The Epicentre: China

The major stimulus package announced by China on Tuesday should be a warning sign to markets of how bad their economic woes are and not a reason to celebrate as they did. The growth of China from an economic backwater to a global powerhouse over the past 45 years has been phenomenal. In many respects, we are seeing the first real stumble for the emerging economic and geopolitical power since they embraced elements of the capitalist system and moved to integrate into the world economy in 1978. But China increasingly appears to be the epicentre of an emerging global slowdown.

An influx of capital investment from all around the world turned China into a manufacturing behemoth. It became the centrepiece of the global supply chain and the primary beneficiary of globalisation. The subsequent urbanisation of China led to their next phase of growth based around construction and infrastructure. The rapid rise of China’s middle-class consumer opened an entirely new market for companies across the world and appeared to be the driver for the next phase of economic growth as the nation looked to overtake the US as the world's major economy.

However, that hasn’t quite played out as the Chinese economy falters under the weight of economic, geopolitical and demographic crises converging at the same time. The major problem facing China now is that the themes that provided their economy uninterrupted growth for decades no longer exist and are even reversing in some cases. There are three key challenges that fundamentally threaten the drivers of China’s economic growth going forward.

Firstly, they have been dealing with a collapsing property market for years now and there isn’t an obvious or simple solution. As a government-controlled economy, China can implement strategies to contain losses that western capitalist economies cannot. While that has helped prevent a full-scale collapse and the immediate contagion, the fallout is still reverberating through the economy.

The second key problem China is facing is the decoupling from their economy by the west. This is a slow-moving but very real problem for them. What gave China such as boost for the last 20 years simply doesn't exist anymore. Following the Russian invasion of Ukraine most western countries have moved to decouple from China in the interests of national security. There is a whole suite of changes that ultimately boil down to removing their dependence on China to protect their supply chains in the increasingly probable event of a conflict. This will be a decade-long economic drag on the Chinese economy as investment is redeployed by western nations back home or to allied nations.

Thirdly, they have a population problem. China has low fertility rates and its population is rapidly aging. Around 30% of the population is forecast to be aged over 60 by 2035 and that figure is forecast to hit almost 40% by 2050. The implications are serious for China because it means more people need government support with a shrinking workforce paying taxes to fund it. You need only look at Japan most recently to see how problematic this can be.

What does this all mean for Australia and the rest of the world? Well, it’s bad news. From European auto manufacturers to Australian miners, it going to hit core industries at the hearts of many national economies. It's important to remember that outside of Australia almost every major economy is now cutting rates to get ahead of the slowdown. This month alone the US cut interest rates 50 basis points (bps), Europe 65 bps, and China 20 bps. Ironically, for all its own problems, the US may well be the best-positioned major economy. It remains our preferred investment market against the backdrop of a potential slowdown.

This all raises the question of how China can stabilise its economy and avoid a more serious economic downturn. China doesn’t have many options up its sleeve. In some ways, they are simply at the mercy of the wave they rode up now that it is on the way down. Many of the changing themes are structural and out of their control. The flow-on effects of the downturn in China are yet to fully impact Australia and the rest of the world. Keep watching though because the downturn is coming.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Get Comfortable Being Uncomfortable

The most successful people are those who are the hungriest to learn and improve. They understand early on in life that they need to get comfortable being uncomfortable. They are confident operating in the grey zone of uncertainty. That’s how you learn and grow. They know they need to be outside their comfort zone on a regular basis because if you are not growing as an individual or as an organisation, you are going backward.

But being comfortable being uncomfortable is easier for some than it is for others. For some, learning can be intimidating. But you cannot let fear hold you back. I am reminded of the karate teacher who once told a class of new white belts attending their first lesson that every black belt walked through the dojo door once as a white belt on their first day too. That lesson applies to everything. Whatever we are great at in any field, we were all white belts once. Conversely, whatever you want to be great at you can learn if you just start.

It is not only fear that we need to combat, complacency is equally damaging. There are many people who go through life and grow to a point and then stop. They get comfortable and then lazy. Being comfortable is like an inflation that erodes a person's ambition and ability to grow. We all know people who wish they changed careers, or took the job offer or lived overseas and never did it. When they don't, it’s often a combination of being too comfortable in their current situation and a fear of failure, so they do nothing. They stay where it is comfortable and then it gets easy not to change and grow.

The people who have achieved success do not think about or talk about failure in the same way as unsuccessful people. They are too busy trying to improve to let anything stop them. Successful people are focused on improving, what worked and did not work, then they move forward fast. Velocity matters with learning. It is not about your feelings. If you want to be successful, it is best to leave your insecurities at the door.

When someone is thinking about embarking on a life changing journey, I will often ask them what their mix of fear and excitement is. I find personally when the mix is 50% excitement and 50% nervousness that has always been a good indicator that this challenge is the right step up to the next level. Too much fear might mean you are not ready for the challenge or it’s beyond uncomfortable, while too much excitement might mean you are blind to the risks, or you are being irrationally exuberant. While it is important to push outside your comfort zone it must still be a very rational and deliberate approach.

At a time when there is so much uncertainty in the world, I hear from a lot of people, especially younger people, that they are increasingly overwhelmed. They often don't know where to start or how. There seems to be an increased level of anxiety people feel when they are out of their comfort zone. There is no need to overthink this because there is never a perfect time or place to start. The best way is simply to walk through the door like everyone else before you and create your own day one. A lot of things will go wrong, but that doesn’t matter. You will work hard and solve the problems as they are faced with them and keep moving forward. That’s how you start to learn and ultimately succeed.

Not happy in your life or career? Change something, do something different. The worst thing you can do is keep doing the same thing that makes you miserable because you’re too worried about what might go wrong. But it happens every day because people are complacent or scared. So, they do nothing. Getting comfortable being uncomfortable is not about learning. It is a mindset that becomes the difference between getting to the end of your life and having achieved your hopes and dreams or becoming complacent and living a life filled with the regret of potential that was never reached.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Keep Watching Jobs and Unemployment

As I have said for a while, keep watching the unemployment data. When the unemployment rate starts to move up then you know the economy has a problem. I wrote about exactly that in my weekly note titled “Unemployment the canary in the recessionary coal mine.” back in February. Unemployment in the US has indeed gone up. From 3.4% in April 2023 unemployment has since jumped to 4.3% in July 2024. The trend is clear; the US economy is genuinely slowing.

A rising unemployment rate is very significant because it is a real and tangible indicator that the economy is slowing. It is why interest rate cuts in the US are on the table for September and beyond. Then the question becomes how fast is the economy slowing and how far will it fall? The ongoing debate for investors is whether it will be a soft or a hard landing. In other words, will it be a mild downturn or a major problem? I think a recession is probable with the potential for a crisis, or crises to emerge. We are positioned accordingly within our client portfolios, though we are cautiously optimistic.

I am concerned that governments and investors all seem to think that an economic slowdown can be fixed every time simply by dropping rates. It is not always the case. When the GFC and Covid hit, the playbook was to drop interest rates to 0%, pump money into the economy and away we go. It was about giving consumers confidence to keep spending by letting them know that the government would do everything needed to keep the economy moving. Somewhere along the way, the world became addicted to low interest rates as governments moved from lower rates to save a faltering economy to using them to turbo charge it. That is where the asset bubbles and inflation we have seen across the world come from.

