Stupid is Good

Marcus Today

November 2022

Las Vegas houses some of the world's most magnificent hotels. The Wynn, the Encore, the Bellagio, the Venetian, the Palazzo, the Palms, the Trump Hotel, the Aria, the Mandarin Oriental, the Mirage, the MGM Grand and Caesars Palace, to name just a few. And Caesars Palace in particular. It's the most colossal hotel and casino complex you have ever seen.

Begun in 1966, it now boasts six massive towers. The Forum, Roman, Centurion, Palace, the Augustus and now the Octavius. It has 3960 rooms, eight Roman-style swimming pools, 160 restaurants and shops, four gigantic ballrooms and three wedding chapels.

The game in Vegas is to wow you with so much pizzazz that you don't see what's going on until it's too late. The classic example is the Palazzo, which is completely indoors and designed to feel like Venice at 8pm, at night, all day. Who wants to gamble at 9am? At the Palazzo, you don't have to.

Of course, most people buy into the whole thing and have a blast - they go hard, spend their money and retire hurt with lifelong memories that make it worthwhile. But stay long enough and you see through it, if you care to, which is why Vegas is only ever a place you visit. It's not a place you live because if you stray too far from the game plan, walk about during the day, turn the lights on and stop to notice what's going on, then your epiphany will be that all those hotels, all those towers, all those incredible casinos were built on the backs of losers.

It is rather incredible, really, that despite Caesars Palace standing right out in the middle of the Strip as a gigantic, unembarrassed testament to the odds at a casino, people still turn up to play. Maybe that's why they bus you straight into the underground car parks - so you don't look around, so you don't notice, so you don't begin to question too soon just where all the money came from.

Then there's Australia. A nation of gamblers whose courage and risk taking is legendary. After all, Australia is a nation built by people who took a risk, simply by coming to its shores.

The legacy is that half of adult Australians gamble on a regular basis. And to the incredulity of Bill Bryson, an objective English Author, we have close to 200,000 gaming machines, which is almost one per on hundred adults and our total gambling turnover is around $225 billion a year, and more during the pandemic when the proportion of online gamblers rose to 78%.

See this article in the Washington Post about Australians. We have half a per cent of the World's population but 20% of the World's pokies.

Gambling is in the Australian DNA, it must be, because faced with almost certain loss, we have still turned up, and keep turning up, with hope in our hearts. In Australia we admire a winner. We laud a "Boy done good" particularly if they were lucky. In Australia taking risk and luck is a noble, not stupid, trait.

Lucky Country? Or unlucky country?

The comparisons between gambling and the share market are unashamedly unconcealed. In the casino, they distract you with flash and feathers and disable you with drink. Meanwhile, somebody has their hand in your back pocket.

In the share market, they dazzle you with colourful software, trading platforms, average returns, IPOs, dividend yields, franking, charts and the media iced by jargon, urgency and ever-thinning sophistication, whilst someone has their hand in your SMSF.

And the marketing is the same. Drive from the Las Vegas airport to your hotel and you will hear the taxi driver's story of the girl who put a single dollar in the pokie machine at the airport and won a million dollars; a delusion of success reinforced by casino-floor plasma screens showing winners and their hauls.

And so it is that the share market also blinds us with the winners and their books about "How I Made $2,000,000 in the Share market". It is no different. The stock market's casino owners are out lauding the winners as well, by glorifying the success of Warren Buffett and by suggesting that you too can achieve a limo at 24 by trading forex on your mobile phone.

And one of the most convenient truths of all, for the casinos as well as the stock market, is that in any betting/gambling industry, while the winners buy Ferraris so we will notice them, the losers seek the dark corners of anonymity. The winners stay and play, and the losers go away. Perfect.

Perfect for any industry that sells transformation through risk taking. Thankfully for them, no one ever publishes a book called "How I Lost My Kids' School Fees in Leveraged Derivatives". Even the losers wouldn't want anyone telling their stories, and they don't. Convenient.

Yet gambling is one of the oldest industries in the world. And for a reason. People love gambling, you can't stop them and they don't want to be stopped.

The confusion for you as a long time sensible investor is that this short term momentum driven activity has no reference in value, and has added volatility, noise and predators. It is hard to tell them apart these days, the bookies from the financial services providers. The bookies use the same jargon, dress code, media outlets and, even, licences, as everyone else in the industry. And as they do so they are plundering the limited store of stock market respectability and integrity built over hundreds of years, as a camouflage for their bet-taking platforms and products.

