Hedge Clippings | 15 December 2023

No wonder there's a property crisis - and it's not just because in the 12 months to 30 June Australia recorded a net annual gain of 518,000 people, with migrant arrivals up 73% year on year to 737,000. Temporary visa holders numbered 554,000, while departures decreased marginally by 2% to 219,000. To what extent this represents a catch-up post COVID remains to be seen, but with a population of just 26 million this represents a huge influx - and a massive supply/demand imbalance when it comes to housing and infrastructure.

Australia's economy has always benefited from migration, and with 910,000 jobs created over the last two years, and historically low unemployment, there's nothing to fear from the numbers.  Australia needs migrants to fill job vacancies, and to maintain the record of growth. As the federal government announced this week, going forward the "mix" of migrants is to change, although we're not confident that when they announce the details they'll get the balance right. Being politicians, there's always the risk they'll make decisions based on the next election, rather than what's best for the long term economic and social benefit of the country as a whole.

Even though unemployment inched up by 0.1% in November to 3.9%, with 19,000 joining their ranks, employment increased by 61,000 people, resulting in the employment to population ratio reaching a record high of 64.6%, and the participation rate also at an all time high of 67.2%. But back to property...

All too often Hedge Clippings' focus is on interest rates and inflation. However, in spite of the Doomsday merchants and some so-called property experts predicting a 20% to 30% fall in property prices and widespread mortgagee sales as the RBA jacked up interest rates, this hasn't occurred. Prices have remained strong. One reason - and possibly the major one - for the property crisis in Australia is simply the imbalance between supply and demand - economics 101. According to Brook Monahan of Mosaic Property Group, who operates a highly successful building/development business in SE Queensland,  Australia wide in the year to March 2023, homes were needed for an additional 226,000 households. Only 170,000 were completed. Next year is worse, with a forecast of just 153,000 new homes completed.

As a nation, Australia has never completed more than 191,000 new homes, and the ten year average is 173,000. The target requirement is 240,000. In other words, we're simply going backwards, and cost pressures and lack of effective decision making by governments of all persuasions is not going to help. As Monahan continues, until there is action on a policy front (because winding back migration is not the solution), the current housing shortage will continue to drive rents higher still, and worsen housing affordability.

Forecast reductions in interest rates towards the end of 2024 on the back of falling inflation won't help, although it will help those with existing mortgages.

And so as we end 2023 and look both backwards and forward, we'd have to say it's been a challenging year, and next year is likely to be the same. Meanwhile, Hedge Clippings will be taking a short, but (we think) well earned break, so this will be the last edition before we return in the New Year. Until then, we'd like to thank you for your time and attention over the past year, and wish you and your family a Happy Christmas, and a safe, healthy and prosperous New Year.

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China Property: Has the "Grey Rhino" been tamed?

Ox Capital (Fidante Partners)

December 2022

Stabilization of property market in sight = Time to buy quality growth stocks in China.

Relative to most governments in the world, the Chinese authorities proactively controlled and deflated the property
market bubble to sustain a stable economy in the long run. Policy measures, including tighter lending standards and
house price restrictions, were put in place to dampen real estate speculation while containing escalating home and
land prices. Notably, latest statistics from China indicate signs of stabilization in the property market.

1. Policy measures have been effective: Measures put in place over two years ago have been effective and
authorities have started relaxing some policy measures given :

1) Property sales are down ~50% from 2021 levels (near 2015 levels).

2) Housing starts have declined over 60% from peaks to 2023 YTD. Urbanization rate in China is only ~60%,
much lower than that of developed countries, and the lack of new starts in the system will ultimately reduce
overall supply (less completions) in the next few years. As such, supply and demand dynamics will increasingly
tighten.

2. Affordable housing vs. other counties: China property prices are affordable relative to other EM/DM counties
while affordability will improve further as mortgages rates decline.

3. Stimulating growth: The Chinese authorities have started to stimulate the economy, showing an intention to boost growth, increase consumer sentiment and investor confidence. We believe further reforms are likely to mitigate risks to the broader economic recovery. Notably, our base case for China is that of continual policy easing and continued government stimulus, an environment ripe for improving economic activity.