But as inflation took hold and interest rates went higher, cost of living pressures reemerged for the first time in decades. The world changed and a psychological line in the sand was drawn as real-life consequences began to emerge. Higher costs eventually slow the economy, whether it is via inflation, or the higher rates needed to curb it. Then as business adjusts the casualty is jobs. That is the real game changer. As the unemployment rate moves higher, the issue is not the lost spending from the few people who lose their jobs, that's just the tip of the iceberg. It's a complete change of mindset in the consumer.

A consumer is not just someone who spends in isolation. They are usually an employee who earns an income so they can meet their living costs. If they have some income left over, they also have discretionary income they may spend. In the past, when the economy slowed, rate cuts put money into people's pockets and the spending flowed. In the environment we face now, the unemployment rate is going the wrong way, so the rate cuts are not going to be met with the same psychological response as they were in the past. They are not going to think about spending extra, as unemployment creeps higher the fear becomes “will I have a job next month or next year?”

So, a rate cut in this situation is not met with the previous celebratory spending. Employees, as they become worried about their job security, are instead battening down the hatches and preparing for a rainy day that may soon befall them. We are at the very start of this process. Unfortunately, that very fear of their job security is the catalyst for why rate cuts are unlikely to have the same positive economic impact as they have in the past. The biggest challenge facing governments across the world next is rising unemployment as economies stall and businesses cut jobs. While consumers might react to rate cuts, employees care more about jobs.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Debt and Deficits

Investors are trying to work out just what a win for either Trump or Harris means for their investments, the economy and the ramifications for the entire world. Certainly, there are significant changes ahead in many areas depending on who leads for the next four years. However, what many overlook is that there are many areas that will not change much regardless of who wins. In many respects, these areas are more important to understand long-term.

Firstly, the US will keep spending and run up huge budget deficits. With a forecast deficit of $1.9 trillion (yes with a T) for 2024 this is not sustainable, but the US will keep on this path until they cannot. In other words, while we would all like to think the US government will at some point rein in their spending and get their house in order proactively, history tells us it will take some form of crisis to force change.

Secondly, on the back of those massive budget deficits, national debt will continue to balloon. At last count, it is about $35 trillion and increasing rapidly. By 2034, the US Federal budget deficit is forecast to be $2.9 trillion and debt to reach $54 trillion US dollars. Go back ten years to 2014 US govt debt was $17 trillion and ten years before that in 2004 it was just $7 trillion. Ever higher debt will have massive implications for the pricing of debt in the future, not just for the US but for every other country and business in the world. US debt is seen as the benchmark for pricing risk.

Thirdly, the US will continue to be the most important and powerful country in the world, from both an economic and a military perspective. The biggest, best and most innovative businesses will continue to prosper there. The US dollar will continue to be the world's currency for international trade despite what people may say about the emergence of crypto currency or any other currency taking hold. The US will continue to be the undisputed military power in the world. Regardless of their challenges, sentiment and enemies; US military might remains critical to global stability and economic trade.

Eventually, there will be a time when too much debt is needed by too many countries from too few investors. No one really knows how long it will be before that happens. Everything will be fine until it's not. Once too many debt issuers are competing for too few investors it will force bond yields up. While some countries simply won't get finance and will need to dramatically reduce their spending while others will not be able to refinance their existing debts. Either way, it poses significant economic problems for individual nations and the global economy.

However, the major reason financial markets are less concerned when it comes to the US debt level is that where a country controls its own currency, it effectively has an endless source of money. The US specifically has the added advantage that it is the global reserve currency too. If the debt problem one day morphs into a debt crisis, the US can pull the money printing lever as its get out of jail free card. But the closer we get to that lever being pulled, the more we need to consider what that world looks like.

If the debt and deficits from countries across the world are not reined in, a global debt crisis will eventually emerge. The US will do whatever needs to be done to protect their national interests. They will have no problem going back to the GFC playbook and printing even more money to inflate asset prices and their economy once again. The likely outcome then is a massive spike in inflation. It's not inevitable but fast forward 10 years to a world of many nations with higher deficits and more massive debt, then that will be the necessary outcome.

So, when it comes to the USA, regardless of who wins the election, some things will not change. The federal deficit and debt will continue to grow. There is no plan to address it. Everyone is in denial on this from politicians to financial institutions. No one knows how to implement the change needed before it gets to be out of control so they just kick the can down the road and will deal with the crisis when it eventually arrives. When it finally does, the US will be able to use its dominant position in the world to manage the situation and make it everyone else's problem.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Are You The Leader You Wish You Had?

One of my favourite parts of interviewing exceptional leaders and businesspeople on my podcast is hearing the stories that are unique to their journeys. While high performers have many similar traits, there are always insights to uncover based on each person's path and hard-earned lessons along the way.

With that in mind, I was especially looking forward to speaking with Sydney Swans Premiership coach and AFL Legend Paul Roos on my most recent episode. There were so many awesome insights across a range of topics. We covered everything from success and failure to culture and leading through to mentoring, succession, family, and parenting.

When he retired as a player in 1998, he compiled a list of 25 'Coaching notes’. These were the key attributes or actions he wanted from his coaches. The list was quite different from what you might think and was part of the revolutionary approach he brought to the AFL when he started coaching. He is adamant that he would never have won the 2005 AFL premiership without the list.

The list comes from a simple question that Paul suggests that every leader ask themselves:

“Are you the leader you wish you had?”

It is a question worth asking.

Paul Roos Coaching Notes (1998):

1. Always remember to enjoy what you’re doing.

2. Coach’s attitude will rub off on the players.

3. If coach doesn’t appear happy/relaxed, players will adopt same mentality.

4. Never lose sight of the fact it is a game of football.

5. Coach’s job is to set strategies: team plans, team rules, team disciplines, specific instructions to players.

6. Good communication skills.

7. Treat people as you want to be treated yourself.

8. Positive reinforcement to players.

9. Players don’t mean to make mistakes – don’t go out to lose.

10. 42 senior players – all different personalities, deal with each one individually to get the best out of him.

11. Never drag a player for making a mistake.

12. Don’t overuse interchange.

13. Players go into a game with different mental approach.

14. Enjoy training.

15. Make players accountable for training, discipline, team plans – it is their team too.

16. Weekly meetings with team leaders.

17. Be specific at quarter, half, three-quarter time by re-addressing strategies – don’t just verbally abuse.

18. Motivate players by being positive.

19. After game don’t fly off the handle. If too emotional say nothing, wait until Monday.

20. Surround yourself with coaches and personnel you know and respect.

21. Be prepared to listen to advice from advisers.

22. Keep training interesting and vary when necessary.

23. Team bonding and camaraderie is important for a winning team.

24. Make injured players feel as much a part of the team as possible (players don’t usually make up injuries).

25. Training should be game-related.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions

The Economic Power of Sentiment

When it comes to the stock market, sentiment is usually something I’d associate with the noise of the market. In this context, sentiment is often the momentum of the share price movement driven by the investor emotions of fear and greed. When sentiment is against a company, it is often out of favour. Ignoring the noise of the crowd means it may potentially be a buying opportunity. Conversely, when sentiment is in favour of a stock or trend, this noise may well mean that it’s time to sell down or take profit. In this regard, sentiment reflects the weight of the herd's view in the short term. For long-term investors in shares, paying attention to sentiment can be counterproductive.

From an economic perspective though, sentiment really does matter. After all, the global economy is not a machine or some abstract concept, it’s just the output of what all the people in the world do. The global economy is simply the result of what we collectively produce and consume as individuals every day. This is an important and often forgotten aspect of how we look at the world from an investment perspective.  If consumers and business owners are positive about where the economy is going, they are more likely to spend and invest. While if they are negative about the economic situation then they’ll spend and invest less. So, it becomes a self-fulfilling cycle. Consumer and business sentiment matter a great deal to economic activity.

