Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 476

Welcome to Firstlinks Edition 476 with weekend update

  •   22 September 2022
  • 9
  •      
  •   

The Weekend Edition includes a market update (after the editorial) plus Morningstar adds links to two highlights from the week. On Friday in the US, the S&P500 lost another 1.7% and NASDAQ was off 1.8%. 

One of the downsides of being a financial newsletter and media junkie is reading the same material over and over again. Each month, fund manager updates describe what central bank chiefs Philip Lowe and Jerome Powell said a few weeks earlier as if we have not heard it a hundred times before. Then the updates take a guess at what the central bankers might do next month suggesting some unique inside knowledge. Do they all subscribe to the same machine learning or AI programme for their reports? C'mon, fundies, you're supposed to be Masters of the Universe and the Smartest People in the Room. Mix it up a bit. Don't let us think your Intelligence (I) is Artificial (A).

These are the same fund managers who implore investors to think long term and ignore short-term performance (especially when the numbers are not so flash). Yet their communications include pages of comments on the very short term like nobody else has covered the cash rate, inflation or daily index moves. Leave that stuff to economists such as Bill Evans, Shane Oliver and Gareth Aird and tell us something original. The Reserve Bank does not even have a track record worth following, with the Governor himself calling their guidance "embarrassing".

For anyone writing a programme using AI for fund managers, here's a template for the opening paragraph:

"Last month, the [Australian index]/[global index] [increased]/[decreased] by [x%] due to the the US Fed making [dovish]/[hawkish] comments on the [better]/[worse] [inflation]/[interest rate] outlook. The [name of fund] [gained]/[lost] by [y%] in [month name], [outperforming]/[underperforming] the index by [z%]. The portfolio benefitted from its exposure to [sector x], especially [company x name], but the position in [sector y] through [company y name] detracted. The outlook for next month is [strong]/[weak] based on expectations of [growth]/[recession] with GDP forecast to [increase]/[decrease] by [a%]. We expect cash rates to [rise]/[fall] by [0.25%][0.5%][0.75%][1%] at the next [Reserve Bank][Federal Reserve] meeting. As we invest through-the-cycle in quality companies, we expect them to perform well over time."

And on it goes. No choices in the last sentence, as every fund manager thinks their investments are the best. Add some charts, update the performance table, send it off, rinse and repeat, across thousands of fund managers all over the world.

In the current climate, many pontifications are out-of-date as analysts hit the send button. The US Fed's Powell upended the market recently at Jackson Hole in a speech that lasted only eight minutes. The Wall Street Journal claimed that prior to the speech, Fed officials were concerned that investors were pushing stocks higher and misreading Fed intentions to control inflation by rising rates aggressively. So Powell changed his original speech to be far more blunt and direct, with the punchline that "the Fed would accept a recession as the price of fighting inflation." The stockmarket in the US dropped 4% immediately, and the optimism of a few hours earlier was completely reversed and updates rewritten. 

As they say about sausages, nobody should see how they are made. You don't want to know how quickly an analyst can change their opinion based on one number or one sentence from a government official.

There are exceptions where research provided is genuinely unique. One of my favourites is the Global Fund Manager Survey (FMS) from the BofA Data Analytics team in BofA Securities. The monthly report records the views of about 300 institutional fund managers around the world. Here is a sample of charts showing the current investment activity of global market professionals, and what is especially notable is how many of these indicators are at record levels. The signs are nearly all negative for the market outlook.

First, asset allocations to equities (dark blue line) are at an all-time low.

Second, a record number of investors expect a weaker economy.

Third, 79% of FMS investors expect slower global inflation in next 12 months than today, suggesting that inflation may have peaked last month when inflation rate was 9.3%.

Fourth, a record low share of FMS investors (net -60%) taking higher risk than normal.

(Of course, neither BofA nor Firstlinks takes any responsibility for how these charts may be interpreted and this is only general information).

And while many media outlets have reported on the Deputy Governor, Michelle Bullock, speaking at a Bloomberg event yesterday, describing the $40 billion mark-to-market loss on its bond holdings and inability to pay a dividend to the Government for many years, I took away an important sentence during question time. "The outlook for the world's economy is on a knife's edge."

In this week's edition ...

With well over 800 responses to last week's Reader Survey, we have a strong sample of your opinions on a wide range of policy issues facing the Government as it frames the upcoming Federal Budget. Check the full results with an attached PDF quoting thousands of your comments. Thanks for the exceptional result. We will leave the Survey open for a few more days and publish highlight comments in another article next week.

A few articles this week focus on the impact of inflation in investing. Don Hamson of Plato Investment Management shows how much purchasing power a conservative investor is losing in term deposits, and warns that many more people may end up on an age pension if their assets do not grow. He sees a positive outlook for dividends. And Ashley Owen of Stanford Brown includes two of his fantastic charts to show the dramatic impact of inflation on asset values over time.

