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Welcome to Firstlinks Edition 492 with weekend update

  •   19 January 2023
  • 6

The Weekend Edition includes a market update (after the editorial) plus Morningstar adds links to two additional articles.

Back on the tools after a sabbatical, the new year feels more than usual like a time to stocktake and check the goals for an investment portfolio, especially since I turned 65 a few weeks ago. Nobody hands out a card that profiles the future, and everybody needs to plan their own investments based on their life, their resources, their desires, their objectives.

Although every financial newsletter shares the tea leaf reading of market experts at the start of the year, here's how legendary US fund manager Peter Lynch colourfully describes these efforts: 

" ... they can't predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack."

The most important risks are the ones few people anticipate, and if you could predict them accurately, they would no longer be risks as counter action would be taken. This is a time when US Fed Chairman, Jerome Powell, has made it clear that rate rises will not stop until inflation is under control. But flip a coin on where the market is going. The S&P500 is currently about 4,000, and the range of 2023 targets below varies from 3,675 to 4,500. Up, down and flat pretty much covers it.

Wall Street’s 2023 S&P 500 Targets (as of Dec. 4, 2022)

The dubious value of this pontificating was emphasised to me over the holiday during a regular quarterly lunch with four chaps I have known for decades. We call ourselves the 4Gs - Graham, Geoff, George and Gordon - and we each had long careers in different parts of the financial markets, from actuary to financial adviser to markets to legal SMSF specialist. And while three of the Gs discuss investing and markets, the actuary sits there sipping his beer and smiling at his lamb shoulder.

In the 40 years I have known Geoff, he has been admirably consistent in his investing technique. His portfolio mainly holds shares, directly and through funds, and he cares only about the rising dividends while he worries little if at all about the market value (much like the Peter Thornhill's view). So while the other three genius Gs solve the economic woes of the world to no practical effect, he collects his dividends confident he has 'enough'.

There's a word we don't hear much in financial markets: 'enough'. I read a lot during my break, including a fascinating small book by Jack Bogle, founder of indexing and Vanguard, called "Enough: True Measures of Money, Business and Life". What sets Bogle apart from dozens of the famous global wealth icons who became billionaires is that he felt the financial system subtracts value from our society and he should only take enough for his needs and goals. He quotes many examples of the 'Heads I win, tails you lose' by businesses in funds management.

"What I'm ultimately looking for is an industry that is focused on stewardship - the prudent handling of other people's money solely in the interests of investors ... and values rooted in the proven principles of long-term investing and of trusteeship that demands integrity in serving our clients."

How much is enough for Jack Bogle? He founded the second-largest fund manager in the world, and could easily have amassed billions. He says:

"Let me open up my confession about what is enough for me by saying that, in my now 57-year career [the book was published in 2009 and Bogle died in 2019], I've been lucky to earn enough - actually more than enough - to assure my wife's future wellbeing; to leave some resources behind for my six children (as it is sometimes said, 'enough so that they can do anything they want but not enough that they can do nothing'); to leave a mite to each of my 12 grandchildren; and ultimately to add a nice extra amount to the modest-sized foundation that I created years ago."

He says that for 20 years, he has given away one-half of his annual income to various philanthropic causes, but he feels he has done well because of three reasons:

1. He was born and raised to save rather than spend (his Scottish thrift genes).
2. He has been blessed with a 'fabulous' defined benefit plan into which he has invested 15% of his salary over his entire career and in retirement.
3. He has invested wisely, avoiding speculation and focussing only on (you guessed it) conservatively-invested, low cost mutual funds.

And like my mate Geoff, he tries not to watch the balance of his fund. 

He says enough should be $1 more than anyone needs, and saving is the key to wealth accumulation.

When I sat down in recent weeks to review my SMSF's investments for 2022 and position the portfolio for the future, there is a focus on 'enough' and protecting the capital in the fund rather than swinging for the fence. I describe some of my investment decisions in the hope there may be ideas there for you.

Finally, the best chart I saw in the last few months acknowledged the major milestone of global population passing 8 billion, with Australia represented by that tiny purple triangle on the left. We love to think we punch above our weight.  

Many thanks to James and Leisa for producing such good newsletters in my absence. James will continue to edit Firstlinks content and write for both Morningstar and Firstlinks, while Leisa holds the whole show together.

Also in this week's edition ...

Chris Joye of Coolabah Capital Investments is the bearer of bad news for those who think stocks and residential property will bounce back this year. He says both have further to drop and even when interest rates start to fall, they're only likely to deliver returns in line with wage growth in the medium term. He is bullish on one asset class though: fixed income.

And he's not alone as Tim Larkworthy is also positive on bonds. He makes the interesting case that central bank efforts to tame inflation will depend on their ability to rein in the behaviour of consumers, who've been happy to spend despite rapid rate rises. Until this behaviour changes, the central banks are unlikely to cut rates.

Cameron Murray is frustrated by fearmongering from politicians and the media about Australia’s ageing population. He says it's fine for them to make the argument for more immigration, but they shouldn't pretend that the age structure of the population is the reason why.