They are using us, well, our share prices, as the base price for many highly marketed gambling options.

And that's before we mention crypto. What a perfect combination for predators. A pandemic of government stimulated gamblers combined with a brand new highly volatile hard to explain, hard to argue against, social media driven, hyped up plaything, that anyone old, experienced and sensible couldn't possibly know anything about. Don't listen to us.

Brilliant. For the now failing platforms that clipped the ticket. 

But its not all bad. The stock market may be more volatile now than ever, there may be more sentiment that value in the share price equation, and there may be more guesswork than science in the trend, but don't give up on the stock market just yet.

While stock market price integrity has become more fluid, volatile and vacuous, the underlying fundamental value of the companies on whose share prices the gamblers now rely, are still there. In the long term. And no manner of hype and herd will take that away.

So rest easy.

And for traditional investors, this is your take home. Do not dismiss the gamblers, welcome them. They are a gift, delivered to you daily. For two reasons.

The first is that short term momentum-based activity based on urgent guesswork creates volatility and price extremes. For the investor that creates regular, exploitable opportunity. That's great.

And secondly, you should welcome the stupid into the market. The more uninformed people in the market, the more people there are to exploit.

Or let me put it this way. In a paddock packed with bunnies, even the sheep start to look like wolves. 

Author: Marcus Padley, Founder of Marcus Today

Funds operated by this manager:

Marcus Today Equity Income SMA, Marcus Today Growth SMA

Economists are idiots!

Yarra Capital Management

November 2022

Funds operated by this manager:

Stock Story: ASML

Magellan Asset Management

October 2022

Lithography is the process by which powerful, fast and cheap microchips are made. Advances in how lithography systems imprint electronic circuitry patterns on silicon wafers govern enhancements in microchips and memory.

In more detail, a lithography system is essentially a manufacturing machine whereby light is projected through a blueprint of the pattern to be printed. The system's optics shrink and focus the pattern onto a photosensitive silicon wafer (whereby a wafer is covered with chemicals that react with light). A series of other non-lithography steps are also carried out. To make a microchip, the process is repeated layer upon layer to create the components of the chip including the transistors, which are miniaturised semiconductor devices. The most advanced chips have up to 150 layers. So advanced is lithography, the latest chips are printed at a scale of nanometres, where a nanometre is one billionth of a metre. The A16 processor in the iPhone 14 will contain about 16 billion transistors.

Lithography is so key to making the best microchips, the US stops the company that makes the most advanced of these manufacturing systems from selling its product to China.

That company is ASML. The Netherlands-based group sold 309 lithography systems on the way to earning revenue of 18.6 billion euros in fiscal 2021. The most advanced ASML lithography system today costs about 160 million euros.

ASML, which formed as a venture between Philips and ASMI of the Netherlands in 1984 and listed in 1995, extended its industry leadership in lithography with its development of 'extreme ultraviolet' lithography, which is an advance on its 'deep ultraviolet' lithography system. This system is regarded as the best system for reliably printing transistors on wafers at high volume using a light wavelength of just 13.5 nanometres.

ASML's customers are microchip manufacturers such as TSMC of Taiwan, Intel, Micron, Samsung and SK Hynix of Korea. All semiconductor producers rely on ASML's equipment to produce the most advanced chips. From an investor's point of view, ASML's technology leadership is its core competitive advantage that has given it an 83% stranglehold on one of the world's most crucial industrial systems. Nikon of Japan is ASML's nearest, even a distant, competitor.

Couldn't Nikon or another company invent a lithography system that betters that of ASML? Such questions have always existed but competitors have only fallen further behind over time. ASML's advantage is not in any singular aspect of the lithography system but across the many complex technologies, including the light source, optics, wafer stage, software, and process control, that need to come together in perfect unison. All of this would take incredible effort to replicate.

ASML has also set up a sophisticated production network underwritten by exclusive agreements whereby it outsources the making of components to about 4,000 companies around the globe. Many of the parts are complex. The mirrors in ASML's lithography machines, for instance, are the smoothest structures produced on earth. In fact, they are so flat, if someone expanded a mirror to the size of Victoria, the highest mountain would be 1 millimetre tall.

No rival, even if possessing a better design for a lithography system, could quickly or easily build a similar global manufacturing network. The biggest semiconductor manufacturers in the world have a vested interest in ASML's commercial success.

At the very least, it seems ASML is poised to hold onto its market dominance for the foreseeable future; in recent years, the company has widened its lead over competitors as it achieved double-digit sales growth. The stock is found in the Magellan global portfolio because ASML has the potential to generate excess returns on capital for the foreseeable future.

