Climate and Environmental challenges and opportunities

11 Apr 2023 - Redwheel

The Greenwheel Insights team provide thematic sustainability research to our investment teams to help shape their thinking on key themes or holdings within their portfolios. In this piece, commissioned by Redwheel's Global Equity Income...

11 Apr 2023 - Climate and Environmental challenges and opportunities

By: Redwheel

Climate and Environmental challenges and opportunities

Redwheel (Channel Capital)

March 2023

The Greenwheel Insights team provide thematic sustainability research to our investment teams to help shape their thinking on key themes or holdings within their portfolios. In this piece, commissioned by Redwheel's Global Equity Income team, Stephanie Kelly highlights the key issues investors should consider in the Fast Fashion Industry and Nick Clay explains how the research has informed their views on some of their fashion holdings.

Stephanie Kelly, Head of Greenwheel

Fashion accounts for an estimated 10% of global carbon emissions, which is more than the emissions of the shipping and airline industry combined.[1] Fast fashion, defined as 'inexpensive clothing produced rapidly by mass-market retailers in response to the latest trend', is heavily criticised for driving these emissions through a combination of high volumes and material choice. Relatedly, the environmental impacts of fashion are profound in terms of water use, microplastics and the use of synthetic dyes and chemicals in textile production.

Unsurprisingly, fast fashion companies have been under pressure in recent years to show commitment to greater sustainability. While much is said by companies about their commitment, it is important to dig deeper to evaluate the true sustainability credentials of these firms.

The key drivers of emissions and environmental damage in this sector are:
• Materials: Producing clothes can vary significantly in terms of environmental footprint. Key factors to look out for in terms of climate and environment impacts include:
• Energy inputs to production
• Land use/management
• Crop yield
• Water & chemical use.
• Volumes: The fundamental challenge for fast fashion in the context of sustainability is the high volumes of goods produced and distributed. Ever higher volumes of product limit the potential cuts to emissions and environment improvements.
• Lifecycle: Related to the issue of volumes and material choice, the life cycle of textiles is an important component of sustainability. With high volumes of textiles being pumped out, the average life span of a high street garment is claimed to be just seven wears. The natural corollary of this is huge volumes of textile waste going to landfill or incineration, not to mention massive resource depletion.

Nick Clay, Head of Global Equity Income, Redwheel

The input of the Greenwheel team into our understanding of the complexities of the environmental challenges that face our fast fashion companies has been insightful, educating on the nuances of each issue and has aided in the structuring of an engagement plan and ongoing monitoring with respect to our holdings.

Our central view has always been one where a solution to the life cycle impacts of fashion is both necessary and achievable, rather than the solution being fashion cycles cease to exist. The strategy has always looked to invest in those companies able to transition through their ESG challenges and demonstrate that they are doing so. The greater depth of understanding of the challenges faced, highlighted by Greenwheel, has demonstrated the importance of our flags to monitor the progress the companies are making.

Two examples are Inditex and H&M. Inditex continue to demonstrate their desire to be a leader in reaching a closed loop system to deliver its fast fashion. Investing EUR1.1bn per year in order to achieve this along with its collaborations with recycling textile companies (such as Infinited Fiber Company) and recent "resell, repair or donate" programs are all evidence of progress. Greenwheel correctly point out how much more needs to be done for Inditex and are advising on metrics to monitor the impact of their initiatives, but Inditex are exhibiting the characteristics we look for.

H&M, on the other hand, have demonstrated that the continued pressure being placed upon the company from the high inventories and China setbacks, has led to them cutting back on investment required for them to transition in a similar vain to Inditex. This is a warning flag to us, as the transition required is absolutely necessary if these companies are to be the ultimate winners in the new future of fast fashion. We had the opportunity to sell H&M and switch into Inditex, and some others such as Kering (another strong improver in its ESG challenges) to improve our likelihood of transitioning the ESG challenges faced whilst not having to pay a higher valuation for doing so. This is an ongoing process over many years, and one we look forward to engaging and monitoring with Greenwheel by our side.

Authors: Stephanie Kelly, Head of Greenwheel & Nick Clay, Head of Global Equity Income, Redwheel

Funds operated by this manager:

CC Redwheel Global Emerging Markets Fund, CC Redwheel China Equity Fund

Sources:

[1] European Parliament: The impact of textile production and waste on the environment.