When investors think about commercial property, they often focus on office, industrial and retail, but specialised sub-segments are starting to get more attention. Student housing, healthcare, life sciences and the like. And Stuart Cartledge takes a look at another potentially lucrative, niche segment: pubs.

Meanwhile, Magellan addresses the elephant in the room when it comes to LICs: their tendency to trade at discounts to asset values. Magellan explains what it's trying to do about it, as well as addressing the underperformance of its Global Fund last year.

Richard Bernstein notes the sectors that led the last bull market are unlikely to lead the next one. He says investors looking at US tech and meme stocks to bounce back will be disappointed. Instead, they should be eyeing new sectors emerging as market leaders, such as energy and infrastructure.

In the weekend update by Morningstar, Sarah Dowling looks at six ASX stocks poised to outperform over the long term, while Nicki Bourlioufas reports on a brighter outlook for Australian travel stocks in 2023, with headwinds beyond that.

The sponsor white paper featured this week is VanEck's Portfolio Compass on Australian Equities in 2023. As in Graham's article, it recognises that Australian equity investors had a reasonable year, not the setback that many analysts describe. 


Weekend market update

On Friday, US stocks roared higher by nearly 2% on the S&P 500 to crawl back to near-unchanged for this abbreviated trading week. Treasurys had a rougher go of it, with the two-year rising to 4.14% from 4.09% a day ago and the long bond settling at 3.66% compared to 3.57%, while WTI crude tested $82 a barrel and gold continued higher to $1,925 per ounce. The VIX retreated to just below 20. 

From AAP Netdesk: The local share market on Friday inched higher for an 11th day of gains in the past 13 sessions, finishing at a fresh nine-month high.
The benchmark S&P/ASX200 index on Friday finished up 16.9 points, or 0.23%, to 7,452.2, its highest level since April 22. For the week the index was up 1.7%, its third straight week of gains. It is up 5.87% so far already this year. 

The ASX's two commodity sectors, mining and energy, were the best performers on Friday, with the former rising 0.9% and the latter up 1.4%. Whitehaven Coal was a standout, climbing 6.2% to a three-week high of $9.48 as the coalminer said it expects to announce its first-half earnings had more than quadrupled to around $2.6 billion on soaring coal prices. Fellow coalminers also rose, with New Hope adding 2.7%, Yancoal gaining 4.7% and Stanmore Resources climbing 4.6% to a fresh all-time high of $3.66.

Among the iron ore giants, BHP was up 0.5% to $49.95, having hit an all-time intraday high of $50.09 in late afternoon trading. Rio Tinto had added 1% to a 10-month high of $127.20.

Lithium miner Pilbara Minerals rose 13.2% to a one-month high of $4.55 after announcing what CEO Dale Henderson called an "absolute cracker" December quarter, with its cash balance rising to $2.2 billion.

Fisher & Paykel Healthcare rose 4.9% to a 10-month high of $24.32 after the New Zealand respiratory products company said it expects to make as much as $NZ1.6 billion in revenue for the financial year ending March 31.

Elsewhere, the big banks were mostly lower, with ANZ down 0.5% to $24.75, NAB down 0.4% to $31.60 and CBA edging 0.1% lower at $108.66. But Westpac managed to gain 0.2% to $24.

From Shane Oliver, AMP:

After rising solidly in the first two weeks of the year, US and European share markets pulled back over the last week on the back of recession and earnings worries and hawkish ECB comments. Falls were curtailed by a strong rally on Friday though helped by more optimistic Fed comments with US shares ending down 0.7% for the week and Eurozone shares down 0.5%. Japanese shares rose 1.7% though and Chinese shares rose 2.6%.  

The news flow has been somewhat better so far this year. Last year ended poorly for investors not helped by hawkish commentary and moves from central banks in December – notably the Fed, ECB and Bank of Japan – and uncertainty about China’s reopening. But the news flow so far this year has been somewhat more positive with:

- inflationary pressures continuing to show signs of receding with further falls in US and European inflation rates in December and business survey price indicators pointing down

- resilient economic data in Europe

- signs that the surge in cases in China may have peaked with optimism about Chinese growth this year leading to some lessening in global recession risks

- a continuing decline in the $US which takes pressure off Asian and emerging countries

- a somewhat less hawkish tone from most Fed speakers with more talking of downshifting further to 0.25% hikes and Fed Vice-Chair Brainard and Governor Waller leaning incrementally dovish and a bit more optimistic on the outlook

- the tensions with China appear to be easing a bit – with signs of an easing in China’s trade restrictions on Australian products.

Our Pipeline Inflation Indicator continues to point to a further sharp fall in US inflation in the months ahead. And with US inflation leading other countries’, including Australia’s, inflation rates on the way up its decline points to a fall in Australia and elsewhere too. We remain of the view that US inflation will slow faster than the Fed is expecting, so see the Fed Fund’s rate topping out earlier (probably in March) and lower than its “dot plot” is indicating. 

Graham Hand


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