Then the analysts at Natixis led by Dave Goodsell dive into the impact of inflation and demographics on the retirement wellbeing of Australians and investors globally, and report on Australia's progress in the Global Retirement Index (GRI). Of the many factors contributing to a good or bad retirement, see how we rate on a global scale.

Will Low of Nikko Asset Management suggests there is a regime change hitting investors and they need new techniques to navigate along a different and bumpier road. Then Robert M. Almeida of MFS Investment Management argues that many analysts do not actually invest money, and that's where the rubber hits the road. He describes changes he has made in his portfolio in the last month, believing we have not yet 'hit the bottom' as there is not enough pain.

And Stephen Dover of Franklin Templeton says the focus on inflation and high employment is missing a major threat, that of stagflation, where low growth is accompanied by low inflation and low interest rates.

In the update for the weekend, Nicola Chand checks the Morningstar Australian database for three companies which carry a 5-star rating due to recent share price falls despite their promising outlooks. Then Jessica Bebel offers seven quick tips for personal financial success, based on a conversation with US author Farnoosh Torabi.  

Weekend market update

US market update: Shares fell again in New York on Friday, testing the June 2022 low which drove a bear market rally in July. That optimism has completely gone. The S&P500 lost 1.7% (although it was down 2.5% at one stage) and NASDAQ fell 1.8% as major stocks such as Amazon off 3%, Apple down 1.5% and Tesla losing 4.6% led the falls. All major European markets lost at least 2%. The Australian dollar lost further ground, close to US65 cents.   

From AAP Netdesk: After taking a break for the Thursday public holiday, the local share market picked up where it left off - by sinking lower as central bank rate hikes weigh on sentiment. The benchmark S&P/ASX200 index on Friday closed down 125 points, or 1.9% to 6,575. The losses came after the US Federal Reserve issued a hawkish forecast about future interest rate hikes as it raised them by 0.75% for a third consecutive month.

Friday's losses were the fourth losing session the past five, with the ASX200 closing at its lowest level since July 1. The index dropped 2.4% for the week. On Friday, every sector was lower, with the biggest laggards the ones most affected by interest rate hikes. Consumer discretionary and tech both dropped 4.4%, property dropped 3.6% and utilities were down 3%.

All the big retail banks were down with Commonwealth faring worst, dropping 1.9%. Westpac dipped 1.4%, NAB retreated 1.6% and ANZ 0.9%. Macquarie was down 3.1%. The heavyweight mining sector fared the best, dipping 0.5% as the three biggest players gained ground. Coalminers also did particularly well off the back of Russia's 'partial mobilisation' policy to support its invasion of Ukraine, which has badly disrupted energy markets. Whitehaven gained 2.7% to an all-time closing high of $9.20 and New Hope added 2.8% to a similar peak of $6.33.

From Shane Oliver, AMP, (as at 3pm Friday): Share markets fell sharply again over the last week in response to another round of hawkish rate hikes pushing up bond yields and adding to recession fears and with a threatened intensification of the war in Ukraine adding to worries. Reflecting the poor global lead Australian shares fell, led by interest sensitive IT, property, utility and retail shares. Bond yields rose as ever higher short-term interest rates for longer were factored in. Oil, metal and iron ore prices fell on the back of ongoing recession fears. 

Shares are likely to see more downside in the short term as central banks remain hawkish, recession risks are high and rising, the conflict in Ukraine looks likely to escalate, we remain in a seasonally weak period of the year for shares out to mid-October and earnings expectations are still being revised down. While investor confidence is very negative, we have yet to see the sort of spike in put/call ratios or VIX that signals major market bottoms. 

However, the combination of Australian households being far more vulnerable and hence responsive to rising rates than US households, lower inflation pressures in Australia and a desire to avoid overtightening means that RBA should not raise rates as aggressively as the Fed.

***

Finally, remember all the talk a year or two ago about meme stocks on Reddit and first-time traders making a killing on the Robinhood trading app in the US? We don't hear much about it these days, but the beauty of social media like Reddit (extract below) is people can post their results anonymously. In the meme mania, some people leveraged into options without knowing what they were doing, and that's how US$700,000 was turned into US$122,000. These 'diamond hands' usually only talk about their wins, making it seem as if everyone is doing well. They're not. (Example courtesy of MyMoneyBlog).

Graham Hand

 

Latest updates

PDF version of Firstlinks Newsletter

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Monthly market update on listed bonds and hybrids from ASX

Indicative Listed Investment Company (LIC) NTA Report from Bell Potter

Monthly Funds Report from Cboe Australia

Plus updates and announcements on the Sponsor Noticeboard on our website

 

9 Comments
Glen Crameri
October 02, 2022

Thank you Graham, your article was hilarious and confronting.

