In a post-Covid world, where we’ve all purchased enough hard goods since March 2020 to last us another decade, where does the consumer spend their discretionary dollar? Services of course, and what better way to while away a Saturday night than to reminisce about where you were in 1987, and compare Top Gun to Top Gun: Maverick. This film, which is far from “amazing” by the way but still worth watching for the flying scenes, grossed over US$250m at the box office in its first weekend! A record, and the most of any Tom Cruise film. Who ever said going to the movies was dead?
I mention this because much of what we are being told is that a recession is inevitable because consumer demand is slowing. Yes it is slowing if you are Harvey Norman, but it’s on the up if you are Flight Centre. Consumer spending is being diverted away from goods and into services. As part of this trend we have recently been altering the makeup of the portfolios and this is starting to pay off with our Global Growth Fund up 1.5% this month. More on this in the fund update section.
A tough May
The Australian small cap growth space was again tough in May, with the Small Ordinaries Index down 6.5% for the month.
A good example of how this negative sentiment is affecting our holdings would be to look at Karoon Gas (held in the Australasian Dividend Growth Fund) and compare this to ExxonMobil. Shortly after the Ukraine invasion, both stocks were up around 35% YTD. As at the end of May, Exxon is now up over 50% YTD and Karoon has fallen, to now be up only 16% YTD. This is an example of how the market has indiscriminately sold all small cap stocks in Australia. Baby out with the bathwater stuff. Where we find ourselves now is that there is actually value in small caps and, in time, investors will discern the good from the bad. Not all small caps were going to zero! But it certainly felt that way mid-May.
Is a recession coming?
So where to from here Mike? Are we done yet? Should we expect another sell-off later in the year? Has inflation peaked? As I said above, the indiscriminate selling has enabled us to recycle our capital into positions we feel should continue to do well. Not despite everything, but despite what’s in front of us currently.
My base case is no recession for 2022, but I’m cognisant of growing concerns, particularly if oil, which is the main inflationary culprit, continues to go up. A price of US$150+ would be deeply troubling if sustained. It is entirely possible to have an “earnings” recession, where the profit margins retreat from peaks, as corporates absorb wage rises, inflation, inventory build, and higher input costs. But with unemployment so low and pent up demand for services, at this stage it looks like profits will bear the brunt of this. Therefore, no economic recession.
I also don’t see a systemic failure of the financial system like 2008 brewing, and crypto is still not big enough to worry about. Plus, globally, housing isn’t out of control like it was in 2007 with mass overbuilding, and NINJA (no income, no job, and no assets) loans. But let’s see what the impact of higher rates is over the next six months.
So, is it time to turn and burn? Not yet. The funds are positioned cautiously, neither aggressively buying, nor selling at this point. As at the end of May we have no market hedging on, but I am looking to add this should this rally we are currently experiencing persist.
A regular buying plan
As with every market sell-off, it’s impossible to time the exact low. The best strategy is simply to allocate money to equities on a staged basis, i.e. just keep buying. Often the biggest ‘up’ days occur within a short timeframe of the market low, for example the Nasdaq rallied 10% in three days at the end of May. If you have a regular buying plan, you won’t miss the lows.
Thank you again for your support. If you have any questions please don’t hesitate to email me on [email protected]