Key information:

No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. Past performance is not a guide to future results. The prices of investments and income from them may fall as well as rise and an investor's investment is subject to potential loss, in whole or in part. Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of Redwheel. This article does not constitute investment advice and the information shown is for illustrative purposes only.

Hedge Clippings | 06 April 2023

6 Apr 2023 - FundMonitors.com

Last week's Hedge Clippings correctly predicted that the RBA would hit the pause button on their combined rate rises of 3.5% since last May. However, the key word is "pause". As always, after all the preliminaries in the RBA's post meeting...

6 Apr 2023 - Hedge Clippings | 06 April 2023

By: FundMonitors.com

Hedge Clippings | 06 April 2023

Last week's Hedge Clippings correctly predicted that the RBA would hit the pause button on their combined rate rises of 3.5% since last May. However, the key word is "pause". As always, after all the preliminaries in the RBA's post meeting statement, check out the last paragraph, and particularly the final sentence:

"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."

That target of course is the oft' quoted range of 2-3%, but the Governor's statement also noted that inflation, while moderating, is not expected to reach "around" 3% until mid 2025. As we also discussed last week, while the latest monthly inflation figures are improving, (no doubt helping the "cause for a pause") the tight labour market, as evidenced by unemployment at 3.5% and at around 50 year lows, coupled with calls for wage increases in some sectors of 6-7%, are a "cause for concern".

The RBA release noted that at the aggregate level wages growth is still consistent with their inflation target, (i.e.2-3%) but our best guess is that this is where the wheels may fall off the RBA's calculations. The RBA's statement referred to it in classic central bank-speak by saying the board will "pay close attention to both the evolution of labour costs and the price setting behavior of firms". By which they also presumably mean the public sector in the Labor controlled mainland.

Calls for Philip Lowe's head on a platter have (sensibly) diminished over the past couple of months, but going forward this will no doubt depend on him being able to navigate the narrow path between taming inflation with higher rates, and so slowing the economy, and at the same time achieving a soft landing.

That's a tough juggling act.

For the moment - at least for another month - the RBA is buying some time as they wait for clarity on both inflation, and the effect of their efforts to control it over the past 12 months. Thereafter, expect rates to rise by another 0.15 to 0.25%, while any reduction - barring a recession - seems a long way off.

Meanwhile, staying on the RBA, their latest Financial Stability Review, released this morning, looks at household budgets and associated financial stress, and confirms the bank's Baseline Economic Scenario; namely, that over the course of 2023 unemployment increases slightly to 3.75%, incomes will grow by 4.25%, expenditures will increase by 4.75%, and the cash rate will peak at 3.75%.

In that scenario, the RBA predicts that around 15% of households will have "negative spare cash flow" (aka mortgage and living expenses greater than income), which from the perspective of the overall economy, they expect to be manageable.

The Adverse Scenario - unemployment rising to 5.5%, under-employment 8%, and with wages growth and inflation dropping as a result, would see 17% of households with negative spare cashflow - as usual with the stress falling unevenly on lower income borrowers with low, or zero, savings buffer.

The Bank expects the broader financial stability implications (i.e. damage to lenders' balance sheets) to be limited. However, as Philip Lowe pointed out in his address to the National Press Club earlier in the week, one of his major concerns is the level of inflation and stress in the rental market, where the data and statistics are more difficult to assess.

This is dry subject matter for a Thursday, but we'd like to take this opportunity to wish everyone a safe and "Happy Easter" or whatever you may be celebrating.

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March 2023 Performance News

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Performance Report: Argonaut Natural Resources Fund

6 Apr 2023 - FundMonitors.com

The Argonaut Natural Resources Fund rose by +3.62% in March, an outperformance of +3.78% compared with the ASX 200 Total Return benchmark which fell by -0.16%. Since inception in January 2020, the fund has returned +40.56% per annum, a...

Performance Report: ASCF High Yield Fund

6 Apr 2023 - FundMonitors.com

The ASCF High Yield Fund rose by +0.55% in March. Since inception in March 2017, the fund has returned +8.33% per annum, a difference of +6.67% relative to the Bloomberg AusBond Composite 0+ Yr benchmark which has returned +1.66% on an...