Even the best-placed companies, however, face challenges. Among threats to ASML, the shrinking of transistors could reach its physical limits in terms of tininess and finesse. If so, it would buy time for rivals to one day catch up to ASML's lithography standards. But somehow microchip-related technology keeps advancing. Another threat is the Chinese government. Beijing understands the strategic worth of microchips and is investing billions of dollars to catch up with the West and is willing to ignore patents to do so. ASML warned in February that an affiliate of a Chinese company it had accused of stealing its trade secrets is marketing products that could infringe on its intellectual property rights. Hence Washington is keen to keep ASML's lithography systems out of China.

ASML, however, has a record of delivering ever-improving lithography machines on time to its customers. If the company keeps doing that, investors will be looked after too.

Sources: ASML Annual Report 2021, company filings, Bloomberg and Dunn & Bradstreet. 

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') 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 read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant PDS relating to a Magellan financial product or service may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

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Chris Gosselin, CEO of FundMonitors.com, speaks with Rob Hay, Head of Distribution & Investor Relations at Collins St Asset Management.

The Collins St Value Fund  has a track record of 6 years and 9 months and has outperformed the ASX 200 Total Return Index since inception in February 2016, providing investors with an annualised return of 14.17% compared with the index's return of 9.16% over the same period.

Rob also discussed Collins St Asset Management's new Fund, the Collins St Convertible Notes Fund.

Funds operated by this manager: Collins Street Value Fund, Collins St Convertible Notes Fund

Hedge Clippings | Friday, 02 December 2022

For the first time this year market analysts - or at least the media - are hinting that the interest rate medicine we've collectively been taking to curb inflation might be working, and as a result, the US Fed and Australia's RBA might take a breather on the size of future rate increases. Jerome Powell indicated as such this week, saying they might start as soon as December, while also cautioning that there was "still a long way to go in restoring price stability."

Meanwhile, in Australia the ABS released monthly inflation figures this week, for the first time providing a monthly rather than a quarterly report, which showed annual inflation at 6.9% to the end of October, down from September's number of 7.3%.  In his last statement on November 1, RBA Governor Philip Lowe expected inflation to peak around 8% by the end of the year, so there's some cause for optimism, even though his past (admittedly longer term) forecasting hasn't always been spot on. There's also a slight caveat on the make up of the ABS' monthly inflation numbers, which only measures 63% of the CPI basket, excluding for instance electricity and gas prices, which - unless you're living "off the grid" or under a rock - you might have noticed have been on the rise recently.

With their board meeting next Tuesday, we won't have long to wait to see if the RBA holds off on their next rate increase, but most economists think not, having "only" increased them by 0.25% in October and November, and with a 2 month gap to the next meeting in February 2023. Meanwhile, it's worth remembering that in the US there's room to "ease off" as rates there rose by 0.75% in each of June, July, September, and November.

Meanwhile, equity markets, renowned for pricing in future conditions and earnings, are pretty confident that the worst is over, with the ASX 200 in November posting its second successive monthly rise of over 6%, to take its 12 month return into positive territory, up (just) 0.39%. Adding in dividends, the total 12 month return was a not so shabby 5%, or just over 2% YTD since January. That doesn't mean everything has recovered, with the ASX Small Industrials down 21% over 12 months and the same YTD. For comparison purposes, the S&P 500's Total Return was down 9.21% over 12 months to the end of November, and -13.1% YTD, while for some really eye watering gyrations, the S&P Cryptocurrency Broad Digital Market Index has toppled -71% over 12 months, having been UP 296% over 12 months to November 2021.

All this goes to show that markets move in different ways at different times. There is no "one" market, hence the need for analysis and asset allocation. Investors and fund managers understand the cycles, even if they are frustrated by them at times when their preferred strategy or sector is facing headwinds, while other sectors are benefiting from tailwinds. This was shown best by the growth/value divergence (and subsequent reversal) of the past five years and is also reflected in the popularity and performance of specific investment strategies and sectors we see in the FundMonitors.com database.

One such sector has been the significant, but often overlooked, fixed income sector, encompassing debt and credit funds which lack popular media appeal while equities (and the tech/growth sector in particular) often dominate investor and media interest. In falling markets the attraction of regular income and capital protection come into their own, potentially with a yield of 6-10%. Out of this has emerged a Peer Group of hybrid funds, blending credit and equity, or equity like elements, designed to provide the regular income needs of investors, coupled with either equity upside and/or downside protection.

