The global inflation bogeyman slips away...

Insync Fund Managers

February 2023

In this White Paper, Insync said five common assertions had been stirring the pessimism pot, one of which was that the resumption of rising interest rates, and therefore inflation, is firmly established.

Insync Portfolio Manager John Lobb said, "We disagreed with those pessimistic assertions then, and in the face of further evidence, we still disagree."

In August 2022, Insync said the incredible rate of money creation during 2020-2021 of 20% to 30% pa, had dramatically slowed to the average of the historic range of 5-6%. Excess money had been chasing an interrupted supply of goods and services up until last year, pushing up prices artificially.

"Today, the Money Supply (M2) rate of change is negative (-1.3%). This has not happened for at least 80 years," Mr. Lobb said. "This development would be of concern to the Federal Open Market Committee (FOMC), since productive investment relies heavily on the availability of credit."

In 2022, Insync had also pointed out that inflation of the price of goods leaving the gates of Chinese factories, which had been running at 13-14%, had dropped back to 4%.

"The factory gate prices of Chinese manufacturing plants have now declined at -1.3% over the last year," Mr. Lobb said.

Additionally, he said that a decline in the net number of small to medium (SME) businesses looking to implement price hikes, also identified by Insync in August 2022, had continued to such an extent that SME pricing intentions in the next three months now match those prior to the pandemic.

Looking to carbon energy supplies, which was also touted as an ongoing inflationary pressure, the reverse has been true.

"It fell even further than we predicted," Mr. Lobb said.

"In more normal times, central banks largely ignore the ebb and flow of global energy and food prices. However, in today's conditions where the labour force has contracted, rises in food and energy prices may strengthen the case for higher rates since pay demands could create a more sustained impulse to inflation."

Mr. Lobb said that fortunately, Natural Gas (MMBtu) has dropped 65% in less than six months, back to the same level as that during the previous four northern hemisphere winters.

"Besides being used for heating, it's a core determinant of fertiliser and thus food prices. Crude oil and therefore gasoline prices, have declined in excess of 20% to $78/barrel in the last six months. This is even below its price prior to the Russian invasion of Ukraine," he said. "So, whilst the FOMC is usually more interested in CPI ex food and energy, they would appreciate how reductions in the prices of these non-discretionary goods has a positive indirect effect on wage demands in what is a tight labour market."

Insync had asserted that inflation over the past few decades had been abnormally low, and they had expected it to settle around its longer-term norm, which is not bad for equity markets.

"This is exactly what it is heading towards. Five-year inflationary expectations are now congruent with the 5-10 year inflationary expectations (2.3%) which will calm the nerves of the FOMC," Mr. Lobb said.

"It has always been our view that long-term inflation expectations will not revert to those of the recent abnormal past of around 2% due to a less (internationally) mobile labour force and a higher degree of onshoring. Nevertheless, the FOMC's expectations will also be tempered by their assessment of the new global regime, mainly attributable to the re-evaluation of geopolitical risk by large corporates."

Insync had also noted that looking at the core drivers of inflation it was hard to see price rises continuing as had been the case in the previous year and, if the prices of the core drivers of inflation stabilise, inflation would drop dramatically in this coming year.

"Even total weekly wages, a significant driver of 'stickier' service inflation, are now only growing at 3.5-3.75%, similar to the rate of growth that existed in 2019," Mr. Lobb said.

"As employees and managers become more accustomed to the increased prevalence of the hybrid work schedule, productivity should recover from the currently negative -1.7%, leading to an even greater improvement in unit labour costs (ULC). The Federal Reserve is keenly aware that ULC is the real culprit of endemic inflation."

While Insync believes the global economy is unlikely to regain its 'fluidity', it also believes the central banks will feel more comfortable promoting a more neutral policy stance based on the above developments.