The FED doesn't blink

6 Apr 2023 - Kapstream Capital

Kapstream's Portfolio Manager, Dan Siluk, explains why the Federal Reserve (Fed) opted to raise rates and highlights the threat posed by persistently high inflation despite recent upheaval in the banking sector.

6 Apr 2023 - The FED doesn't blink

By: Kapstream Capital

The FED doesn't blink

Kapstream Capital

March 2023

Kapstream's Portfolio Manager, Dan Siluk, explains why the Federal Reserve (Fed) opted to raise rates and highlights the threat posed by persistently high inflation despite recent upheaval in the banking sector.

Key takeaways:

While acknowledging the recent developments in the banking sector, Fed Chairman Jerome Powell emphasized that the central bank's primary focus continues to be guiding inflation toward its 2.0% target.
Although relatively hawkish, the Fed's move was likely tempered by tightening credit conditions weighing on consumers' and businesses' ability to borrow, which could act as an economic headwind.
A bullish pivot likely doesn't await investors, but by delivering a 25 basis point (bps) rate hike, the Fed may have decreased the chance of a policy error that could send bond yields markedly higher.

After nearly two weeks of speculation, with a few pointed sentences Federal Reserve (Fed) Chairman Jerome Powell reaffirmed that the Federal Open Market Committee's (FOMC) highest priority remains price stability, while also acknowledging that recent banking sector upheaval and its impact on credit availability are developments they cannot dismiss. By shifting the focus back to inflation and a tight labour market despite indications of a slowing economy, Chairman Powell provided the context for the FOMC's 25 bps rate hike to a range of 4.75% to 5.00%.

Even with the focus squarely on inflation, we believe the impact of the banking turmoil was already evident in Chairman Powell's statement. In his Congressional testimony only a few weeks ago, he hinted that rates would likely have to rise higher than the market anticipated. Taking him at his word, futures prices responded by implying the terminal rate would climb as high as 5.75% in mid-2023. Fast forward to Wednesday and his message morphed to a less certain "some additional policy firming may be appropriate."

All eyes on the mandate

Citing "robust" job gains keeping stickier drivers of inflation - e.g., wages - elevated, Chairman Powell emphasized that there is much work to be done in achieving the Fed's objective of 2.0% inflation. This meeting's update to the Summary of Economic Projections reflected the Fed's modestly hawkish thinking. Estimates for 2023 headline and core inflation were revised upward to 3.3% and 3.6%, respectively. The challenge facing the Fed is acutely illustrated in the incongruity of paltry 2023 gross domestic product growth of 0.4% and the year's unemployment rate being revised down to 4.5%.

While banking sector turbulence has sent 2-year Treasury yields lower, sticky inflation could reverse that trend

Source: Bloomberg, as of 22 March 2023.

Given the recent developments in the banking sector, we had suspected that the Fed could have considered a 2023 pivot as lenders' health can materially impact financial conditions. Chairman Powell, however, dismissed that scenario, noting that the FOMC does not see a rate cut occurring this year. In fact, the Fed's much ballyhooed DOTS survey revealed that respondents see the fed funds rate finishing 2024 at 4.3% - slightly higher than the 4.1% suggested in its December survey. We interpret this as the Fed being willing to leave rates at their cycle high for longer than what the market is currently pricing in. Such a pause would give the central bank time to assess the impact of previous rate hikes and other tightening initiatives.

We believe the Fed was correct in shifting the conversation back toward its battle with inflation. Even before most people had ever heard of Silicon Valley Bank (SVB), the Fed was faced with striking a delicate balance between reducing inflation and inflicting as little harm as possible on the economy. That battle has not gone away.

Breaking something

Arguably, the genesis of the current banking turmoil was last year's rise in interest rates, which led to the mismatch between SVB's assets and liabilities and resulted in the run on the bank. We often state that the purpose of monetary tightening is to break something. Typically, what gets broken first are the weaker business models and pockets of the economy that are dependent upon low rates. While regional banks with narrow customer bases may be the first segment to give way, they may not be the last, and investors must be wary of what else higher rates could expose.