Central banks and governments understand that sentiment matters from an economic perspective. It’s why they are so focused on managing consumer and business expectations. In tough times, they will never say “this situation looks like it could be an economic disaster”. Even in a recession they will say something like “it’s been a tough few months, but we think the worst is behind us, the green shoots of growth are coming through”. Then they will repeat that every month until it ends up being right. That approach is also the right way to manage sentiment in the down times from a government managing the macro-economic perspective. If you talk down the economy, you’ll shift sentiment down fast, then the economy will fall off a cliff too quickly.

It's rare and in fact counterproductive for governments and central banks to speak openly about any real concerns for the economy as it will only make them worse. It's far better to speak positively to blunt the impact in tough times and eventually, the good times will return. That’s the playbook for governments around the world. The mistake investors make after listening to it is to believe it. It's up to an investor to decide for themselves what their view of the macroeconomic picture is. Your mandate is to generate a return from your investments and that is completely different from the aim of the government and the central banks. The worst time to listen to the government for economic guidance is when the economy slows because that is exactly when your goals clash with theirs.

So, as the global economy begins to slow over the coming months remember all of this. It’s up to you as an investor to form your own view of the economy and what that means for consumers and businesses. Understanding the impact that sentiment has on a slowdown in the global economy is critical for investors because ultimately the activity of consumers and businesses flows through directly to the profits of companies you invest in. But don't be fooled into thinking that the government or central banks will tell you how an economic slowdown will play out. Their task is different to yours.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions

How the Mighty Have Fallen

Share markets have been hitting all-time highs for much of this year on the back of standout performances of the big tech. But it is certainly not across the board. Many equally recognisable global names have significantly underperformed and are feeling the brunt of investor wrath. For some, it is due to a downturn in sales while for others it might be an event or series of events that bring chaos and a reputational hit.

Sometimes the events causing the problems are worth looking at more closely. While the issues at play often justify the share price decline, if the company, brand, and management are strong enough such events can be overcome. This potentially presents a one-off opportunity for patient long-term investors to buy an unloved and out of favour company.

Often, short-term investor sentiment is volatile. Too exuberant when there is positive news and too fearful when news is negative. For investors, Warren Buffett's classic quote sums up the counter-intuitive approach needed when he said, “Be fearful when others are greedy, and greedy when others are fearful.” Buffett has on many occasions looked at what other investors have seen as a crisis and invested having realised it was in fact an opportunity.

In 2008, at the height of the Global Financial Crisis (GFC), Buffett famously invested billions in Goldman Sachs. He bought shares in the investment bank at a time when fear in investment markets was at extreme levels. He profited greatly from investing at that point. Many years earlier he bought shares in American Express after the company had been embroiled in a fraud scandal. The shares plummeted with its future and reputation brought into doubt. Again, Buffett understood that while the situation was obviously serious, the company could address these problems and recover.

Currently, companies that have taken significant hits include Nike, Boeing and most recently CrowdStrike. Often the reasons for share prices falling are valid such as a declining industry or a competitive environment. But often there are a range of circumstances that while bad are not as bad as investors fear in the moment. Of course, it is not always the case.

The key to this is the strength of the brand and the importance of the company within its industry. You need to consider if the issues can be resolved too. Are the issues a one-off and temporary or are the issues embedded in the company? If they are systemic, can they be remedied? It's worth having a look to consider if the issues facing the company are the existential threat that markets sometimes would have you believe. If the company can overcome the issues in the long term, then the share market might well be marking it down too harshly in the short-term.

In the case of Nike, the share price is down heavily this year on slower sales globally and increased competition from new entrants. Nike’s share price is down just over 40% since December last year and almost 60% lower than its all-time high back in November 2021. What is clear to me is that Nike is an extraordinarily strong global brand. It is dominant in areas such as basketball and running. While consumer demand is sluggish around the world, it will not last forever. There are exciting growth opportunities in key markets such as Asia and Africa that are passionate about sports, especially basketball.

In the case of Boeing, there are some really concerning issues around safety. Their 737 planes which accounted for almost of third of their revenue were grounded after a series of fatal crashes. But these appear to be potentially systemic issues. Government investigations paint a concerning picture about the culture at the company. However, there are not many companies that can do the things Boeing can do. Not only that but they do a significant amount of work in the defence space at a time of massive increases in military spending. They obviously need to overhaul not only their processes and procedures but their entire culture. But if they can, perhaps this is an opportunity. After a long period of remediation, it may be possible for Boeing to emerge stronger than ever.

CrowdStrike is an interesting case study. I am particularly interested as cybersecurity and defence is a massive growth industry and these stocks tend to trade at levels that I find too expensive to justify. The CrowdStrike outage that affected the entire world obviously carries with it reputational risk, but it also highlights how important and embedded in the global communications infrastructure framework these companies are. There are not many companies with the capability of CrowdStrike. At this point, the share price is 40% lower than a month ago on the concerns investors have right now. But if it is a one-off this incident may be a distant memory in 5 years' time. Obviously, the risk is that this is a reoccurring issue, and they lose credibility and customers.

It's somewhat more difficult to be greedy when others are fearful. In the case of Nike, I think this is a potential opportunity to accumulate shares for long term in a leading global brand at fair prices. In Boeing, I think the likelihood is that the cultural turnaround will take many years, and the risks associated with this are probably too high for me. With CrowdStrike, if recent events are not symptomatic of a deeper systemic problem, it may well be soon forgotten, and business returns to normal. It's critical for investors to think about the long-term prospects of the companies they are investing in when a company faces serious issues. One of the best questions you can ask is will these issues matter in 5, 10 or 15 years’ time?

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

An Excellent Disappointing Result

Yesterday, Microsoft results were released. After the news, the shares immediately dropped over 6% in after-hours trading as headlines called it a ‘disappointing result’. Analysts referred to the result as ‘below expectations’ and questioned when investors would start to see a return on investment for the $US14 billion spent last quarter on AI (Artificial Intelligence) infrastructure.  

Seems grim. Just how bad were their results?  

Well, revenue was up 15% year–on-year. In their important Azure Cloud division, revenue was up 29% for the quarter with guidance for 2025 for growth ‘slowing’ to 28%. Profit was up 10% to $US22 billion. For the full year, revenue was $US245 billion and net income was $US88 billion.

This is an excellent result from an outstanding company. So why the drama and consternation?  

Share markets and investors are incredibly short-sighted. The primary reason for the fall in the share price was that however well a company performs investors want more. The share price went up too much this year on expectations that were too high. Investors expected 31% revenue growth and were concerned about the level of capital expenditure for the quarter.  

Microsoft is only just getting started in building out its capabilities to win the AI arms race. This is a multi-decade investment. It is madness to expect to see a return on investment on a quarter-by-quarter basis. This is where long-term investors need to look beyond the noise in the financial media and quarterly results. Understanding the big picture is critical.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

JP Morgan Juggernaut

There are a handful of stocks we hold in our client portfolios that I consider to be cornerstone stocks. These are the bluest of blue-chip companies such as Microsoft, Amazon and Coca-Cola. Another name, less well-known here in Australia is JP Morgan Chase (JPM). We added it to our portfolio before the regional banking crisis in early 2023 and have continued accumulating shares in the stock for most clients in their international portfolios in that time. The performance has been outstanding, and we expect their market leadership to continue.

There are several important reasons I like this company.

