The Rules of Investing

What happened to that recession we were promised?

In 1990, then-Treasurer Paul Keating famously said that the country's economic downturn was the “recession that Australia had to have.”
Although Keating was responding to a poor GDP print and doing his best to control the narrative, at the start of the rate hiking cycle in mid-2022 most in the market spoke of an impending recession with almost as much certainty. As it stands today, said recession is yet to materialise.
So, what happened? And perhaps more importantly, what does it mean for investors?
In explaining why a recession hasn’t occurred, Sebastian Mullins, Head of Multi-Asset, Australia at Schroders points out that both the Australian and US governments pumped money into their respective economies—something we hadn't seen in a long time.
“During the GFC, you had targeted programs to bail out banks and stimulate the economy, but on average, you had a very, very loose monetary policy and very tight fiscal policy to preserve balance sheets – i.e. improve the fundamentals of both corporate and government balance sheets”, says Mullins.
“This time around, it's the reverse. We're hiking rates but the government's stimulating aggressively. So that has offset quite a bit of it”, says Mullins.
Regarding America, where most of the recession indicators have been flashing red, Mullins adds that the US went into the current downturn un-levered – at least compared to previous episodes.
“If you think about what the pillars of the economy are, you have the consumer, you have corporates, and you have the government”, notes Mullins.
The US consumer de-levered after the GFC, reducing their amount of debt to GDP, as did corporations. “You'd expect higher interest rates to crack corporates”, says Mullins, but that hasn’t happened.
And while the government has been hurt by higher rates due to the bigger interest payments on its debt pile, “If the two pillars of the private economy are fine and the corporates are all fine, then there's no recession”, says Mullins.
Great, no recession. What about inflation?
For Mullins, the inflation conversation depends on how far into the future you look. “So in the short term, inflation's definitely coming down,” says Mullins.
As for the next five years and beyond, Mullins believes there are structural forces that will mean inflation could stay above the long-term targets of central banks – although that doesn’t have to be a bad thing.
“There are more inflationary forces in the system now than they were over the past decade” notes Mullins, adding that “things like fiscal stimulus that's here to stay”.
“You're seeing more populous governments come in around the world. You're talking about the election in the US, they're both going to spend. 
"It doesn't matter who wins, it just depends on who they spend on. But there's no tea party candidate or fiscal conservative”, says Mullins.
Mullins points to other inflationary factors, including de-globalisation, on-shoring, and increased security spending—whether that means military, food, mineral, or cybersecurity.
“So all that is to say, we're not saying we're going to 1970-style inflation, but if in the US 2% was the ceiling of inflation for the past decade, we think it's going to become a floor. So, it might be between two to three, maybe two to four [percent]”, says Mullins.
So, how are you investing?
A potentially higher floor for longer-term inflation seems like a small price to pay following the most aggressive rate-hiking cycle in living memory.
If someone offered the current economic and investing scenario back in late 2022 and early 2023 – with equity markets near all-time highs, bonds providing a decent yield, and an absence of recession – we’d all likely take it in a heartbeat.
So, as a multi-asset strategist, how is Mullins shaping portfolios in light of macro developments and a seemingly benign backdrop? Find out in this edition of The Rules of Investing, presented by James Marlay.
Mullins provides a view on Australian, US, Chinese and Japanese equities, bonds, and Australian vs. US credit. Finally, he outlines the bull case moving forward as well as the biggest risk to the outlook. 
Note: This episode was recorded on 27 August 2024. 
https://www.livewiremarkets.com/wires/what-happened-to-that-recession-we-were-promised

Why AI will have a bigger impact on the world than the invention of electricity

In this episode of The Rules of Investing, Livewire's Ally Selby learns about some of the companies that meet these criteria, why Rizzo believes AI will be far more transformative than investors currently think, as well as why he believes that investors are likely to do more harm waiting for a correction in some of these tech winners than a correction itself. 
Plus, he shares what he is seeing on the ground in the US right now in terms of economic weakness, the stocks he believes are worth paying up for right now, and how he takes advantage of sell-offs when he holds very little cash. 
Note: This episode of The Rules of Investing was recorded on Wednesday 14 August 2024. 
https://www.livewiremarkets.com/wires/why-ai-will-have-a-bigger-impact-on-the-world-than-the-invention-of-electricity
Timecodes: 
0:00 - Intro 
2:10 - Making sense of the volatility in tech stocks 
3:11 - This is a healthy bull market correction 
4:44 - The true transformational nature of AI 
8:11 - Spotting the imposters from the real AI winners
11:06 - There are risks but we are starting to see business acceleration from AI
13:27 - Should you take advantage of sell-offs in AI companies? 
15:08 - What Dom is seeing on the ground in the US in terms of economic stability
17:08 - How to identify winning tech stocks 
19:53 - How Dom thinks about risk 
22:01 - Dom's wishlist of stocks he would own at a cheaper price 
24:15 - Stocks it is worth paying up for right now 
26:32 - A deep dive into semiconductor stocks and cycles 
30:20 - NVIDIA at the point of deceleration and what this means for investors
31:16 - How to take advantage of sell-offs with very little cash 
34:19 - One thing investors are getting wrong about markets 
34:53 - Biggest lessons Dom has learnt during his career 
39:06 - One stock Dom would hold if the market closed for 5 years.

