gains tax that's really causing
29:20
Speaker 2: this effect. So yeah, seven to ten percent following house process.
29:24
Speaker 2: I've actually think it's a pretty reasonable assumption, but quibble
29:27
Speaker 2: with that too much.
29:28
Speaker 1: All right, we'll take a short break. I've got some
29:30
Speaker 1: questions signed up for Tim. Back in a minute. Hello,
29:35
Speaker 1: Welcome back to The Australian's Money Puzzitive podcast. James Kirby
29:38
Speaker 1: and Tim Towey. Here we are talking markets. We're talking
29:43
Speaker 1: about the issue of how the real economy is going
29:49
Speaker 1: in relation to how your investments and markets have been going,
29:52
Speaker 1: and what you need to know in terms of how
29:55
Speaker 1: they interact and how that's going to affect your investments
29:58
Speaker 1: for the rest of this year certainly, and we're into
30:01
Speaker 1: a new financial deer. I thought it was the time
30:03
Speaker 1: to do that with Tim. I have collated some questions
30:06
Speaker 1: from listeners that are particularly economic in tone and tenor
30:13
Speaker 1: so here we go, John. Government spending has reportedly increased
30:17
Speaker 1: from around six hundred and sixteen billion to seven hundred
30:19
Speaker 1: and eighty eight billion in just a few years of
30:21
Speaker 1: public service staffing has gone by more than twenty five percent,
30:25
Speaker 1: and deafith deficits remain very large. Why doesn't there seem
30:30
Speaker 1: to be more scrutiny of government spending. There is this
30:34
Speaker 1: argument that the bulk of our inflation, since the economy
30:37
Speaker 1: is barely ticking along, but the bulk of our the
30:40
Speaker 1: key thing is government spending, and government spending is in
30:44
Speaker 1: and of itself inflationary, and if they peeved it back,
30:47
Speaker 1: we would cool off from the four percent rerogating, which
30:51
Speaker 1: is way above what we deserve. I would have talked
30:54
Speaker 1: with our GDP growth.
30:55
Speaker 2: What's your view, Yeah, I mean, he's right that government
30:58
Speaker 2: spending is way too high as a share of the economy.
31:02
Speaker 2: It's getting towards a record high, which some of that
31:06
Speaker 2: is infrastructure spending. A lot of it is state based
31:08
Speaker 2: infrastructure spending. Trouble is, they all tried to do it
31:10
Speaker 2: at once, and that was really causing a competition for
31:14
Speaker 2: resources elsewhere in the economy. It was driving up wage
31:17
Speaker 2: costs and material costs, and it's quite unhelpful in that
31:20
Speaker 2: sense that it was all coming at once. The kind
31:24
Speaker 2: of good news is that what we can see across
31:28
Speaker 2: most of the states excluding Queensland is it looks like
31:31
Speaker 2: we're moving through that peak right now. And we can
31:34
Speaker 2: also see it in job vacancies. We can see that
31:36
Speaker 2: construction job vacancies are starting to fall, which is indicative
31:39
Speaker 2: that whole build out is starting to crest. But to
31:43
Speaker 2: the point that John's asking, he's one hundred percent right.
31:47
Speaker 2: Governments haven't helped us in the sense that they've been
31:52
Speaker 2: far too aggressive from their spending and it's actually has kept
31:54
Speaker 2: the RBA in the game for longer than they probably
31:56
Speaker 2: should have had to have been in terms of fighting
31:59
Speaker 2: the inflation domestically. They've also there's another element to this
32:03
Speaker 2: that people are probably less aware of that part of
32:06
Speaker 2: the inflation problem is actually the level of taxation itself.
32:10
Speaker 2: You know, with taxation as the share of the economy
32:12
Speaker 2: is very high. But if you look at what's been
32:15
Speaker 2: driving all of the inflation locally or a lot of
32:17
Speaker 2: the inflation locally, Yeah, the electricity subsidy falling out was
32:21
Speaker 2: a massive component, but that was really a government choice.
32:24
Speaker 2: If you look at the property rates and charges, which
32:27
Speaker 2: is more you state and local component, it's a large
32:29
Speaker 2: contributor to inflation as well. Exhaus is a large contributor.
32:32
Speaker 2: So you strip the government taxes out of the local inflation, Yes,
32:36
Speaker 2: it's still above the target band. For the RBA, but
32:39
Speaker 2: only a little bit. So I do think there's a
32:41
Speaker 2: really user case to be made there that governments are overtaxing,
32:45
Speaker 2: but they're also overspending, and a little bit of prudence
32:47
Speaker 2: and better planning would give a better inflationary outcome locally.
32:51
Speaker 1: Okay, thanks for that, John, And of course this is
32:54
Speaker 1: always investment in permission, it's not advice. Quickly, Lucas, I'd
32:59
Speaker 1: be to understand more about recent guests Mark Jocom's comment
33:03
Speaker 1: about investing in the AI hard assets the next order beneficiaries.
33:08
Speaker 1: Just briefly, Tim, what is that?
33:09
Speaker 2: What is that?
33:10
Speaker 1: Next order beneficiaries are AI? It's like, what is whatever
33:15
Speaker 1: is the next phase?