Firstly, they have outstanding management. It starts with their CEO of the past 18 years, Jamie Dimon. He has guided the bank from strength to strength including navigating not just JP Morgan through the GFC but the entire banking industry. He is the definition of a great leader.

Under his guidance, he has balanced the need to perform in the short term while optimising for the long term. His leadership and foresight have set JP Morgan up to achieve long-term growth while creating a culture of prudence and discipline that has delivered consistent results and made JP Morgan a beacon of stability in an era of disruption and change.

This discipline and stability enable the bank to not only weather the most difficult of financial storms but also to take advantage of them and add value to shareholders in the toughest of times. As the GFC took hold and big-name banks collapsed, JP Morgan’s position of strength enabled it to be a buyer at a time when no one else could. They were able to buy Bear Stearns and Washington Mutual in the process for pennies in the dollar.

More recently, the regional banking crisis in 2023 highlighted how susceptible the smaller US banks are to failure when depositors withdraw their funds and create a run on a bank. This caused the downfall of Silicon Valley Bank (SVB) because they were forced to sell assets at a loss. Once again, JP Morgan was able to capitalise on the situation by taking over SVB as well as First Republic.

More importantly though, it was their relative strength and stability that was able to help in heading off the crisis. Once JP Morgan stepped in, depositor concerns about their deposit dissipated. During that time, it became clear to me that going forward the banking world was going to change, consolidation was going to be inevitable, and the big will get bigger. Additionally, their global presence is growing and their investments in technology are paying off too. They will be a beneficiary in the advancement and integration of artificial intelligence technology.

But from a pure investment value perspective is what appeals to me most. Within our portfolios, we tend to buy Australian companies where the Australian market leader has similar attributes to their global peers. We prefer to buy exposure in international companies where you simply cannot invest in a theme domestically. For example, all things being equal on valuation, you might prefer Woolworths over Walmart, but you simply cannot find a domestic equivalent to Microsoft.

When you start comparing JPM to Australian banks, the difference in valuations is stark. Australia’s biggest and safest bank Commonwealth Bank of Australia (CBA) trades at a 22 times price earning (PE) ratio while JPM trades at just 11 times. Comparing their valuations to their profit, CBA is twice as expensive as JPM. While JPM has a market capitalisation of AUD $895b approx. four times CBA’s AUD $220b, one is dominant globally while the other is dominant in a nation of only 25 million.

Obviously, Australian investors love CBA and will point out it has a higher dividend at 3.7% fully franked compared to 2.2% for JPM. But this is where its critical to look under the hood and really understand how the numbers work. CBA pay out almost 80% of their profit to maintain that dividend. JPM only pay out about 25% of their profit as dividend. JPM could pay a higher dividend yield than CBA if they chose to. But they retain their earning to reinvest massively in the future as they position for global opportunities.

It's important to remember that the issues that created the regional banking issue back in 2023 haven't really disappeared. With all the geopolitical and economic uncertainty around the world, its critical to invest in companies with a proven track record. But history has shown that whatever the problems or crises that arise in the decade ahead, JPM will be positioned, ready and waiting patiently to capitalise on any opportunity. Few companies have a better track record, market strength and leadership to confidently enter a more difficult phase. Few are better positioned on the global stage than JP Morgan. This is why investors need to consider the best companies across the world, not just at home.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Is Now a Good Time to Consider Selling Your Business?

I’m having an increasing number of conversations with business owners recently where they have asked whether it’s a good time to sell their business. If you run a successful private business, you have probably been approached by private equity firms gauging your interest in selling or taking on a big investor. Anecdotally though, it seems that these approaches are becoming more frequent and the valuations on offer higher than ever. 

The current situation reminds me of 2006 when I saw a surge in people exiting businesses at fantastic prices. Shortly after that, the GFC hit, and it all came to a grinding halt. Obviously, it depends on lots of factors including your age, your industry, your motivation, and stage of life. But subject to those personal considerations, my answer is increasingly, yes, now is a great time to sell a business. 

It starts with the largest investment institutions, big superannuation, pension funds and wealth management firms. With share markets hitting record highs, they are trying to diversify and find better value opportunities. Many of these organizations are mandated to invest these funds regardless of valuations. Increasingly they’ve poured billions into private equity. 

With a flood of money into private equity funds, managers are looking across the country at private companies they can buy or invest in to deploy these funds. What happens in situations like this is there’s more money and more managers competing for the same number of deals. In such a competitive environment they have a choice, pay more than they’d like to or stay disciplined and miss out on the deal altogether. 

Here’s where it gets tricky. Often the funds are deployed even though it puts future returns of the fund at risk. Why? Well, firstly it’s not their money. Secondly, if they don’t deploy the cash their investors will want their cash back. Either way, if they don't find businesses to buy then they don’t get their management fee.  

While many PE firms will be disciplined, many aren’t, and this is when bad investments are made. As the late great investor, Charlie Munger once said, “show me the incentive and I’ll show you the outcome”. So, the deals will get done and this flood of money will find a home. That’s why as the landscape becomes increasingly competitive the price earning multiple on private deals starts to ratchet up. 

In many cases, the profits of these businesses are not increasing dramatically to justify the higher prices private equity will pay, they are simply prepared to pay a higher multiple of the profit. It’s also the reason I’ve completely avoided private equity funds for my clients. They sound great but in this current market, it’s possible you’re paying $1 to buy 80 cents.  

Conversely, it's a great opportunity for a business owner who might have been thinking of selling in the years ahead to bring forward their timeline. Why? It’s because this situation isn’t sustainable. This is the frothiest part of the market cycle. Once the music stops business owners will see these offers dry up and they be leaving tens if not hundreds of millions of dollars on the table. So, is it a good time to sell?  

Yes absolutely. 

The next question I get is what’s the timeline? 

If these elevated prices on offer are not sustainable then when does it end? How long do you have before things change? I continue to be surprised by how high and how long both the share market and property market have continued their rise. The level of growth needed to justify current valuations is very high. This is especially so in an environment where higher rates are taking so long to cause the slowdown they are intended to create. I think we are already overdue for a pullback in share markets and economic growth, so I'd get on with it sooner rather than later.  

Then it's about how to structure a deal when you sell your business. Usually, deals are structured as a mix of cash, shares and an earnout based on hitting agreed metrics in the years ahead. If you think there’s a risk business conditions might deteriorate significantly, then logically you’d want to take as much of the sales proceeds in cash as possible. Signaling is important in these transactions. A founder who wants all cash is a red flag for investors, so you need to temper your enthusiasm in this regard and ensure your selling narrative is for the right reasons. 

Often business owners take more in shares and much less in cash if they feel there is still high growth ahead. But unless you are convinced of the upside growth opportunity a higher cash component is worth considering given you won’t have the same level of control or autonomy over the company post-exit. And no matter how well it starts it’s always difficult for founders to manage with the new regime and increased bureaucracy during the earn-out phase. While a three-year earn-out phase is the norm, if you can negotiate a shorter period, it might be better for you. 

This is, in my opinion, a once–in-a-generation opportunity for business owners to potentially obtain a price that they may look back on in a couple of years and regret not taking. Like 2006 and even 2021 for tech, once the music stops and the downturn is in full swing, these deals dry up and the valuations fall to much more normal or even depressed levels. So, if you have been thinking about selling your business in the next few years, I would strongly suggest considering whether current higher prices coupled with the potential for an economic downturn ahead, make it worth acting much sooner.  