"Perhaps for those investors that hold a pessimistic view, it may be time to question this, to deploy assets towards those equites that are primed to deliver above average earnings growth in a mediocre at best, GDP environment," Mr. Lobb said.

Funds operated by this manager:

Insync Global Capital Aware Fund, Insync Global Quality Equity Fund

Disclaimer
Equity Trustees Limited ("EQT") (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) ("Insync"), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.

Airlie Quarterly Update

Airlie Funds Management

January 2023

Speaker: Emma Fisher, Portfolio Manager

Funds operated by this manager:

Airlie Australian Share Fund

Important Information: Units in the fund(s) referred to herein are issued by Magellan Asset Management Limited (ABN 31 120 593 946, AFS Licence No. 304 301) trading as Airlie Funds Management ('Airlie') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to an Airlie financial product or service may be obtained by calling +61 2 9235 4760 or by visiting www.airliefundsmanagement.com.au.

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10k Words 

Equitable Investors

February 2023

Funds operated by this manager:

Equitable Investors Dragonfly Fund

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Hedge Clippings | 24 February 2023

Beware of the Politician with his hand in your pocket...

The government set the proverbial cat among the pigeons this week with the "floating" of ideas to change the superannuation system - with a particular emphasis on the top end of town, and it seems those fortunate - or smart enough - to have a super balance of $3 million or more. Depending on where you sit - or maybe that should be where your super balance sits - this is either irrelevant or a clear breach of then shadow treasurer Jim Chalmers' statement on the ABC in March last year that "Australians shouldn't expect major changes to superannuation if the government changes hands."

Chalmers is on electorally safe ground for two reasons: Firstly, it's a fair bet that Labor will stay in office for at least one term after the present one, and secondly, he quotes the statistic that the average balance in super is about $150,000. Of course, this is misleading, presumably deliberately, so as not to alienate the "average" voter. The average balance includes those who have only recently joined the workforce - and by recently that would include those on "average" wages who've been working for the past 20 years. According to AMP, you'll need to be closer to 50 than 40 to have a super balance of $150,000 while the average super balance of a 65-70 year old male is $414,380, and $370,042 for a female.

Unfortunately, AFSA calculates that a comfortable retirement lifestyle requires a balance of $640,000, so the average is not going to be enough for the average retiree. Super is great, but for the majority is not enough.

Chalmers, Albanese, and Assistant Treasurer Stephen Jones have all hit the airwaves to re-iterate that any changes are fairly and squarely aimed at the top end of town, and unlikely to resonate elsewhere - although they should. For far too long superannuation has been tweaked by both sides of politics to the extent that it is incomprehensible to the average (there's that word again) worker. Successive governments have used a combination of carrot (tax incentives for voluntary contributions) and stick (legislation to compel employers to pay or deduct from wages) to reduce the reliance on welfare in retirement. Both have been successful but only up to a point.

The stick has helped, but not enough to provide a comfortable retirement to the average retiree. Meanwhile, the carrot has, for those in the treasurer's sights, been overly successful, such that he wants his share of their success! You can't offer a carrot, then take a stick to those who make the most of it. You know what they say about the dangers of having a politician's hand in your pocket...

While it seems the devil will be in the detail, hints are that the aim is to limit the amount one can have in super to $3 million. This seems patently unworkable to a simple mind such as ours. More logical would be to set a reasonable tax rate for income over a certain level (excluding capital withdrawal) from super in retirement. That won't be popular either, because once a tax has been introduced it will only be a matter of time before it is increased.

Chalmers is trying to avoid the stuff-up Bill Shorten made suggesting changes to franking credits before his 2019 election loss. His other target might be negative gearing on property, but too many pollies have second properties (Albo included) so that's not likely as too many votes would evaporate. Taxing the super of the rich (and the not so rich) is a much safer option.

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Funds operated by this manager:

WaveStone Australian Share Fund, WaveStone Capital Absolute Return Fund, WaveStone Dynamic Australian Equity Fund

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