In his statement, Chairman Powell emphasized that the U.S. banking sector was "sound and resilient." This is due, in part, to the action taken by the Fed in concert with the U.S. Treasury to shore up banks' access to funding. Thanks to the alphabet soup of policy prescriptions created during the Global Financial Crisis, the Fed has a full cupboard of facilities well-suited to addressing financial stability. This leaves the fed funds rate available for the task at which it's effective: addressing inflation.

Bringing this full circle, the stress to regional banks that initially caused a historic rise in rates may, in the end, assist the Fed in tightening financial conditions. Mr. Powell made a point to highlight that households and businesses are likely to face tighter credit conditions. This is in addition to higher rates already negatively impacting the housing market and business investment.

Narrowing rates' range of outcomes?

We think recent developments - and the Fed's decision - leaves much for investors to digest. In one respect, the added headwind of tightening credit conditions means that the near-term ceiling for interest rates may be lower than it was in early March. This could lead to lower volatility in shorter-dated bonds. Still, we see a disconnect between the yield on the 2-year U.S. Treasury of roughly 4.0% and the end-of-2023 DOTS projection of 5.1% for the fed funds rate. This disparity may reflect the Fed's concern that it's too soon to declare victory in its battle against inflation.

In contrast to the Fed's expectations for its benchmark rate, the futures market believes a dovish pivot is in the cards by the end of 2023

Source: Bloomberg, as of 22 March 2023.

Recent market and economic developments have no doubt tested the Fed. We appreciate that its focus remains on price stability, as imbedded inflation expectations can lead to long-lasting price distortions across the economy. By recognizing that it has the facilities at its disposal to address financial stability, the Fed can keep another 25 bps rate hike on the table should consumer prices remain uncomfortably hot and the labour market tight.
In choosing a circumspect hike rather than the pause many had called for, the Powell Fed, in our view, has passed the initial test of not blinking at the first sign of something breaking, which - as history has shown - only results in more difficult battles down the road in containing inflation and longer-term rates.

Basis point (bp) equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.
The Federal Open Market Committee (FOMC) is the body of the Federal Reserve System that sets national monetary policy.
The FOMC dot plot is a chart that summarizes the FOMC's outlook for the federal funds rate.

Disclosure: This information is for adviser & wholesale investors only

Funds operated by this manager:

Kapstream Absolute Return Income Fund

This material has been prepared by Kapstream Capital Pty Limited (ABN 19 122 076 117 AFSL 308870) (Kapstream), the investment manager of the Kapstream Absolute Return Income Fund & Kapstream Absolute Return Income Plus Fund ('Funds'). Fidante Partners Limited ABN 94 002 835 592 AFSL 234668 (Fidante) is a member of the Challenger Limited group of companies (Challenger Group) and is the responsible entity of the Funds. Other than information which is identified as sourced from Fidante in relation to the Funds, Fidante is not responsible for the information in this material, including any statements of opinion. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable to your circumstances. The Funds Target Market Determination and Product Disclosure Statements (PDS) available at www.fidante.com should be considered before making a decision about whether to buy or hold units in the Funds. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Past performance is not a reliable indicator of future performance. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Kapstream and Fidante have entered into arrangements in connection with the distribution and administration of financial products to which this material relates. In connection with those arrangements, Kapstream and Fidante may receive remuneration or other benefits in respect of financial services provided by the parties. Fidante is not an authorised deposit-taking institution (ADI) for the purpose of the Banking Act 1959 (Cth), and its obligations do not represent deposits or liabilities of an ADI in the Challenger Group (Challenger ADI) and no Challenger ADI provides a guarantee or otherwise provides assurance in respect of the obligations of Fidante. Investments in the Fund(s) are subject to investment risk, including possible delays in repayment and loss of income or principal invested. Accordingly, the performance, the repayment of capital or any particular rate of return on your investments are not guaranteed by any member of the Challenger Group.

The Path to a Soft Landing is a Narrow One, yet Stocks Hold Together

5 Apr 2023 - Wealthlander Active Investment Specialist

The latest RBA statement highlights the problem of high inflation and that the path to a soft landing is a narrow one. It reiterates the RBA's commitment to pursuing a 2 - 3 % inflation target, a target which notably the current RBA...