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Setbacks and Success

When I was younger the ultimate definition of greatness for me was Michael Jordan or Steve Jobs. I aspired to be like that. I learnt a lot growing up reading everything I could about them.

I have always been fascinated by those who reach the highest level of achievement in their chosen field. I am interested not just in their achievements but their mindset and what really makes them tick; what lies deeper down that drives them to succeed.

When I wrote my weekly note a few weeks ago about consistency, I reflected on why I place such a high value on routine. It occurred to me that there are two types of people who achieve their goals. There are those that are disciplined and so they have a strong routine, then there are those who need a strong routine to be disciplined.

Those in the first group have always seemed focused and methodical, almost robotic in their execution. I was never like that. I was in the second group and my biggest strength was that I was determined. A lot of successful people across all types of fields fall into the second category.

Often, it is the setbacks, disappointments, and trauma in life that underpin their drive to succeed. Michael Jordan was cut from his high school basketball team; Steve Jobs was fired as CEO of his own company. Yet in both cases they were determined to come back stronger than ever. Their determination to succeed was fueled by their failures.

They did not accept failure or shy away from it and did not let it define them. Instead, it was the catalyst for who they became. When you are determined to succeed, the overriding focus is not winning. It is often about refusing to be beaten. That does not mean you never lose. In fact, losing is one of the best ways to learn and get better.

That said, neither Jordan nor Jobs had a reputation for being tolerant of anything less than perfection. In society, those we put on a pedestal are not necessarily the people you really want to be like. Often the best of the best are driven to achieve not only despite their flaws but because of them.

The point here is that the level of success that anyone achieves is often a far uglier and traumatic process than we realise. Even the toughest of times are romanticized in the storytelling. The truth is that working out how to succeed is usually a series of iterations or small wins that accumulate into a larger achievement.

My routine was born out of many years of trial-and-error and finding what worked best for me. It certainly was not how I have always worked. Success in any field is a lot like life itself whereby no matter how ‘together’ or successful someone is they are still trying to navigate life and all its challenges the same as the next person.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Land Mines

From the rapid increases in interest rates to the aftereffects of the pandemic, there are multiple generational events that the global economy is continuing to digest. However, there is increasing evidence of financial problems hidden beneath the surface that are raising some concerns. Investors need to watch their step.

I have been warning for a while now that central banks cannot increase interest rates from 0% to 5% with no consequences. Higher rates impact the entire economic system, not just people’s mortgages and businesses. Large corporations through to entire countries with high debts are feeling the pinch. So far, their impact is taking longer than I expected to flow through and cause a financial or economic mishap, but they will eventually.

There have been a couple of recent near misses. There was the run on the regional banks in the US that brought down Silicon Valley Bank and a close call for the UK pension funds. In both cases, disaster was averted but it is worth remembering that the underlying issues that created those problems are still lurking.

A recent property transaction in New York City highlighted just how much the world has changed in the past 5 years. Earlier this month there was an office building sold in NYC for US$50m. What stood out was that it was sold at a 67% discount to its 2018 purchase price of US$150m.

In 2018 interest rates were low, we hadn’t heard of covid and working from home was unusual. Compared to 2024 with much higher rates and office vacancy rates at much higher levels, the numbers and cash flows look radically different.

The real problems begin when owners in financial difficulty are forced to sell, or worse, the banks seize the property, and are selling. You end up with a glut of properties, no buyers, and increasingly desperate sellers. Prices fall and continue to fall. This leads to even more sales as desperation to get out before you cannot sell at all.

There are other signs too. Many organisations including BlackRock and Charter Hall have suspended or limited withdrawals from some of their office property funds. They are doing this preemptively to prevent investor withdrawals requiring them to sell assets at lower prices, potentially realising losses. This has not raised alarms so far, but it should have attracted much more attention than it has.

There are many of these funds holding billions of dollars of office property assets managed by large and small fund managers for investors. The proliferation of unlisted funds for everything from property to private credit raises real questions for investors as to how they get their money out if markets go the wrong way.

I have not seen a set of circumstances like this since the GFC and here in Australia not since the early 1990’s recession when record-high interest rates created a property and loan default crisis that almost sent Westpac Bank broke. This time around the big banks seem more conservative. The risk may well be with the organisations who filled the gaps.

I am not predicting this for the entire property market, but the office property market specifically has all the hallmarks for a situation like this to unfold. How that implosion, should it happen, flows through to financial markets and the general economy is a real risk. My concern is that the office building in NYC is not a one-off, but that it might be the first domino of many more to fall.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Consistency is The Key

What I’ve come to understand over the years is that if I am to achieve my goals in business and in life, I need to think more like an elite athlete. Performing at the highest level doesn’t require you to do anything spectacular though. The key is simply being consistent and working on building winning habits every day. I’ve found there are a few tasks that are not negotiable for me if I am to perform at my best. Embedding these tasks into my routine so that they become habits removes the decision-making process and ensures they get done without even having to think about it. 

The most important part of my day is getting up at 5am. I get up and make myself an espresso on the stove using my mocha pot like my Nonno back in the old days. Then it’s off to the gym. I have found that the habit of getting up early and hitting the gym first makes my whole day fall into place. I’ve tried every other option, morning, noon, and evening but for me, there is nothing better than getting my workout done early and forgetting about it. As the saying goes “win the morning, win the day”. 

I work out at the gym 7 days a week. I used to have Sunday off for rest, but I have found it much easier to get up and go every single day without any rest days. I have worked out now for 266 days in a row with no day missed. My goal is 366 days in a row. For me, streaks work because they change your mind set significantly, you’re more invested psychologically. When you have been to the gym for 266 days in a row and you wake up feeling tired or it’s cold, you still go otherwise tomorrow you are back to day 1.  

I’m at my desk at 7.30am. I read the Financial Review, Bloomberg and Wall Street Journal to catch up on what happened in financial markets overnight. Then I will write a few words for my weekly insights note. It can be any topic that is broadly relevant, and I find interesting. This process is critical because it helps to both broaden and deepen my thinking on topics and form a more articulate and considered view.   

At 8.30am, I tackle the most important task of the day. Like a lot of people, I find it all too easy to procrastinate and put important tasks off and instead reply to emails or complete other work. But when I attack the most important task first it means my attention is in the right place and I am making the most productive decision for me and my business.  

Perhaps most importantly with regards to my phone, I don’t have any notifications on other than for text messages and phone calls. With so much noise these days you need to be deliberate in removing distractions to ensure you have an environment where you spend time doing the tasks that you intend to do. I’ve deleted apps such as Twitter and LinkedIn off my phone because even when you use them for work it’s too easy to waste time on interesting but unproductive content.  

During the day, I make sure I get out of the office a couple of times and go for a walk around Circular Quay and get my 10,000 steps. That’s also not negotiable, I do that every day. I have dinner with my wife at 6.30pm and by 8pm I am watching Bloomberg TV. The show brings together some of the best minds in the world across finance, investment, politics and economics and provides insights that are current and very useful.  

I have an alarm set for 9.30pm so I make sure I go to bed on time. Rest and recovery are critical and the biggest part of that is sleep. I go to bed and read for 20-30 minutes before I go to sleep. I try to get a good 7 hours a night and as I get older it’s too difficult getting up at 5am if I haven’t had enough sleep.  

