15 Dec Macro Musing, 2023 Outlook & How The Mighty Have Fallen
Part 1: Macro Musing and 2023
Part 2: How the mighty have fallen
Macro Musing and 2023
As anticipated, macro-economic factors – inflation and rising interest rates – have led the markets in 2022.
Inflation has proven to be higher than expected a year ago and the ensuing cash rate rises are the fastest since the early 1980s.
The Federal Reserve rate is now at the highest level in 15 years, post the December 50bpt rise to a range of 4.25% to 4.5%.
The RBA has also hiked the cash rate. Anyone with a floating rate mortgage would be more than aware of the impact on the household budget, although consumers to date have proven resilient.
Of note, the Reserve Bank has lagged the magnitude of US rate rises.
Maybe the Australian indebtedness and accompanying love of property is slowing the size of interest rate rises?
Stock markets have responded to rising interest rates largely through a compression (fall) in the valuations of shares.
Loss-making technology companies and big tech (Meta, Google, Netflix) have been at the forefront of the selling with value stocks (with lower PER valuation) and quality defensives (think healthcare, consumer staples) the winners in the US. The energy trade has also been a winning formula, yet this is an overcrowded sector going into 2023.
Domestically, the Australian ASX200 index, with the heavy weighting to more ‘value’ stocks in the commodity space such as materials, energy, lithium and gold, as well as the banks, has put in more than a solid performance for 2022, and could end up flat on the year.
On balance, investors have gravitated to value stocks typified in the Australian market with the more ‘value’ oriented Dow Jones Industrial Index outperforming the technology-heavy Nasdaq Index.
Where to in 2023?
The inflation/interest rate debate continues with a diversity of views around potential 2023 outcomes.
– For how long will inflation remain high?
– How many more rate rises are on the cards?
– Will there be a recession in the US, Australia, globally?
– When will rates stop rising and come down?
There are as many views and opinions as noses in the world but, broadly speaking, the investing experts sit within one of the three following camps.
- Higher for longer with inflation remaining at more elevated levels than post 2009 to 2021. Howard Marks recently wrote that we are entering a new era, breaking with the last four-decade trend of consistently lower interest rates, meaning cash rates between 2% and 4% going forward compared to zero rates.
- Inflation will trend down more than expected and the Federal Reserve is driving the US economy into a recession, underpinning a pivot to rate easing sooner than expected. Renowned economist David Rosenberg, along with bond guru Jeffrey Gundlach and Wharton Professor Jeremy Siegal all continue to believe the Federal Reserve is overdoing the tightening.
- The Federal Reserve already pivoting from Quantitative Tightening (QT). From a global liquidity perspective, expert Michael Howell revealed on a recent podcast the US Central Bank through the complex machinations of the “arcane” plumbing of the US financial system may have already started to ease liquidity. In other words, the shrinking of the US Federal Reserve balance sheet (QT) may not be as bad as expected, post the UK gilt crisis. Maintaining financial stability in the largest market in the world, the US Treasury market, is paramount in a rate-hiking cycle.
I think we can agree Central Banks are nearing the end of the rate-hiking cycle, however, we all should be watching how the credit cycle plays out with some of the booming sectors such as private equity yet to feel the full brunt of tightening in the financial system.
Morgan Stanley’s US strategist Mike Wilson believes investor concerns will shift to an earnings recession in 2023 and share prices will be more heavily impacted by profit downgrades.
Wilson may be at the lower end of the bearish forecasts with the US S&P500 possibly falling 20%-plus to around 3000 to 3200 in the first half of 2023, before rallying back to current levels around 4100 to 4200 by the end of next year.
Domestically, depending on how the RBA responds and how sticky inflation is in Australia, there is a good case that the ASX200 will continue to be well supported with the heavy ‘value’ weighting and dividend yield.
Much will depend on China re-opening, alongside liquidity injections into the Chinese financial system, and how resilient the banks are to a slowing economy and the roll off in fixed rate mortgages in March 2023.
Personally, I have been building positions in good quality income- generating stocks both in the US and Australia. Whether inflation eases more than expected or remains stickier, income will be king, as capital gains are potentially more limited in the year ahead as economies and earnings growth slows.
‘When the facts change, I change my mind, what do you do?’ (paraphrasing apparently John Maynard Keynes or was it Winston Churchill)?
Just as when we started 2022, predictions and forecasts are helpful but remaining alert to a changing world will help you avoid the loss-making scenarios. Nevertheless, 2022 was a seminal year for all investors and likely 2023 will bring many surprises too.
Part 2 How the Mighty Have Fallen – Tesla and FTX
On December 13, 2021, Time magazine named CEO of Tesla and Space X, Elon Musk, man of the year.
Twelve months on, Musk is in a firestorm of self-inflicted pain post the seemingly misguided takeover of Twitter.
The mighty Tesla brand is increasingly being damaged by the externalisation of Musk’s political views on his personal social media foghorn.
He has sold Tesla shares to fund the mispriced acquisition with an ongoing overhang of further Tesla stock sales to refinance Twitter’s high-cost debt.
Demand for Tesla vehicles is apparently being impacted by shrinking waitlists, high interest rates (financing costs) and a leakage of customers due to Musk’s Twitter rants.
Musk is not alone in his fall from grace. First prize must surely go to Sam Bankman-Fried, known as SBF. The Founder and CEO of FTX and the Alameda hedge fund is currently locked in a Bahamian prison cell facing fraud charges.
At one stage, this supposed crypto genius and gaming fanatic was quoted by a media source as the second coming of ‘JP Morgan’. Surely claims like this should have sent alarm bells ringing.
Regrettably investors both in FTX, the company, and the associated Alameda hedge fund are staring down the barrel of the US largest embezzlement scandal in history with US$1.8bn plus in losses.
A film may even be in the wings with lauded author Michael Lewis already on the case apparently.
Lessons for Investors
The most glaring red light for investors is to be wary about charismatic, maverick business founders and CEOs.
Mavericks in the investing world cut both ways for shareholders.
The Tesla board is wanting for legitimacy as Musk has used his substantial Tesla shareholding to fund his own personal social media dream (Twitter).
In the process, some would argue Musk’s lack of hubris and ‘Godlike’ complex is compromising loyal investors.
Of course, not all Tesla shareholders and Musk fans will see the foray as misplaced but, in the short term, a 55%-plus fall in the share price is painful.
No billionaire can save the world, but this doesn’t stop some from imposing their own will on the rest of us.
Corporate governance matters and matters a lot.
Investors are often all-to happy to gloss over the significance of a governance, because when the sun shines and the share price is rising, nobody cares.
Stakeholders only take note when they start losing money.
The exclusion of Tesla from multiple ESG indices and funds, based on perceived lack of good corporate governance, looks in hindsight to be a well-founded decision.
Tesla is not dead nor even on life support, it is no FTX.
Fundamentally, the company is financially strong, but at this stage on a risk/reward basis the Musk overhang and potentially softer EV demand could continue to squeeze the share price and valuation.
I am guessing the company will look a lot different in a year’s time and so might the board and management structure!
Anyway, I want to wish everyone Happy Holidays and all the best in 2023.
Until then,
Best wishes from
Shareplicity
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