33:18
Speaker 2: Yeah? I mean well yes, and i'd say there's an
33:22
Speaker 2: element of you know, who's selling the picks and shovels
33:25
Speaker 2: to the AI build out, So you know, in our
33:28
Speaker 2: sort of small and microcap funds, you know, we've got
33:31
Speaker 2: a lot of exposure to the people who are actually
33:33
Speaker 2: doing the electrical work and the build which I think
33:36
Speaker 2: is quite good. But then it's also you know, I
33:39
Speaker 2: think the second phase is who's actually going to be
33:41
Speaker 2: harnessing and generating the actual genuine productivity enhancements that are
33:46
Speaker 2: being deployed through the economy, and that's a little bit
33:48
Speaker 2: harder to be frank to identify at a macro level.
33:51
Speaker 2: At this point, we're all sort of can see massive
33:54
Speaker 2: deployment by companies, but the companies are having a little
33:56
Speaker 2: bit of a hard time to articulate how big of
33:59
Speaker 2: an impact actually heavy on the earnings of the right.
34:02
Speaker 1: Yes, the last time I heard the argument about picks
34:05
Speaker 1: and shobles locally, Liliz was the dot com boom, and
34:08
Speaker 1: the great argument was Telstra. But Telstra, you know, was
34:11
Speaker 1: the picks and shovels. It was that you see, if
34:13
Speaker 1: you get in on the dep dot com boom without
34:14
Speaker 1: taking a big risk by bank testerra, that sure didn't
34:17
Speaker 1: work out very well at the time. So in picks
34:20
Speaker 1: and shovels it sounds like, you know, a compromise, an
34:23
Speaker 1: easy way, a low risk wade to go into a boom.
34:26
Speaker 1: But in my experienced term, they fall, They all fall,
34:29
Speaker 1: and the picks and shovels fall. Two. But I think
34:31
Speaker 1: of mining services in mining booms. But we'll leave that
34:34
Speaker 1: one hanging there for the moment, if I can andrew
34:37
Speaker 1: last question. Theoretically, this is really good from Andrew, what
34:41
Speaker 1: would it take for the RBA to adjust its target
34:43
Speaker 1: inflation band? Having in at two to three percent seems
34:47
Speaker 1: divorce from the reality post COVID, especially when minimum wage
34:51
Speaker 1: increases are four point seventy five. He's likely try to
34:55
Speaker 1: enforce a fifty kilometer speed limit on an eight lane motorway.
35:00
Speaker 1: Why don't they just pack it in tim and say, look,
35:02
Speaker 1: we're never going to get there. I mean, is that
35:06
Speaker 1: pie in the sky.
35:07
Speaker 2: Yeah, it's a fairly common question that Andrew's put out there,
35:11
Speaker 2: and some central banks actually contemplated doing this, you know,
35:13
Speaker 2: lifting the inflation target because I can't hit it. I
35:16
Speaker 2: think the IBA has been very strong in this. They
35:18
Speaker 2: have zero interest in doing it, and I think they're
35:21
Speaker 2: fearful that you know, AAR inflation target is higher than
35:24
Speaker 2: all that pig group anyway, by half a percent in
35:26
Speaker 2: any ways. But secondly, you know they're fearful they've in
35:31
Speaker 2: doing that. It becomes a bit of a thin edge
35:33
Speaker 2: of the wedge. And if you lift the inflation target,
35:36
Speaker 2: you all also reset people's longer run inflation expectations. And
35:41
Speaker 2: then yeah, that's right and builds upon itself, which could
35:44
Speaker 2: be a little bit problematic personally, I actually do think
35:47
Speaker 2: the two and a half percent target target, if you're
35:49
Speaker 2: sort of target in the middle of the band, is
35:50
Speaker 2: actually achievable, and I think we're actually going to see
35:53
Speaker 2: inflation surprise people on the downside, actually over the next
35:56
Speaker 2: twelve to eight a month, rather than on the upside.
35:59
Speaker 2: But that perspective, I think he the IRBI won't be
36:01
Speaker 2: changing that the target target anytime soon.
36:04
Speaker 1: All right, Well, on that happy note that the inflation
36:09
Speaker 1: target may be more realistic than we think, and we
36:11
Speaker 1: may see a surprise on the downside. That is, folks,
36:14
Speaker 1: it'll fall rather than that it'll fall lower than many
36:17
Speaker 1: people are predicting. I'd like to stop right there, because
36:20
Speaker 1: that's we'd like to finish on a positive note. We
36:22
Speaker 1: can find one. Tim, thanks very much for coming on
36:24
Speaker 1: the show.
36:26
Speaker 2: Pleas youre Jess.
36:27
Speaker 1: Always pleasure to have you. Tim. That was Tim Towey
36:29
Speaker 1: of your Capital Partners. Okay, let's have some correspondence the
36:34
Speaker 1: money puzzle at the Australian dot com dot you. Thank
36:37
Speaker 1: you so much for all the questions are coming in
36:39
Speaker 1: at the moment on the budget and how it works.
36:41
Speaker 1: And it's hardly a surprise, is it. With CGT changes,
36:44
Speaker 1: negative gearing changes, family trust changes, serves many super fun changes.
36:51
Speaker 1: There's a lot to ask questions about, but feel free
36:53
Speaker 1: to ask questions on anything you like. Today's show was
36:56
Speaker 1: produced by Leah Samitlu. Thanks for listening Talk you soon be.
37:01
Speaker 2: The first super the Wood.
37:05
Speaker 1: The plan so