In today’s busy world, I find that without a strong routine, it’s too easy to be distracted by any number of things. The key to performing at a high level is the discipline to do the simple things consistently. For me, the biggest part of that was working out the routine that worked for me. No one wants life to happen to them by accident. We all have goals we want to achieve in life, so it’s critical to be clear and deliberate in the way we spend our time. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Warren Buffett’s 10 Rules for Investing

Warren Buffett, or the “Oracle of Omaha,” as he is known, is one of the most successful investors in history. His investment philosophy is built on principles that are timeless. These are tried and tested principles that are the most fundamentally sound approach to investing. So many investors tend to forget that when you are investing in shares, you are simply buying a part of a business. The best thing you can do sometimes is forget the daily share price noise and market movement and focus on the fundamentals of the company you are a part owner of.

1. Value Investing

At the core of Buffett’s strategy is value investing. This means buying stocks that appear undervalued based on their intrinsic worth. In other words, Buffett looks for companies that are worth more than their current stock price suggests. This involves careful analysis of a company’s financials, such as earnings, dividends, and future growth potential.

2. Understanding the Business

Buffett avoids investing in businesses he doesn’t understand. He focuses on companies with clear business models. This allows him to forecast the company’s future performance more accurately. For instance, he has significant investments in consumer goods, financial services, and insurance companies — industries he understands well.

3. Long-Term Perspective

Buffett is known for his long-term approach to investing. He once said, “Our favorite holding period is forever.” He looks for companies that will perform well over many years, not just the next quarter. By focusing on the long term, he avoids the pitfalls of short-term market volatility.

4. Economic Moats

Buffett seeks companies with strong economic moats. An economic moat is a competitive advantage that protects a company from its rivals. This could be a strong brand, patented technology, or unique business processes. Companies with moats can maintain higher profit margins and fend off competitors, ensuring sustained profitability.

5. Management Quality

The quality of a company’s management team is crucial to Buffett. He looks for honest, capable, and shareholder-oriented leaders. He believes that good managers can navigate challenges and capitalize on opportunities, driving the company to long-term success.

6. Financial Stability

Buffett pays close attention to a company’s financial health. He looks for strong balance sheets, consistent earnings, and low levels of debt. A financially healthy company is more likely to withstand economic downturns and continue to grow. Buffett avoids companies that rely heavily on debt, as they are more vulnerable to financial instability or economic shocks.

7. Margin of Safety

The concept of a margin of safety is central to Buffett’s investment decisions. This means buying a stock at a price significantly below its intrinsic value. The margin of safety acts as a buffer against errors in analysis or unforeseen market fluctuations. It reduces risk and increases the potential for returns.

8. Patience and Discipline

Patience and discipline are hallmarks of Buffett’s investment style. He waits for the right opportunities and doesn’t rush into investments. He often sits on cash until he finds a stock that meets his criteria. This disciplined approach helps him avoid impulsive decisions driven by market hype or fear. At Fortress I call this ‘busy being patient’.

9. Focusing on High-Quality Companies

Buffett prefers investing in high-quality companies with strong brands, loyal customers, and reliable earnings. He believes that owning a great company at a fair price is better than owning a fair company at a great price. This focus on quality reduces risk and enhances the potential for long-term gains.

10. Ignoring Market Noise

Buffett is known for his ability to ignore market noise and focus on fundamentals. He doesn’t get swayed by daily stock price movements or sensational news headlines. Instead, he bases his decisions on thorough analysis and a clear understanding of a company’s value. This helps him stay calm and rational in turbulent markets.

Warren Buffett’s investment philosophy is grounded in simplicity, patience, and a deep understanding of the businesses he invests in. He is focused on high-quality companies, maintaining a long-term perspective, and exercising discipline. While the principles might seem straightforward, applying them consistently with the constant media noise and fear of missing out on the latest trend makes it more difficult than you’d think. Buffett’s principles and approach have been fundamental to my own investment philosophy for years. In a world of instant gratification, ultimately as an investor, as in life you are rewarded for patience and discipline.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Data Dependent

The economy is going to slow one way or the other. Either rates at their current level will slow it down significantly in the months ahead or central banks will be forced into another round of interest rate increases until it does. It’s the same issue I’ve been talking about for over 2 years. If inflation reemerges, as it appears to be, then interest rates will have to go higher. Central banks inevitably need 2-3 attempts to get inflation fully under control. If we look at the 70’s and 80’s where multiple attempts were required to bring inflation under control it seems so obvious that central banks needed to go higher.  

Firstly, central banks don’t really have any great foresight when it comes to what should happen with interest rates. The direction of interest rates is ultimately driven by the economic data of the day. The biggest mistakes occur when central bankers start providing too much guidance. Phillip Lowe in 2021 saying that rates won’t go up until 2024 was a disaster, and Jerome Powell has made a similar mistake this year flagging rate cuts that the data now seems to make improbable. Everything would be simpler if central bankers stopped giving their best guesses and just did their job when the time came and not opine what might happen one day.  

When inflation in Australia rose quickly beyond the RBA’s 2% target level, the data eventually forced central banks to increase interest rates despite their reluctance. Over 18 months, many countries saw rates increase from near 0% to 5% range. Inflation started to fall. In Australia inflation, fell from a high of 7.8% in 2022 to 3.6% last quarter. However, before returning inflation to its target level, central banks made the decision to stop raising rates in the hope that they had done enough.  

Around the time of the last rate rises, I recall the build-up of pressure on the central banks from all kinds of stake holders. The rate increases were causing pain in the community. Pain for businesses, consumers and mortgage holders. I remember seeing media reports highlighting organisations such Lifeline meeting with Chairman Lowe to plead with him to stop raising rates. It was clear to me at this point why the job of the central banks is more difficult in reality than it is in theory. Regardless, they have a job that must be done for the benefit of the entire economy.   

There was a level of pain that was acceptable and a level that was too high. Even though continuing to raise interest rates would ensure that inflation targets were reached the level of pain in doing so had become unpalatable for the community. At that time, the economic pain of higher rates was worse than the possibility of inflation not hitting the target. So, a wait and see approach prevailed. Now with inflation appearing to reemerge central banks can once again raise rates if needed as they point to the dangers of higher living costs. Rate rises even if they deliver economic and financial difficulties will be possible if the inflation data deems them necessary.  

All this nuance will be forgotten in the future when we look at the charts of inflation and interest rates and see that central banks ended up taking 2 or 3 goes over multiple years to rein inflation in. I am not particularly sympathetic to the central bank. They are often wrong and lack conviction and the intestinal fortitude to make the necessary decisions for the overall good of the economy.  But living through these times and observing the dynamic directly helps to understand why seemingly foolish decisions are made.  

The current conundrum of central banks is that they’ve been wrong too many times already and another misstep would be a problem. As inflation in countries across the world, including Australia, reemerges, they are now hoping that holding rates higher for longer will be enough to slow the economy. If not then they will need to start raising rates, but that is a problem as markets have gone from expecting several rate cuts this year to almost none. Deferring rate cuts until 2025 is one thing, but rate rises are another altogether. Regardless, central banks need to go back to basics and remember that they are data dependent.  

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Solving the Housing Crisis

The solution to fix the housing crisis is simple because it’s a supply and demand issue. We need more houses or less people. More supply or less demand. While the solution may be simple that doesn’t mean it is easy.  

The obvious way to increase supply is to build more homes and apartments. But this is constrained by the realities of market forces around capacity, finding workers, the cost of materials, and time. It will take many years to build the number of houses and apartments needed to solve the problem.  

Achieving the massive increase in supply needed will address the issue in the medium to long term. It will also play a huge role in the continued growth and prosperity of our country. But increasing supply is not going to solve the housing crisis we face right now. 

