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Welcome to Firstlinks Edition 434 with weekend update

  •   18 November 2021
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The Weekend Edition includes a market update plus Morningstar adds links to two of its most popular articles from the week including stock picks.

Weekend market update

From AAP Netdesk: Australian share investors recovered some of the week's losses on Friday as the All Ordinaries index closed higher by 17 points, or 0.2%, to 7,730 points. An $8.5 billion takeover offer for Crown and gains for healthcare and commodity stocks were among notable movements. Inflation remained a chief concern in a week in which the index lost 0.6%. UK inflation reached a 10-year high annual rate of 4.2% and in Canada, the reading was 4.5%.
Reserve Bank Governor Philip Lowe this week explained people were buying more goods rather than services during the pandemic, leading to shortages and higher prices. Inflation, which stands at 3% in Australia, would normalise, Mr Lowe said.

In ASX stock movements, Sonic Healthcare gained 3% for a second consecutive day, while market giant CSL improved in the latest session by 1% to $315.50. The big miners were higher. BHP gained 1.1% to $36.45 while Fortescue and Rio Tinto rose by less than 1%. 

From Shane Oliver, AMP Capital: Global share markets were mixed over the last week. US shares rose 0.3% helped by strong data but with gains pared slightly by concerns about rising coronavirus cases in Europe and hawkish Fed comments. Eurozone shares fell 0.3% on the back of coronavirus concerns after Austria announced a lockdown, but Japanese shares rose 0.5% and Chinese shares were flat. Bond yields fell in the US and Europe but rose in Australia. Oil and metal prices fell but iron prices rose slightly but only after making new lows mid-week. The $A fell as the $US rose.

The drumbeat of higher inflation continues, maintaining pressure on central banks with the Bank of England on track to raise rates next month and Fed vice-chair Clarida saying the Fed might have to have a discussion about speeding up the taper, which would clear the way for an earlier rate hike next year. So far, the upwards pressure on long bond yields has been relatively minor, with yield curves tending to flatten reflecting longer term inflation expectations remaining relatively contained and possibly concerns that central banks may make a policy mistake by tightening prematurely. And share markets don’t seem too fussed. Like the Fed and RBA, we are of the view that inflationary pressures should ease as workers return, production catches up and spending rotates back to services. However, this could take 6-12 months with the risk that it feeds further into wage rises and inflation expectations, making the spike in inflation stickier.

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Has investing changed? Every week, we face new challenges to our understanding of how investing works. A Bitcoin is worth about US$60,000 (and it lost 18% of its value in eight days to 19 November) but only 10 years ago, a Bitcoin sold for less than US$1 after Satashi Nakamoto published his paper explaining a new payments system:

"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution."

The recent IPO of Rivian was another startling example of market mania. A company that has manufactured less than 200 cars with no revenues and $1 billion in costs in the September quarter is now valued at over $200 billion (yes, billion). That's more than Volkswagen which delivers 10 million vehicles a year with €250 billion in revenue. Ford makes over 4 million vehicles a year and is valued at US$77 billion. Rivian's share price has doubled since issue, with famous short-seller Michael Burry (played by Christian Bale in The Big Short movie) calling it:

“More speculation than the 1920s. More overvaluation than the 1990s.”

It was impeccable timing in an Australian context this week, when electric vehicles and utes were front and centre in our news for other reasons. Rivian's major vehicle, the R1T, is not a car but what the Americans call a 'pickup truck', and obviously, it's an impressive one judging by the initial reviews. Wait a minute. It's an electric ute! Surely, no self-respecting tradie would want one, as we were told by Michaelia Cash in April 2019 (now our Attorney-General):

"What I worry about for people like Johnny is that the car he is driving today, if a Labor Government is ever elected, will not be the car he is driving tomorrow. In fact, if you look behind us at all these apprentices here, 50% of those apprentices will be driving an electric vehicle under Bill Shorten. We are going to stand by our tradies and we are going to save their utes, because we understand choice, and that is what Bill Shorten is taking away from our tradies."

And what is wrong with an electric ute? Scott Morrison explained:

"And I'll tell you what ... it's not going to tow your trailer, it's not going to tow your boat, it's not going to get you out to your favourite camping spot with your family. Bill Shorten wants to end the weekend when it comes to his policy on electric vehicles, where you've got Australians who love being out there in their four-wheel drives, he wants to say 'See you later' to the SUV."