Why trying to time small caps is a "big waste of time"

Much has been made of the “Great Rotation” of late and the move away from highly concentrated large caps into small-cap equities, particularly in the US.
Greg Dean, founder of Langdon Equity Partners, is having none of it. When quizzed about whether the rotation was impacting how Dean and his team invest, the short answer was ‘no’.
Late last year, amid widespread commentary about 2024 being the ‘year for small caps’, Langdon wrote about the time and energy people spend talking about timing in small caps and called it a “big waste of time”. Dean feels a similar way about the rotation.
“The reality is if you wait for the perfect time, you've probably missed out on a lot of opportunity during that period when fewer people were interested”, says Dean.
Dean founded Langdon in 2021 on the concept of a “clean sheet of paper” – i.e. not being beholden to anyone but investors.
His philosophy is built on deep research and holding management to account, allowing him to ‘trust but verify’. He adds that speaking with management is a delicate balance that is often “executed poorly”.
“You think you have to be aggressive and definitive or you have to be a “yes” person and agree with everything that they're telling you, and neither of those is optimal”, says Dean.
In the following episode of The Rules of Investing, Dean delves deeper into small-cap investing, explains why he and his team take more than 300 individual company meetings each year, talks through the current portfolio tilt, and shares why the fund favours Europe over the US.
He also upacks two global small-cap stock ideas that highlight Langdon’s approach. 
Note: This episode was recorded on 31 July 2024. You can watch the video or listen to the podcast below. 
https://www.livewiremarkets.com/wires/why-trying-to-time-small-caps-is-a-big-waste-of-time-and-2-long-term-stock-ideas
Timecodes
0:00 - Intro1:36 - Investment background and founding Langdon5:05 - Biggest influences over the journey and why small caps?8:39 - Investment philosophy origin story11:01 - When is enough, enough?12:45 - The Great Rotation and current market conditions15:31 - Company meetings how the best stand out20:09 - Honing the craft23:42 - Current portfolio: underweight US, overweight Europe26:58 - Why cashflow is Landon's North Star28:07 - Other non-negotiables29:12 - Testing beliefs30:40 - Navigating patience as a small-cap investor32:57 - Small-cap stock ideas37:52 - What are investors getting wrong about today's markets?49:27 - Courage of conviction41:29 - The five-year stock
 

How to dominate small caps like Roger Federer dominates tennis

In tennis, just as in investing, it's the points that you win that matter. After all, Roger Federer played 1,526 singles matches throughout his career, and while he only won 54% of the individual points within those matches, he walked away with the win 80% of the time.
Ausbil Investment Management's fresh-faced co-head of emerging companies, and portfolio manager for its small and micro-cap strategies, Arden Jennings, is focusing on just that.
"Stocks are just points. But it's the points that matter that win you the game. So for us, our largest detractor was still smaller than our 17th biggest winner. Even though we had an even spread of winners and losers, it was the ones that were successful that made it a good year," he says.
And a good year it was. The Ausbil MicroCap Fund returned 33.53% in FY24, while its Australian Small Cap Fund delivered investors a nice 25.73%. Since inception, these funds have returned 20.08% (since February 2010) and 24.17% (since April 2020), respectively.
So, where is the Roger Federer of Australian small caps seeing the most opportunity today? You'll find out in this episode of The Rules of Investing.
Note: This episode was recorded on 30 July 2024. You can watch the video or listen to the podcast below. 
https://www.livewiremarkets.com/wires/where-the-roger-federer-of-australian-small-caps-sees-the-most-opportunity-today
Timecodes:
0:00 - Intro
2:36 - Decisions that lead to outperformance in FY24
5:04 - Roger Federer's streak and lessons for investing
6:13 - Interest rate expectations
7:00 - Why the small-cap rebound can continue and the Great Rotation in Australia
8:03 - The stocks that will benefit - HUB24 (ASX: HUB), Zip Co (ASX: Z1P), Credit Corp (ASX: CCP)
9:24 - Wildcards that could impact investors' portfolios
11:41 - What to expect this reporting season
12:29 - Why investors should be wary of crowded trades
13:24 - A stock to watch this reporting season: Aussie Broadband (ASX: ABB)
14:15 - One thing the market is getting wrong right now
16:24 - A story of a big win or loss from Arden's investing journey
17:27 - Stories from childhood - investing at 10 years old
18:01 - One stock to hold if the market were to close for the next 5 years... you'll have to listen to the interview for that one!