While no two funds are the same, the Hybrid Credit Peer Group comprises a variety of funds with varying investment processes and performances, and their returns and risk profiles have shown the benefits of the approach. For example, FundMonitors has recently completed a FACTORS Research Report on the *Altor AltFi Income Fund, which "invests via a portfolio of private credit instruments (loans) across a selected group of small to medium enterprises. Investors receive quarterly cash distributions, and gain further upside through free attaching equity exposure on selected debt investments the Fund makes" and has returned over 11% p.a. over 4 years since inception, with a Sharpe Ratio of 3.93%.

Along similar lines is a new fund from *Collins St. Asset Management, which invests in convertible notes, targeting distributions of 2% per quarter [8% per annum], with the potential for equity upside on conversion of the loan at the end of the term. This week we caught up with Rob Hay from Collins St. to discuss the strategy, and you can watch the video below.

These funds also seek to fill a gap in the funding market for smaller and medium sized companies, both listed and private, which was created post the Hayne Royal Commission as Banks and traditional lenders left the market, or restricted lending to the sector.

*Both these funds are only open to wholesale or sophisticated investors. Past performance is no guarantee, and investors should seek appropriate advice.

Manager Insights | Collins St Asset Management

The Long and The Short: Five stocks for the next five years | Kardinia Capital

10k Words | Equitable Investors

October 2022 Performance News

Altor AltFi Income Fund

PURE Income & Growth Fund

ASCF High Yield Fund

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This latest market rally provides investors

with another wonderful opportunity…

Wealthlander Active Investment Specialist

November 2022

The latest US CPI and PPI have come below consensus expectations, precipitating an equity market recovery. Is this the opportunity of a lifetime and the start of a new bull market after months of bear market pain?

Over a year ago, nearly everyone thought interest rates would have to be low for a very long time and according to central banks, inflation was transient. Hence, the shock of seeing inflation rise further and be anything but transient, combined with escalating geopolitical pressures, has turned 2022 into a harrowing year to remember. Rising inflation and escalating geopolitical risk were foreseeable. Despite this, the extent of the world's economic and political challenges has been a shock to all and sundry.

However, there is genuine cause for optimism that the worst of inflation and interest rate rises are now behind us. Bulls are excited because higher interest rates and persistent inflation have been the main cause behind the market's falls. With inflation pressures easing, for now at least, there is less need for further aggressive interest rate rises hurting stock valuations and economic values. This has precipitated a fierce equity market rally and challenged a bearish consensus in October. Bear market rallies can be aggressive and substantial in scope, and seasonally the market may be stronger post-mid-term elections and into Christmas.

Why then, isn't this the start of a new bull market for equities? The bulls are likely confusing a temporary market rally and opportunity with a permanent one. The lower inflation figures are not just due to a recovering supply chain but primarily due to economies slowing fast as the lagged effect of previous rate increases take their toll. Most importantly, an earnings recession is highly likely in 2023 as historically high margins continue to erode, and recession hits. Importantly, The US equity market isn't priced for recession. While risk assets may rally for a month or two, eventually they'll work out that inflation receding isn't occurring in a vacuum and that a recession is right in front of us in many countries around the world. If history is any guide, this may not only see us retest the equity market lows but possibly even break below this. To put numbers on this, S&P earnings in 2023 of 180 on a multiple of 16.5 could see the US S&P500 at 3000 in 2023, more than 25% below today's level of over 4000. While these figures and falls may appear dramatic, they are by no means unrealistic.

Hence a market rallying above 4000 likely provides another incredible opportunity - potentially the last one in this cycle (I have written about this before) - for investors to sell out of traditional risk-heavy portfolios in favour of less overvalued and better-suited investment approaches and assets for today's world.

The second reason the bulls may be wrong is that they continue to assume the Federal Reserve will pivot. But the FED is very unlikely to pivot today (cut interest rates) with inflation still too high, a rising stock market and loosening financial conditions unless a significant financial or economic event force them to. The latter means the market likely has to fall before a FED pivot occurs. The bulls may have their timing about a FED pivot wrong and may be entirely wrong if the FED raises further and then holds interest rates higher for longer - as they say they will. Jerome Powell has been clear that he wants to avoid making the mistake of his predecessors and ensure inflation is under control before changing track. He is emphasising the current data and not forward-looking data, having previously been heavily scarred by the FED's inaccurate economic forecasts; this is something the market doesn't seem to realise and means that the FED will likely still raise interest rates well beyond the point when they need to, again causing further damage to the economy and company earnings in 2023.