There are two distinct phases to solving this problem. A short-term solution to fix the crisis and a long-term solution to solve the issue once and for all. The short-term solution will incur economic pain, but it is necessary to avoid a more serious crisis.  

The short-term solution is simply to substantially reduce immigration for a period of time, say 12-24 months. Many people don’t like that idea but the rapid rise in immigration is a big part of the issue. I’ve got no issue with immigration levels where they are at, I think it’s great for our nation and the economy more broadly. But you can’t just keep bringing people in if you don’t have enough homes, and at the moment we don’t.  

If you owned the only hotel in town and had say 100 rooms and you booked them out to 110 families who are flying in from overseas that weekend, it would be a problem. Not only is it unethical its irresponsible. Your lack of planning or deliberate overbooking is ruining the holidays of many people because you are being either greedy or lazy. 

When you bring in almost 550,000 people from overseas annually when you don’t have enough homes, our nation is doing exactly what the hotel operator in my story above is doing. Except what we are doing is even worse. Many of the people coming into our country are relatively wealthy including the students from overseas and can afford to pay higher accommodation expenses.  

The people most severely impacted here are everyday Australians who are being priced out of the market. Rents and property prices are being forced ever higher, not because they should be but because of the dynamic we have created by our own poor planning. As with any business or enterprise, you need to ensure you build your capacity ahead of ramping up sales or you will crumble under the weight of the increased demand.  

To be clear, I am not suggesting a lower immigration policy beyond what is needed to address the crisis Australian families are facing right now and will continue to in the 12-24 months ahead. There are massive benefits for our country and the economy by opening our doors to people who can contribute to our nation. But right now, we need to take a step back to take the next sustainable leap forward.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The 3 Themes Driving the Next Super Cycle

It is well understood that there are short-term cycles created in share markets by fear and greed and longer-term cycles in economies in the form of booms and busts, but I also believe there are even longer, more influential cycles at play. These are the multi-decade geopolitical cycles driven by a small number of major themes that set the framework for everything that follows.

If you consider the past 30 years, we had globalization, the rise of China, and the evolution of the internet and mobile. These few themes influenced the investment and strategic decision-making of governments and businesses across the world and ultimately the lives of every person on the planet.

But the past few years have seen an inflection point as the cycle ends and a new one has clearly begun. Globalization is over, China has not fulfilled the next phase of its economic potential and the internet and mobile are fully embedded in the economic machine.

The new cycle is driven by very different themes. I consider them to be as follows:

1. A world preparing for war.

2. The rise of AI

3. Energy

The first one is not meant to be alarmist in any way, but I will focus most of this note here because all the sub-themes are understood in isolation, but we don’t do a good job of facing up to what is happening when you link them all together. Countries across the world are clearly preparing for war in the years to come. Hopefully another major global conflict never happens, but the machine is already in motion and the multi-faceted sub-themes are taking shape for the decade ahead.

• Bifurcation of supply chains

• Strengthening ties with allies

• Authoritarian governments colluding

• Growing defense budgets

• The business of war

• New battlegrounds

Russia attacking Ukraine turned the world upside down as suppliers became potential adversaries. Germany’s reliance on Russian energy demonstrated how devastatingly dependent countries had become on potential enemies. This led to the realization that there were many other vulnerabilities in the supply chain that represented a threat to national security.

Globalization had come at the cost of national security, and it was immediately obvious that such a risk needed to be mitigated. China had grown to become systemically entrenched in the global supply chain. Now being slowly unwound simultaneously creates new opportunities as reshoring and near-shoring redirect global trade. But the flip side is that China is no longer the growth market it once was. The dramatic fall in revenue and product sales for Apple and Tesla is evidence that China isn’t standing still either as they support domestic competitors.

Meanwhile, there appears to be an increasing level of collusion and trade between Russia, China, and Iran emerging. Despite sanctions from the US and the West, Iran is selling much of their oil to China, while China is providing Russia with an increasingly concerning level of support by way of componentry and materials to expand their military manufacturing.

Russia, China, and Iran targeting 3 separate nations for conflict, Ukraine, Taiwan, and Israel not only serve their own agenda but also distract and weaken the US. By ensuring the US and their military and financial resources are spread more thinly, the timing is not by chance.

The rising threats not only impacts policy and trade but are now leading to a massive increase in defense budgets and military spending in countries around the world. This funding facilitates investment in a variety of traditional and new technology, machinery, and infrastructure. Many businesses are gearing up for this growth from making weapons to cyber security and everything in between.

The rise of AI and the magnitude of its potential to reshape the world is becoming better understood. But it is very much in its infancy. There are decades of growth ahead with innovations, companies and applications that will change the world. Entire industries will rise and fall on the back of these developments in the decades ahead, including some we haven’t imagined yet.

One thing I am certain of is that the long-term demand for energy will increase significantly and it will require huge investments in all forms of energy. This theme encompasses every aspect of the demand and supply of energy. From the many different types of energy to the infrastructure required to produce, deliver, and store it, energy is a theme critical to all aspects of the global economy and society itself.

I do think that the previous cycle will be remembered as one of the most prosperous and peaceful times in history. In many respects that relative peace and prosperity was taken for granted as the good times continued. But that complacency sows the seed of the disruption which creates the next phase of the cycle. But regardless of how volatile and difficult the next phase may be, there will always be incredible opportunities for people to succeed. If history has taught us anything it is that regardless of what happens, the human spirit is undefeated.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Geopolitical Risks are Rising

Any time you have serious tensions between nations in a time of war there is the potential for escalation. From an investor perspective, I am concerned with the recent developments in the Middle East as there is obviously the potential for even further escalation given the recent attacks on Israel by Iran. That said, at this stage, my view is that it is not in the interests of any country to escalate from here and all things being equal I am hopeful that this doesn’t go further – for now. Keep in mind that any of my comments here are only in relation to their impact on investors and investment markets.

It appears that Iran flagged their attacks ahead of time, giving the US and Israel sufficient room to ready their defences. When the attack came, the Israeli air defence, supported by the US military and other allies was able to fend of almost all of the 200 plus drones and missiles sent their way. I’ve also read reports suggesting that Iran indicated that these attacks are the full extent of their response.

If Iran wanted to maximise the impact and damage, I would have expected them to launch a surprise attack. You would not provide any communication as to the extent or timing of the attack unless it was for misinformation. While that remains to be seen, if that communication is truthful then it suggests the attack was less about aggression or even revenge and more about perception at this point.

It was widely expected that there would be a miliary response of some kind from Iran following the Israeli attack on the Iranian consulate in Syria. Perception matters for all sides, most importantly in the military sense because leaders of a nation cannot appear weak in the face of an attack. A tepid response from a leader in the eyes of their citizens would weaken their leadership and possibly expose them to challenges internally.

Considering that a response was inevitable, and expected, what matters then is the size and scale of a response. In this case, it appears to have been relatively well navigated by Israel and its allies. Iran has responded. Israel has successfully defended itself. Again, from an investor perspective, markets are on edge right now and, in my view, rightfully so given the likelihood of a further Israeli counterattack. What matters most for investment markets is the scale of their response.

A forceful but measured counter will mean It’s still very possible that the situation can settle from here. Certainly, the US and its allies do not want to be dragged in to a war. Of course, any of this can change in an instant. Further disproportionate attacks from either Iran or Israel from here would amount to a serious escalation in my view and I would be concerned about the conflict broadening and the subsequent flow on effects.