5 Apr 2023 - The Path to a Soft Landing is a Narrow One, yet Stocks Hold Together

By: Wealthlander Active Investment Specialist

The Path to a Soft Landing is a Narrow One,

yet Stocks Hold Together

Wealthlander Active Investment Specialist

March 2023

The latest RBA statement highlights the problem of high inflation and that the path to a soft landing is a narrow one. It reiterates the RBA's commitment to pursuing a 2 - 3 % inflation target, a target which notably the current RBA leadership has never sustainably achieved. It flags further interest rate increases too, as has the Federal Reserve. Markets think a further two rate increases in Australia are needed bringing the cash rate to circa 4% and, more importantly, home loan rates beyond 6%.

Home loan rates of over 6% will cause much pain to the average Australian mortgagee rolling off a fixed rate mortgage this year and make a meaningful impact on consumer discretionary spending. As such, we have already seen building approvals fall off in January and much anticipation that Australia will be heading in later 2023 for its first real housing-associated recession since the early 1990s. Much of the global economy is battling similar issues, and housing price falls.

Somewhat perplexingly, equities have held up in 2023 despite belated recognition from bonds that the interest rate pressures aren't over and despite earnings margin deterioration and higher discount rates. Surely equities should have realised by now that we are heading for recession and that the cost of money has risen, so why are they so slow to get the memo?

The answer to this question is critical to the path forward. So, let's consider it.

There are a few potential reasons for high valuations and equity market intransigence, led by the US:

(1) Corporations are still awash with cash because of the massive post-covid government stimulus and are still engaging in aggressive buybacks globally. These corporations feel the need to do something with their cash and prefer to spend it buying their stock regardless of price.

(2) The price-independent "passive investor" or buyer has become dominant in markets. Passive managers don't value anything before they buy it and are price and outlook insensitive. This tends to boost market prices.

(3) The amount of speculation in markets remains incredibly high. Options markets now trade over $1 trillion in notional value daily, which is greater than physical buying. Much of these are one-day or less options capable of easily moving market pricing in the short-term due to its sheer leverage and dominance!

Equity markets have hence never been more casino-like and vulnerable to speculative flows. No wonder price movements defy belief in recent times and over short periods. Much of the market doesn't care whether we are in a recession in late 2023 because it's either price insensitive or only concerned with the current day's price movements. How we got to this ridiculous scenario is another story.

So, it is indeed different in a meaningful way this time because of the character of market participants, but will it be different when we enter recession and earnings, and earnings margins take a more significant hit? This depends on the provision of one key factor, the actual amount of liquidity provided by central banks, commercial banks, and governments to the market.

Commercial banks are and will likely be less willing to lend money to the less creditworthy when the outlook is poor, but what about governments and central banks?

Governments, on the other hand, have become more fiscally irresponsible and dominant globally. They are likely to continue stimulating no matter what, given recent trends for greater government, the need for massive stimulus programs for infrastructure, climate change and increased military spending, and worsening dependency ratios and inequality.

The swing factor is central banks. Suppose central banks are true to their words and are committed to getting inflation down sustainably. In that case interest rates will increase further and potentially stay higher for longer in the face of economic weakness. Quantitative tightening will suck liquidity out of the market.

Given the above, the equity market is still likely to suffer and behave as it has in every other recession (assuming we get a recession, which leading indicators suggest is highly probable).

The challenge for the outlook is that markets don't trust central banks to do what they say, and they have legitimate reason to be sceptical. Central banks could easily give up on tightening measures and reverse course in the face of weakening economies and rising unemployment. Equally, there is a solid case to be made given the sheer amount of debt in the global economy there isn't a realistic option for central banks to become fully responsible now. It is simply too late as the economy has been overly financialised, and without ongoing stimulus, a deflationary bust will ensue which politicised central banks can't tolerate. In other words, financial repression is needed whereby interest rates are kept artificially low to stimulate higher structural inflation to wear away high debt levels over time. This provides a potential path for equity markets to hold up and explains how it could be different this time.

In our view, both the bears and bulls will be wrong and right. Central banks are first likely to cause a market accident or hard landing particularly given the nature of market participants and speculation in today's equity market, yet ultimately will be forced into a path of financial repression. It's a matter of timing. So, while cash looks attractive today, its attractiveness is likely to be somewhat fleeting. Equally equities are unattractive today but will likely provide a great buying opportunity at some point later this year.