Equity market correction provides entry point. Although we do not believe it is the time to buy China developer stocks given structural headwinds facing the sector (i.e. Lower household formation), and we believe the property sector is set to stabilize rather than a robust recovery.

However, we do believe this set-up of "stimulating growth" is a similar playbook to the GFC in USA and Europe in 2009 when it was a great time to own quality growth companies at deeply discounted valuations. As such, we view a similar set up for many quality growth stocks in China at inexpensive valuations now.

Funds operated by this manager:

Ox Capital Dynamic Emerging Markets Fund

Why government bonds remain a natural choice

JCB Jamieson Coote Bonds

November 2023

Funds operated by this manager:

CC Jamieson Coote Bonds Active Bond Fund (Class A), CC Jamieson Coote Bonds Dynamic Alpha Fund, CC Jamieson Coote Bonds Global Bond Fund (Class A - Hedged)

Investing Essentials: Diversification -

The shield against investment volatility

Bennelong Funds Management

November 2023

As any investor will tell you, investing can be a rollercoaster.

Not all investments behave in the same way - different types of investments behave differently under certain economic and market conditions. Some may go up while others go down. Some may be entirely negatively correlated.

This is where diversification comes in. Essentially, diversification means investing across a range of different investment types that behave differently across a full investment market cycle. While nothing will give you an absolute guarantee against loss, spreading your investments across different investment categories and types of assets limits your exposure to individual related risks.

Risks can be in the form of market risks, where the market may become less valuable for assets within a particular class due to external factors, like interest rate changes, war, or weather events. Or, they can be asset-specific risks, which come from the performance of investments or companies themselves, often dependent on management's performance, operational activities or competitor actions, for example.  

There are all sorts of ways to diversify your portfolio to mitigate these risks. Diversification can occur across asset classes (e.g. equities, property, cash), industries (e.g. telecommunications, agriculture, financial services), or regions (e.g. countries, markets, economies).

Diversifying by asset class
Different asset classes - like real estate, equities and bonds - generally behave differently under similar economic conditions. For example, if a market crash sends the stocks in your portfolio tumbling, the assets in other uncorrelated asset classes may not lose value at the same rate, or they may move in the opposite direction and increase in value, thus providing a stabilising impact.  

For example, commodities like gold may not have a correlation to real estate.

Diversifying by industry
Like asset classes, different industries often encounter different risks at different times based on a number of market factors. When one industry encounters a downturn, another might flourish. Diversifying your investments across sectors ensures that your financial wellbeing is not totally dependent on the fate of a single industry.

For example, if you decide to invest all your money into one type of agricultural crop such as wheat, then adverse weather conditions could wipe out the crop rendering your entire investment worthless. But if you had invested across other industries that aren't impacted by weather, such as healthcare or financial services, only a portion of your savings would be impacted by this weather event.

Diversifying by region
The same applies for regions. The landscapes of countries, markets, and economies are based on unique dynamics, and certain risks may affect some regions rather than others.

For example, one region may be in economic expansion while another is in contraction. Exposure to different currencies, and to different political and regulatory environments can have an impact on an investment.

Having your investment diversified across asset classes, industries and regions is important for investment success, and helps to ensure that your range of investments don't all perform in the same way at the same time. Therefore, overall investment returns may be achieved in a less volatile way, relative to holding only one or two different assets.

In determining the right asset allocation for your portfolio, you'll need to consider the overall risk and return of each asset, and how different assets correlate with each other.  It's also important to determine your own risk and return level that you are comfortable with and able to tolerate.

Diversification serves as somewhat of a safety net, capturing the potential benefits of various investments while mitigating the risks associated with market fluctuations.

It's always important to remember that any decisions you make should be in line with your own financial objectives, as each person's investment needs will be different.

For more insights visit www.bennelongfunds.com

Disclaimer

The content contained in this article represents the opinions of the author/s. The author/s may hold either long or short positions in securities of various companies discussed in the article. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the author/s to express their personal views on investing and for the entertainment of the reader.