The third reason why the bulls may be wrong is that they may be utterly wrong about inflation. Services inflation may be more persistent even if goods inflation recedes somewhat. The latest CPI print benefits from a one-off improvement in health insurance inflation. While inflation may recede, it is unlikely to get to target and stay there in a favourable way. If geopolitical risks escalate further in the short term, energy and supply side issues may resume, and inflation may remain sticky and come back in another wave. The boomers may continue to spend and redeem their risky assets as inflationary expectations set in and they consider their lifetimes finite. Waves of higher inflation - or alternating inflation and deflation (i.e. unstable inflation outcomes) - would likely be extremely challenging for policymakers and markets alike, given current valuation levels.

It is also crucial to remember the big picture and see the forest for the trees.

The world and many countries appear to be run in no small part by many bad actors, including sociopaths, autocrats, criminals and frauds with scant regard for anything but their lust and greed. Is it any surprise then that bad things are happening to us? Is this a world which can effectively address some of the most significant governance challenges of all time - some of which require global coordination, including growing diplomatic, governance, corruption and environmental challenges? Some of these bad actors want war for various reasons including the opportunity for graft and funding of their war machines - as well as to further their power ambitions and vision of how the world should look. This could quickly turn the 2020s into one of the most dangerous decades the world has ever seen as our "leaders" take huge risks. They ultimately don't provide favourable asset price policy settings!

War tends to be inflationary or stagflationary and extremely wealth destructive if you're on the losing side or are occupied by enemies. Growing corruption turns previously wealthy societies into submerging markets and lowers asset valuations. Real growth is likely to be low for various reasons, including years of mal-investment, higher debt loads, ageing demographics and greater involvement of inefficient governments in capital allocation.

Furthermore, we are coming off one of the biggest bubbles of all time. Much wealth destruction is still required to realign asset values (still high) with the size of the actual underlying global economy and deteriorating real wealth and purchasing power. This will likely need to occur through both higher inflation and lower asset values, as it is unlikely to occur through productive economic growth. This also probably won't happen smoothly and will be a shock to many who remain confused about why markets don't always go up, having seen nothing else during their (historically short) careers, or who take their investment advice from promotional material, young and ignorant influencers or the mainstream media. FTX is an example of what happens when you do that and a warning sign to us all.

Note: To put numbers on this, S&P earnings in 2023 of 180 on a multiple of 16.5 could see the US S&P500 at 3000 in 2023, more than 25% below today's level of over 4000.  While these figures and falls may appear dramatic, they are by no means unrealistic (although are purely for demonstration purposes and do not represent forecasts).

In this environment, it is naïve and foolish to bet all on believing that good things will persistently happen to traditional risk-heavy portfolios, which depend on real growth happening, higher valuation levels and markets going up persistently. While equity markets still provide selective good long opportunities, these are the exception rather than the rule meaning the index and index-like approaches (so favoured for their "cheapness") are well past their use-by date. While we can all hope for a benign and highly favourable but less likely outcome, that is no way to invest safely. Markets are far more likely to range trade, meaning long-only managers will continue to provide among the poorest risk-adjusted returns and miss out on good opportunities to short overvalued loss-making enterprises. Historically, the 2020s are more likely to look more like the 1970s or the 1940s than the 2010s.

In this environment, better risk-adjusted returns will be achieved by genuine value-adding approaches and more active dynamic and long-short approaches that are better suited to today's macroeconomic conditions and which don't simply rely purely on markets going up to make money. While still capable of making returns, these strategies should be much less likely to lose substantial sums than buy-and-hold approaches - risk management and capital preservation is equally if not more important in this environment than seeking high returns

Buffett famously says that when the tide goes out, you see who has been swimming naked. If your superannuation fund, broker or fund manager is charging you to provide you with significant double-digit losses so far in 2022 (as we warned may would), perhaps take the hint while you still can and look around for a better option which has adapted to today's more challenging investment environment. 2022 is a year in which many are flying blind and as for years before that - well any fool can make money in a bull market and many fools did. Seek genuine diversification and preference good risk managers over speculation because the future is uncertain and risky. There will always be great opportunities to make money over time as the world changes, but this is most likely for those who (like it or not) assess and admit to what is going on with the world today. Avoiding and reducing the risk of significant losses is an excellent place to start.