History has convincingly demonstrated that in every market sell-off investors don't buy at the bottom and become afraid to become invested. Investors hence need to be invested, but just prudently at this point in time to avoid the risks of a hard landing in the short-term while still capture the likely benefits of financial repression over time. This means being invested with truly active and dynamic management that will buy into economic and equity market weakness when it arises but is investing cautiously with low equity market exposure for now, patiently waiting for the opportunity to strike. This management style will look to take advantage of an opportunity that we know investors are not structured to achieve and will otherwise miss. You need to be in it to win it, but equally you need to ensure the journey is tolerable too.

Funds operated by this manager:

WealthLander Diversified Alternative Fund

DISCLAIMER:

WealthLander Pty Ltd is a corporate authorised representative (CAR) of Boutique Capital Pty Ltd (BCPL) AFSL 508011, CAR Number 001285158. CAR is the investment manager of the WealthLander Diversified Alternative Fund (Fund).

To the extent to which this document contains advice it is general advice only and has been prepared by the CAR for individuals identified as wholesale investors for the purposes of providing a financial product or financial service under Section 761G or Section 761GA of the Corporations Act 2001 (Cth).

The information herein is presented in summary form and is therefore subject to qualification and further explanation. The information in this document is not intended to be relied upon as advice to investors or potential investors. It has been prepared without considering personal investment objectives, financial circumstances or particular needs. Recipients of this document are advised to consult their own professional advisers about legal, tax, financial or other matters relevant to the suitability of this information.

The investment summarised in this document is subject to known and unknown risks, some of which are beyond the control of CAR and its directors, employees, advisers or agents. CAR does not guarantee any particular rate of return or the performance of the Fund, nor do CAR and its directors personally guarantee the repayment of capital or any particular tax treatment. Past performance is not indicative of future performance.

The materials herein represent a general summary of CAR's current portfolio construction approach. CAR is not constrained with respect to any investment decision-making methodologies and may vary from them materially at its sole discretion and without prior notice to investors. Depending on market conditions and trends, CAR may pursue other objectives or strategies considered appropriate and in the best interest of portfolio performance.

There are risks involved in investing in the CAR's strategy. All investments carry some level of risk, and there is typically a direct relationship between risk and return. We describe what steps we take to mitigate risk (where possible) in the Fund's Information Memorandum. It is important to note that despite taking such steps, the CAR cannot mitigate risk completely.

This document was prepared as a private communication to clients and is not intended for public circulation or publication or for the use of any third party without the approval of CAR. While this report is based on information from sources that CAR considers reliable, its accuracy and completeness cannot be guaranteed. Data is not necessarily audited or independently verified. Any opinions reflect CAR's judgment at this date and are subject to change. CAR has no obligation to provide revised assessments in the event of changed circumstances. To the extent permitted by law, BCPL, CAR and its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information in this report or for any negligent misstatements, errors or omissions.

This Document is for informational purposes only and is not a solicitation for units in the Fund. Application for units in the Fund can only be made via the Fund's Information Memorandum and Application Form.

Cyber security - the new world order

4 Apr 2023 - Magellan Asset Management

In this episode of Magellan, In the Know, Magellan Head of Macro and Portfolio Manager Arvid Streimann speaks with Suzette Kent in a broad-ranging discussion about the new cyber security landscape. Are companies concentrating enough on...

10k Words - SVB Special

3 Apr 2023 - Equitable Investors

The following is an extract from Equitable Investor's weekly SmallTalk update that summarises the Silicon Valley Bank (SVB) situation in four key charts.

3 Apr 2023 - 10k Words - SVB Special

By: Equitable Investors

10k Words - SVB Special

Equitable Investors

March 2023

Almost half of the US VC universe banked with Silicon Valley Bank (SVB) and the bank was upfront in disclosing that "client cash burn remains ~2x higher than pre-2021 levels and has not adjusted to the slower fundraising environment". It also wasn't a secret that SVB held long duration debt investments that it had not marked-to-market. If it had its capital adequacy would have been brought into question immediately. SVB is unique in terms of its narrow base of clients - the vast majority of its deposits are not covered by the FDIC's $US250,000 insurance per depositor.