30-year property veteran: Australia has its head in the sand on housing

There's no supply in residential housing nor the majority of segments of the commercial real estate market. Sky-high construction costs are now too prohibitive. Bandaid solutions, like rent control, only backfire. And inconsistent state, federal and local policies are not helping either.
That's according to this week's guest on The Rules of Investing, Andrew Parsons, a founder and the chief investment officer of global listed real estate manager Resolution Capital.
While these factors continue to perpetuate Australia's housing problem, they are actually positive for long-term investors in real estate. 
In this episode of The Rules of Investing, Parsons dives into Australia's property problem, outlines what he believes to be the solution, and shares why listed property is in for a strong three to five years ahead of us. 
Note: This episode of the Rules of Investing was recorded on Wednesday 17 July 2024. 
https://www.livewiremarkets.com/wires/30-year-property-veteran-australia-has-its-head-in-the-sand-on-housing 
 
Timecodes
0:00 – Introduction
2:06 – A fascinating, under-appreciated part of the market
3:45 – What is a REIT?
5:30 – The key distinctions between REITs and physical property assets
8:45 – Which do you prefer: an investment property or listed property assets?
9:50 – Where REITs sit alongside equities and fixed income
10:55 – What you’re really paying for when you buy real estate
12:50 – Why property development is so difficult currently
13:40 – Australia’s troubling property supply shortfall
15:04 – “We don’t want urban sprawl”
16:30 – How do you solve Australia’s big property problem?
20:50 – The effect of interest rates on listed property, versus equities and bonds
23:40 – How Resolution Capital is currently positioned
33:50 – What is your best investment of all time?
38:08 – Resolution Capital’s five-year pick
 
 

3 compelling long-term ETF ideas for investors still on the sidelines

Investors are too focused on interest rates and are subsequently underweight risk assets.
That’s the, albeit US-centric, view from Global X ETFs’ Head of Investment Strategy, Scott Helfstein.
He elaborates by saying that the US economy is looking a lot more like mid-cycle expansion than late cycle and that “you don’t want to be sitting on the sidelines”.
A fan of thematic investing, Helfstein goes on to highlight three big investment themes that he likes right now, including one offering the opportunity for true transformation, that’s available for the same price as the S&P 500.
Don’t miss the latest Rules of Investing Podcast.
https://www.livewiremarkets.com/wires/3-compelling-long-term-etf-ideas-for-investors-still-on-the-sidelines 
 
Timecodes
0:00 - Intro1:12 - A unique background for an investment professional7:17 - The current state of geopolitics12:00 - Australia's position in the global landscape14:10 - The appeal of thematic investing16:42 - Where is the puck going?22:53 - Sectors versus themes26:48 - The role of thematic investing in a portfolio28:46 - Nothing but ETFs?30:27 - Ranking the big themes34:22 - A theme that is flying under the radar36:40 - Risks in thematic investing38:32 - Mama's favourite son39:49 - What are investors getting wrong?41:07 - One theme for the next five years

More please! Dr Don Hamson’s cure for the 'disappearing dividends' on the ASX

Fully franked dividends are a prized asset of the Australian market. While the lack of growth is often lamented, plenty of self-funded retirees are content to dine on the distributions of Australia's big miners and banks. 
And who can blame them - high commodity prices, particularly in iron ore and lithium, resulted in record dividends from the top end of town. However, after peaking in 2021 and 2022, dividends from mining companies are steadily declining.
Research from Commsec published late in 2023 showed that the 12-month forward dividend yield for the ASX200 has been below the long-run average of 4.7%, and dividend per share estimates have been cut by 14 per cent. 
The good news is that Australian banks have been increasing their dividends whilst also enjoying surging share prices. There is also a long list of consistent dividend paying stocks that often fly under the radar.
In this episode of the Rules of Investing, Livewire's James Marlay speaks with Plato Investment Management's Dr Don Hamson to get his diagnosis on the case of the 'disappearing dividends'. Hamson insists that diversification remains a free lunch for investors, especially for those seeking stable and consistent returns. He also emphasizes that fully franked dividends continue to stack up as the backbone of an income-generating portfolio.
Timecodes:
0:00 - Introduction
1:43 - The outlook for dividends
8:27 - Dividends versus Fixed Income
10:25 - Dwindling dividends
13:08 - The dividend outlook for mining shares
17:00 - Tactics to combat declining dividends
20:07 - Australian banks - stable but expensive
22:10 - The case for diversification
25:15 - Winning by avoiding the losers
28:09 - What returns are realistic for Plato?
31:26 - A lesson from Medibank Private
34:10 - Don’t focus on the US election
36:23 - The stock most likely to be a 5-year resident in the Plato Australian Shares Income Fund

Recession a line ball as Australia groans under a massive debt load

This time last year, PIMCO Portfolio Manager Adam Bowe told Livewire that there was a 50/50 chance that Australia would slip into recession. March GDP figures show that the economy grew at just 0.1 per cent, the slowest rate since December 2020. Today, Bowe says interest rates are sufficiently restrictive, and the chance of recession remains a ‘line ball’. 
In this episode of The Rules of Investing, Bowe explains why interest rates in Australia don't need to go higher, why house prices have been immune to interest rate increases and where he is finding the best income opportunities right now.