Martin
September 24, 2022

Call me cynical but in the end they are pitching for sales.

Warren Bird
September 24, 2022

We weren't/ they're not. These reports are for existing clients describing what has happened to their investments. Yes, there is a "branding" element, but I can promise you that in 30 years of writing those reports I had the existing investors in mind far more than new ones. Maybe that's why I've now retired from being a fund manager and maybe I was special- but I doubt it.

Warren Bird
September 21, 2022

It was always a challenge to write an informative and interesting fund report.

I preferred writing quarterly than monthly, but many of our investors had monthly board meetings to report to so we had to give them something each month. So I suspect that the template opening paragraph you've produced, Graham, is not actually meant for someone like you, but only for institutional clients with that sort of requirement.

In my most recent full-time role in investments we shifted the performance table to have the longer term data as the main focus. Our thinking was just as you've said - we tell people to focus on the long-term, but then report short-term! We tried to shift that focus. Even then, client questions were often about the short-term because the reality is that they've included an estimate of annual returns in their budgeting process and when things don't work out that way they want to know why, or when things are going better than planned they want to know if that can be sustained.

And many of the readers of that report haven't actually read a thousand of them and don't know what data or central bank activity was driving market behaviour. Again, the report usually wasn't written for someone like you, Graham.

I always tried to have interesting thought pieces elsewhere in a report, that weren't caught up in the short term noise. At Colonial I wrote a piece called the ''Bird's Eye View'' - which morphed into my Kanga News column after I left CFS. I'm sure the best investment manager reports have similar elements.

But it's hard to please all the potential audiences for an investment report!

giselle
September 22, 2022

Hi
This is a topic that is wide open for fund managers to think about. Graham is right on the mark when commenting on very high level macro data that has near zero relevance to the stock selection in the portfolio. If it did, why not link these?
Longer term performance data may be relevant yet often disguises what the manager does not want one to look at, unsurprisingly the date is curated to out-performance, if possible, or otherwise the least worst. Since inception has zero relevance. A short period of performance can make all the difference but not be repeatable.
If the reader of the banal reports can illustrate how they add value that would be great, otherwise you undermine the requirement that advisors have a better understanding of what they might recommend
Another useless segment is the comment on top 3 performers/ underperformers in the month. Seriously, what is that meant to tell us?
As a suggestion, attribution would be useful, win loss ratios, sell decisions (which are the major failure of most managers, reluctant to admit mistakes and get the hell out of there), factor influence and more on the why not the what.

CW
September 25, 2022

If this is indeed what advisors and their clients need, then feedback to the fund Sales and get them work for their pay. Fund managers’ job is to manage money and will supply information as required.

I buy ETFs and pick my own stocks, am not a client of Warren or any fund manager.

Phil Pogson
September 21, 2022

I love sassy articles like Peter Thornhill writes. Love him or hate him, he is actually living off his portfolio and thus qualified to comment.
I’d rather listen to writers who have been successful at their chosen investment approach.

john
September 21, 2022

This comment is no longer available.

john
September 21, 2022

That was a thumbs up emoji

 

Leave a Comment:

banner

Most viewed in recent weeks

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

The greatest investor you’ve never heard of

Jim Simons has achieved breathtaking returns of 62% p.a. over 33 years, a track record like no other, yet he remains little known to the public. Here’s how he’s done it, and the lessons that can be applied to our own investing.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

Latest Updates

Shares

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Property

Baby Boomer housing needs

Baby boomers will account for a third of population growth between 2024 and 2029, making this generation the biggest age-related growth sector over this period. They will shape the housing market with their unique preferences.

SMSF strategies

Meg on SMSFs: When the first member of a couple dies

The surviving spouse has a lot to think about when a member of an SMSF dies. While it pays to understand the options quickly, often they’re best served by moving a little more slowly before making final decisions.

Shares

Small caps are compelling but not for the reasons you might think...

Your author prematurely advocated investing in small caps almost 12 months ago. Since then, the investment landscape has changed, and there are even more reasons to believe small caps are likely to outperform going forward.

Taxation

The mixed fortunes of tax reform in Australia, part 2

Since Federation, reforms to our tax system have proven difficult. Yet they're too important to leave in the too-hard basket, and here's a look at the key ingredients that make a tax reform exercise work, or not.

Investment strategies

8 ways that AI will impact how we invest

AI is affecting ever expanding fields of human activity, and the way we invest is no exception. Here's how investors, advisors and investment managers can better prepare to manage the opportunities and risks that come with AI.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.