A View From The Top End

Earning Season Disappoints the Bears

The market performance in July showed the danger of reacting to short term information and noise in the market. It also showed the utter folly and destruction of wealth that people engage in via the process of "tax loss selling" prior to a Financial Year end.

There is no doubt however that part of the reason for May and June falls were in reaction to the possibility of a policy mistake by Central Bankers in reacting to inflation and the fears as to what could happen in markets where those increase in costs matter - namely Housing and Consumer spending.

Listed markets took their cues from the Federal Reserve commentary in the US and closer to home, the RBA and RBNZ. Forward guidance has been abandoned and it looks more likely that Central Banks believe that they have runaway inflation that is out of control (many market watchers disagree). Equally, profit reporting season in the US and the data from Australia indicates that with employment remaining strong and the consumer in relatively good shape, profit and revenue growth overall have been reasonable while guidance has not been pessimistic (overall).

The Real Estate and Private Equity Reaction

What is interesting is that less liquid parts of the market are now starting their path to correcting to a normalised level of pricing. This is evident particularly in the Real Estate market in Australia and America. In Australia, covid price appreciation in Real Estate is starting to unwind - a function of a cost of funds increase (with the official rates going up 0.50% again in August) and increased supply of property for sale (up 7.1%). A good article to review here is Christopher Joye from Coolabah Capital, who puts a rigorous data driven approach behind his views and can be read here.

Equally, some of the more obscene valuations in Private Equity are being marked back to more realistic levels (e.g.: Canva). Many remain great companies, but the point here is that private assets in the "rockstar" parts of the market are undergoing their normalisation following the fall in listed markets.

Where does this leave us going forward? Well, with a lot of politicians, commentators and asset consultants trying to "out-bear" each other with their best assessment of how the next 18 months will rhyme with the part of history that best suits their argument, there will be a lot of noise. Focusing on what we do know:

• Central banks still have to increase rates for the moment until they get back to equilibrium, but perhaps the best of these to look at is the RBNZ which is now starting to factor in the impact on housing and consumer spending. If you are thinking of locking in a mortgage rate, think long and hard about doing it for too long as rates could move down.


• ANZ just priced a debt package into markets and there was far more demand for the fixed component of the issue than the floating rate. That tells you the smart money thinks that rates could fall next year.


• Government policy continues to drive decarbonisation. This means that manufacturers will continue to switch their operations to EV's and the net shortage of battery minerals remains a decade long theme.


• Unemployment remains low and the potential for migration numbers to increase remains strong. This probably limits the more dire predictions on housing prices. Further, construction material costs are starting to abate, although labour supply remains very tight (exacerbated by major project demand).


• More and more activities are being enhanced by digital processes, which means exponentially more data on the cloud in the future. Hard to believe, but we’re only scratching the surface at the moment of this technology.


• Finally, something that reminds us that change occurs slowly. Covid 19 saw a huge amount of transactions move to the cloud. Post pandemic, the learning from reporting season and many internet companies is that the percentage of online versus traditional transactions has moved back to pre-pandemic levels. The conclusion? We still should be happy owning shopping centres, medical centres, office buildings, etc for while yet.

Regards,