Funds operated by this manager:

WealthLander Diversified Alternative Fund

DISCLAIMER: This Article is for informational purposes only. It does not constitute investment or financial advice nor an offer to acquire a financial product. Before acting on any information contained in this Article, each person should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision or recommendation. To the extent this Article does contain advice, in preparing any such advice in this Article, we have not taken into account any particular person's objectives, financial situation or needs. Furthermore, you may not rely on this message as advice unless subsequently confirmed by letter signed by an authorised representative of WealthLander Pty Ltd (WealthLander). You should, before acting on this information, consider the appropriateness of this information having regard to your personal objectives, financial situation or needs. We recommend you obtain financial advice specific to your situation before making any financial investment or insurance decision.  WealthLander makes no representation or warranty as to whether the information is accurate, complete or up-to-date. To the extent permitted by law, we accept no responsibility for any misstatements or omissions, negligent or otherwise, and do not guarantee the integrity of the Article (or any attachments). All opinions and views expressed constitute judgment as of the date of writing and may change at any time without notice and without obligation. WealthLander Pty Ltd is a Corporate Authorised Representative (CAR Number 001285158) of Boutique Capital Pty Ltd ACN 621 697 621 AFSL No.508011.

Global equities: It's time for 'Covid losers' to shine

Pendal

November 2022

A WEAKER earnings season in the US is indicating a recession is likely next year, but there is evidence it could be mild and short-lived as capital spending offsets slowing consumer demand, says Pendal's Ashley Pittard.

Nine in ten S&P 500 companies have reported their third quarter earnings, with results largely in line with analysts' expectations.

In a market where the average company typically beats earnings forecasts by 2.7 per cent, the overall picture is one of a weakening economy, says Pittard, who heads Pendal's global equities team.

Pittard says one of the most telling signals out of reporting season was the way companies were punished by the markets when they missed forecasts.

"On average, when a company missed this earnings season its share price fell more than 6 per cent. That's the biggest average fall ever. What that tells us is that we are at a tipping point in the markets," he says.

Mild recession

There was also a spike in the number of companies mentioning softening demand in their earnings reports this quarter. That's a measure that traditionally rises prior to a recession, says Pittard.

"In this earnings season, the number of companies mentioning weak demand is at the same highs as it was in the global financial crisis and Covid," he says.

Still, indications are that any recession should be mild because there are signs companies are stepping up their investment in rebuilding supply chains post the pandemic.

"Capital expenditure by corporations is up 24 per cent year on year — that's a real positive that may help any recession be milder," says Pittard.

"It's companies 're-shoring' supply chains and bringing jobs back to America."

To be sure, the strong US dollar is counting against corporate America, with the foreign exchange rate at its highest levels for seven years.

"It's a mixed bag. It's like a rip tide dragging out to sea while the tide's coming in — there's choppy waters ahead.

"You've got all of these positives, but you've also got a few negatives."

Which sectors look good in 2023

For global equities investors, the story of the coming year will be one of correcting a "misallocation of capital" that occurred during the pandemic, says Pittard.

"You don't want to be in the Covid winners, you want to be in the Covid losers.

"During the last few years there has been an over-investment into technology and the cloud and a misallocation away from industrials, supply chain, energy and those sorts of companies.

"You're now seeing that misallocation of capital unwind."

He points to "strong-demand" commentary from companies like Delta Airlines, United Airlines and Visa, alongside negative commentary from Microsoft, Meta Platforms and Google.

United claimed there had been a "permanent structural change in leisure demand because of the flexibility that hybrid work allows", saying "this is not pent-up demand. It's the new normal".

Visa said consumers are "still spending the same amount of money… as they did before".

Meanwhile Microsoft and Meta announced layoffs, along with a slew of other US tech companies.

Microsoft reported "materially weaker PC demand" and Google noted a "pull-back in spend" by advertisers.

Look to industrial and financial stocks

"It's that misallocation of capital that will drive the hits and misses on the markets," says Pittard,

"If you look at new job postings, they are down 50 per cent from their peak of 2021 and 41 per cent of consumers are saying it's tough paying their bills compared to 38 per cent in Covid.

"There's no doubt stresses are increasing. There's no doubt the macro is getting weaker.

"But as an investor, you want to look through it.

"Our cash level is at the lowest that it's ever been, but you've got to have the tide going with you.

"That's why the answer is the industrial companies and the financials.

"Dividend yield on the banks is more than 8 per cent.

"If you hold those kinds of stocks, you're getting paid to just wait for the economy to turn around."

Author: Ashley Pittard, leads Pendal's Global Equities investment boutique

Funds operated by this manager:

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com