So, while there remains a serious risk of escalation simply because war is unpredictable, my read is that this situation can be contained and managed for now. Of course, in a situation as perilously positioned as with tensions in the Middle East, you can never be particularly confident. These are the most complex dynamics of geopolitics because turning the other cheek isn’t an option.

While the situation in the Middle East is extremely complicated, it is made even more so because there are serious implications for the global economy. In this case, Iran’s involvement, and the potential for disruption in the supply of oil would have wide-ranging implications. Lower supply would translate into much higher energy prices and once again put upward pressure on inflation.

As we head towards the USA presidential election in November, increased inflation would create a situation that would bring the cost-of-living crisis to the fore of the election debate and potentially threatens the Biden leadership. It’s possible that this impact the outcome of the election but it’s also possible that it impacts the Biden government response to the situation in the Middle East.

The US political environment is so polarised and divisive that the upcoming election will not only impact the US but also the structure of the world. Whoever wins the presidency will lead a future path that will be dramatically different from the one that would exist if their challenger were to win.

This will be a sliding doors moment for the power structure of the rest of the world. All the nations involved in conflict around the world, or potentially involved in conflict, are well aware of this. So perhaps it’s less about whether geopolitical tensions will rise, but more about where they will arise.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Head in the Sand

There are dozens of different types of risks and biases that investors need to consider when making investment decisions. Some such as market risk, concentration risk, credit risk, liquidity risk and time horizon risk are easier to quantify and are well understood. Others such as recency bias, confirmation bias and herd mentality are more nuanced and require some self-reflection to mitigate or offset their impact.

Share markets have been kind to investors over the past several months, and our portfolios have enjoyed solid returns on the back of this. However, the recent buoyancy in share markets has not changed my underlying cautiousness regarding the risks that investors face. I still think the world is precariously placed, even though the share market doesn’t seem particularly concerned now. Wars can escalate, inflation may not be over, the list goes on.

Investors have become complacent and seem to ignore any potential for bad news. Rather than factor in risks more conservatively, the share market has taken an attitude that everything is great until it has been proven that it is not. This binary thinking isn’t very smart because it doesn’t account for the reality that there are indeed risks that exist with varying degrees of probability. These risks need to be factored in.

To make the math simple, let’s imagine there are 2 separate global events, event A and event B. Let’s further assume each event has a 50% probability of occurring in the next 12 months and would result in a 20% decline in the share market. Based on the probability of each of the 2 events happening, the following outlines the combination of possible outcomes and their probabilities of occurring:

1.      25% chance that neither event A nor event B occur.

2.      50% chance that either event A or event B occurs.

3.      25% chance that both event A and event B occur.

Unfortunately, investment markets often misprice event risk. Perhaps it is due to complacency or the intangible nature of assessing risk. Nevertheless, in the absence of an event occurring, the default assessment of these risks by investors in the current market seems to be to ignore it until it happens.

This might turn out to be ok in the 25% chance where neither of the 2 events occurred. But that results in a mispricing of risk until that point because there was a 75% chance of a negative outcome whereby at least one of the events occurs. If the events do occur markets need to adjust much more aggressively. In the basic scenario I outlined above, there is a 50% chance that one or the other event occurs, resulting in a 20% fall. While there is also a 25% chance that both events occur leading to a much larger fall in the share market.

In reality, there are many risks at play of varying probability and consequence. But in today’s complex geopolitical and global economic environment, where there are many more event risks than usual, the prudent assessment of risk is imperative. It’s critical to think differently and ensure you don’t get caught up in the herd mentality as markets throw caution to the wind. Consider the way various biases impact your thinking and assessment of risk.

So, while investment markets and many investors seem to have taken a head in the sand approach to considering these risks, I am happy to carefully consider them. It means that we continue to take profit from time to time as share markets go ever higher. We want to be prepared for the day when one or more of these events do occur because eventually, they will.


General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Why Does AI Matter?

With so much hype around AI, it is easy to dismiss it as just another technology fad. It’s not always clear how these advancements will really impact our daily lives. So, it is also easy to underestimate how important AI will be for everyone in society and just how quickly it is advancing. Why all the hype about AI? The bottom line is that it is going to change every aspect of our daily lives from the way business is done to the way we all live. It is going to happen quickly.

There is no better example than to compare the evolution of images. When OpenAI’s Dall-E first came out in 2021 it was able to generally produce a picture from a text description, known as prompts. Fast forward to April 2022 and the release of Dall-E 2 showed a material advancement in the technology’s ability to generate higher quality and more detailed images. It brought about questions of what it means in the future when AI can generate video. Well, in only 18 months since the release of Dall-E 2 and ChatGPT, it’s already being answered.

In February 2024, Open AI released Sora for a limited trial within certain industries. Sora generates videos that are up to a minute long in a matter of seconds based on simple text prompts. Imagine being a business that can now generate your advertisements for TV in a matter of minutes. Now imagine being the advertising agency or film company. One of many industries about to become modern versions of the blacksmith. That is a real-life example of the pace of change.

It’s why Hollywood writers and actors were on strike back in 2023. They know where this is going. Imagine being Pixar spending and generating millions on creating state-of-the-art animation only for AI technology to replace you overnight. Just as anyone can produce content today, in the very near future the type of content will expand to include the ability to create ads, animation, TV series or movies in a matter of minutes.

In the short to medium term, many of these organisations will actually benefit by continuing to do the work they do and thrive as they harness AI internally and produce more content more quickly and more cheaply than ever before. But that is phase 1. Phase 2 is when it really starts to disrupt industries. Their customers start to work out that there are now businesses that provide them with access to create their ads online and suddenly the entire industry moves towards almost zero cost and is then ultimately a software service platform.

Talking to senior leaders in the legal industry and they will tell you they are seeing the impact of AI firsthand in exactly this way. Right now, they can have lawyers deploy AI to complete work in an hour which would take an associate lawyer 2 days. It means lower costs and higher margins – for now. But eventually, it flows through the business model, and it won’t be long before AI-enabled solutions are offering far cheaper but no less effective legal solutions.

This is the same for every type of business where people are doing the work. In the future, it will be AI doing more and more of it. Where it’s physical work, it will be at the intersection of AI, automation and robotics. For example, Amazon’s robot workforce is forecast to surpass its human employee count (currently around 1.6 million) by 2030. There isn’t an industry or a job that will be left untouched by AI. Highly trained professionals such as surgeons, lawyers, or accountants? You will be replaced by AI and robots. Construction and labour? You will also be replaced by AI and robots.

A more futuristic example of AI disrupting an industry is the concept of fully autonomous, AI-driven construction. Imagine a construction site where robots equipped with AI algorithms handle everything from excavation to assembly, with minimal human involvement. These robots would be able to analyse blueprints, navigate the construction site, and use technology to build structures with precision and efficiency. They could work around the clock, speeding up construction timelines and reducing labour costs. We can disagree over the timeline, but I can guarantee that this is coming soon enough.

I’ve heard people doubt that this level of computer-driven autonomy can happen because they can’t comprehend a world with so many jobs disappearing. But that’s the wrong way to think about it. What people will do for work or entertainment will take care of itself. It is a completely separate question and has little to no bearing on the fact that many of these jobs will disappear as this technology takes hold. It might be confronting but it certainly won’t stop the progress.

It is quite possible that AI and automation will result in many of the things that people have previously worked all their lives for will be readily available at an extremely low cost. There is the prospect of abundance as technology can easily produce what is needed for everyone. This means an exponential rise in the standard of living and the potential to eradicate poverty. It will happen in stages, but it is happening already. AI matters because it is going to change the lives of every person in the world in the years ahead.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.