Figure 1: SVB's market position

Source: SVB

Figure 2: SVB's QoQ period-end total client funds (TCF) by client activity in $US billions

Source: SVB

Figure 3: Impact of unrealised securities losses on capital ratios - Q4 2022

Source: JP Morgan Asset Management, @TheRealDanSaedi

Figure 4: SVB's deposit mix - insured and uninsured

Source: Federal Financial Institutions Examination Council, WSJ

Funds operated by this manager:

Equitable Investors Dragonfly Fund

Disclaimer

Nothing in this blog constitutes investment advice - or advice in any other field. Neither the information, commentary or any opinion contained in this blog constitutes a solicitation or offer by Equitable Investors Pty Ltd (Equitable Investors) or its affiliates to buy or sell any securities or other financial instruments. Nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.

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Hedge Clippings | 31 March 2023

31 Mar 2023 - FundMonitors.com

Good news on the inflation front! This week we saw Australia's CPI decline for the second month in a row to an annualised rate of 6.8%, down from 7.4% in January, and from 8.4% in December last year. One would imagine it's too early to...

31 Mar 2023 - Hedge Clippings | 31 March 2023

By: FundMonitors.com

Hedge Clippings | 31 March 2023

Good news on the inflation front! This week we saw Australia's CPI decline for the second month in a row to an annualised rate of 6.8%, down from 7.4% in January, and from 8.4% in December last year. One would imagine it's too early to expect the RBA to cut rates at their meeting next Tuesday, but it does bring about the possibility of a "pause", and no doubt a collective sigh of relief from homeowners, and probably RBA Governor Philip Lowe as well.

However, as the saying goes, "one swallow doth not a spring make", and while it looks as if overall inflation may have peaked, there's a risk that wages-linked inflation has yet to impact the full CPI numbers.

Casting our minds back a year or two, inflation seemed dead in the water - in fact, the RBA was concerned about disinflation, which of course was one of the reasons Lowe and the RBA were caught unprepared, in line with virtually every other banker and economist in the world (outside Argentina, where inflation hit 102.5% in February).

Two events coincided - the sudden invasion of Ukraine forcing up energy prices, and the widespread easing of COVID restrictions, at the same time as China closed or locked down, creating a supply chain driven jump in the price of imported goods. That was followed by more general price increases of goods and services, some of which might have been opportunistic, after a long period of stability and margin compression.

What is yet to come is inflationary pressure as a result of wages, with the RBA's estimate of wages growth of 4.2% year on year likely to be exceeded given the ACTU are pushing for increases in line with inflation, and East to West labor governments are more likely to agree or give in to them.

If that's the reality, then the RBA's core inflation target of 2.9% by mid 2025 - or hope that the inflation genie is back in the bottle at 2-3% - is looking optimistic at best.

Our (uneducated) guess is that 2-3% inflation may be a long way off, if ever. Maybe the low inflation, QE induced post GFC era was a one-off - and apart from the low inflation, in some ways, we hope that's the case. For a more educated analysis this piece of research from the nab - although over a month out of date, argues the case in more detail than we can.

So all eyes will be on the RBA's announcement at 2.30 next Tuesday afternoon. We expect a welcome pause, but any reduction to be way off in the distance.

Meanwhile, it was good to see Teal MP for Wentworth, Allegra Spender hosting a round table of experts - including Ken Henry - to shake up Australia's taxation system. As the discussion was only being held today in Canberra it's too early to comment on the outcome, but hopefully it puts some pressure on both major parties to take the subject of real tax reform (and not just tinkering with super balances affecting 0.5% of the population) out of the too hard basket, and into the action tray, as detailed in Hedge Clippings on March 10th.

Australia and Australians are being held back by an overly complicated, inefficient tax system that governments of both persuasions have contributed to, and don't have the political will to fix.

Maybe the independents will force them to get on with some real reform.

News & Insights

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February 2023 Performance News

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Performance Report: Altor AltFi Income Fund

31 Mar 2023 - FundMonitors.com

The Altor AltFi Income Fund rose by +0.62% in February. Since inception in April 2018, the fund has returned +11.2% per annum, a difference of +5.28% relative to the RBA Cash Rate + 5% benchmark which has returned +5.92% on an annualised...

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