The market's enthusiasm for technology is boundless and the reviews suggest an electic ute can handle the needs of our tradies and Rivian has saved our weekends. Meanwhile, we can rely on technology to fix climate change ...

No revenues, who cares? Famous fund manager Stanley Druckenmiller calls current stock prices the biggest bubble of his career:

"... We have crypto craze, we have SPACS, we have booming housing prices, we have these things called NFTs, and equity prices as a percentage of GDP are at an all-time high. And as you also know, inflation is at a 30-year high ... every bust I had ever seen was proceeded by an asset bubble generally set up by too loose policy ..."

And central banks provide whatever liquidity is needed to support the market, including the long-term valuations of tech stocks.

This week we explore whether This Time is Different, and we would love your feedback in two questions. It's our Living Years Survey, where we also ask you to share your investing lessons with a 25-year-old starting out in the market. Thanks to the hundreds of people who have already given their views, which we will publish next week. Many of the forces now driving markets did not exist 10 years ago. As Mike + The Mechanics wrote in The Living Years:

"Every generation blames the one before and all of their frustrations come beating on your door."

Or is this Morgan Housel quotation about a young investor describing the moment he went from cocky and overconfident to broke and unemployed illustrative of what will happen to people who think making money is now easy?

“I sat down at my fancy desk on the edge of my chair waiting for the market to open, ready to have another $50,000 day, and thinking life couldn’t get any better than this. This time, I was right. It didn’t.”

On the theme of market overvaluations, Shane Woldendorp explains why the investment entry price matters, and returns from starting at elevated levels are usually disappointing. Over the past 30 years, when the median stock in the FTSE World Index has traded at a starting P/E ratio above 30 times, investors have never made a positive real return over the following four years.

Joseph V Amato and his fund manager colleagues sat down recently to explore the key themes facing us in 2022, and identified 10 trends to watch. The end of the year is a good time to review portfolios.

A vital advantage of the companies that thrive in challenging conditions is pricing power, as shown by Netflix's ability to regularly raise prices. Diana Wagner identifies the companies and sectors that can retain and grow margins, especially if inflation bites.

What if you have plenty of money in superannuation and you want to take out a lump sum, perhaps to spend on a renovation or help children to buy a home? Meg Heffron looks at the best ways to withdraw a chunk from super.

Australian banks hold dominant positions in many portfolios, managed funds, ETFs and LICs, and they have come through the pandemic strongly. But while Hessel Verbeek and Maria Trinci laud their recovery, they see challenges in the transformation programmes that are supposed to be reducing costs. CBA's biggest-ever price fall last week shows how a favourite can be punished.

We've all seen the dramatic impact of China's regulatory crackdown on stocks such as Tencent, Alibaba and Ping An, but Chi Lo explains the country's motivation and how much it is affecting the private sector generally.

Two bonus articles from Morningstar for the weekend as selected by Editorial Manager Emma Rapaport.

Stockmarkets look expensive according to Morningstar analysts, with US and Australian markets both 6% overvalued on average. A screen of the Morningstar coverage universe finds four Australian names trading in undervalued territory writes Lewis Jackson. And Tim Murphy explains what rising inflation means for Australian investors.

This week's White Paper from VGI Partners looks at the rising power of Asia's middle class at an inflection point too important to ignore. Asia is forecast to deliver around two-thirds of global growth over the next two decades.

Many thanks to Harry Chemay for producing two high quality editions in my absence, assisted by Leisa Bell. Our Comment of the Week comes from Harry's excellent paper on the ways our superannuation system needs to change to regain a podium position. Geoff R reiterates many comments that retirement planning is compromised by the threat of regulation changes:

"I really just wish politicians would leave it alone and stop meddling. As others have said it is hard to invest with confidence in Super especially if you are young and multiple decades away from retiring. I have recently retired and super has worked well for me but my grown-up children are not trusting enough to put extra contributions in citing the uncertainty and risk involved in locking away their money for 30-40 years - and frankly I can't blame them. Also they possibly recognise I have perhaps lived "too frugally" (likely an outcome of my parents having lived through the Great Depression) and now find I have saved more than I really need in retirement - maybe I should have "let down my hair" and lived it up a little more!"

Graham Hand, Managing Editor

A full PDF version of this week’s newsletter articles will be loaded into this editorial on our website by midday.

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