Chris Gosselin, CEO of FundMonitors.com, speaks with David Franklyn, Executive Director & Head of Funds Management at Argonaut.

The Argonaut Natural Resources Fund has a track record of 4 years and 6 months. The fund has outperformed the S&P/ASX 300 Resources TR benchmark since inception in January 2020, providing investors with an annualised return of 27.27% compared with the benchmark's return of 8.73% over the same period.

Funds operated by this manager: Argonaut Natural Resources Fund, Argonaut Global Gold Fund

Hedge Clippings | 02 August 2024

Central bankers love to use the term "a narrow path" as they manage their respective economies delicately between manageable growth, and the risk of recession. With the single tool of monetary policy to balance their twin objectives of inflation and employment, there's always the risk they move too quickly - or not quickly enough - and so miss the so called soft landing that the market craves.

The US Fed looked as if they were on track to do that, but the market has become impatient. Just a day after Jerome Powell held rates steady but indicated they should be able to start easing in September, the ISM manufacturing index came in lower than expected, and at 46.8% indicating the economy was contracting. Suddenly the market's thinking bye-bye soft landing, hello possible recession.

This couldn't come at a worse time for markets, particularly the NASDAQ and the Magnificent Seven, which were already seeing signs of a pull back from nosebleed valuation territory, coupled with concerns over reporting season - or at least missing analysts' estimates.

Falls in the US of course lead to falls elsewhere, and Australia is no exception. To make matters worse the RBA has its own problems, although this week's CPI numbers have at least taken the pressure off them to raise rates at next week's meeting. Not that the CPI numbers were particularly good - June quarter up 1% and 3.8% over the past 12 months - they just weren't bad enough for the Board to raise rates on Tuesday as had been feared.

One problem for the RBA is that Australia has a two speed economy - or at least two sections of the community that are faring very differently. At one end - say 20-25% - are doing it tough and struggling to make ends meet, and, as we hear continually, the government is doing everything it can to save, or at least support them - tax cuts, wage rises, energy and power support,  etc.

At the other end of the spectrum are those who have either paid off their mortgage, or at least paid it down to manageable levels, are comfortably retired, or are higher paid, and for whom inflation of 4%, and/or higher interest rates, aren't creating the same issue, partly because they're also beneficiaries of the government's generosity or stage 3 tax cuts.

Of course there are those in the middle, and overall the average, who makes up the economy. It's the old conundrum: When your feet are in the freezer, and your head in the oven, your temperature is probably average.

The next challenge for investors and fund managers reporting season in the US, and the ASX, where it runs through to the end of August. This is the period when Warren Buffett's famous quote "Only when the tide goes out do you discover who's been swimming naked..." comes into play. Missing market expectations - particularly when valuations are sky high - can result in savage sell offs.

Overnight in the US Intel fell 17% after suspending its dividend, Snap also fell 17%, while Amazon fell 6% on disappointing quarterly sales and sales guidance in spite of net sales which are expected to grow by between 8% and 11% compared to Q3, 2023. Local hero, but NASDAQ listed Atlassian, fell 13% after close of trading, as its revenue projection is only for an increase of 16% this FY, having previously advised it would be 20% per year for 3 years.

This week's edition of "The Last Word" covers all this and more.

The Last Word

In Episode 3 of "The Last Word", Chris Gosselin and Manny Anton delves into the latest market trends and economic developments. This episode covers key movements in the US, the impacts of recession fears on the US market, and the upended outlook for the US election following Joe Biden's withdrawal.

News & Insights

New Funds on FundMonitors.com

Manager Insights | Argonaut

Trip Insights: The US | 4D Infrastructure

July 2024 Performance News

Insync Global Capital Aware Fund

Equitable Investors Dragonfly Fund

Insync Global Quality Equity Fund

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China Autos: Finding the fast lane

Ox Capital (Fidante Partners)

July 2024

BYD starting in pole position!

The rise of the Chinese auto industry is nothing short of remarkable. Thirty years ago, China did not have an auto industry of any scale. China produced only 5,000 passenger cars in 1985! One of the earliest joint ventures (JV) between a foreign car maker and a Chinese company was the Volkswagen JV in Shanghai. Its signature car was the Santana which quickly became a best seller given its superior technology and reliability to competitive offerings at the time.

Fast forward to 2000, China had fewer than 20 million cars on the road, a very low rate of car ownership given its billion plus population. This started to change post the joining of the WTO. With the economy taking off, many other foreign car companies joined in the fray forming JVs in China. These plants were run by foreign management, and were generally highly profitable, as demand was strong, car prices were high and labour costs were low. The blossoming of the domestic auto industry enabled the development of the automotive supply chain. As the Chinese car market grew in scale, manufacturing of key components, for example engines and gear boxes, moved to China

Foreign joint venture partners were typically state-owned companies, with standout successes including Shanghai Auto and Guangzhou Auto. Both companies were able to develop their own car brands, effectively competing in the market. For instance, Shanghai Auto acquired the MG brand and has successfully exported it to other countries.

The more enterprising, privately-owned auto manufacturing upstarts have proven to be tougher competitors. After a decade of intense competition, hundreds of private automakers have been whittled down to a handful of survivors. These operators have gained scale and technological knowhow, are extremely cost-conscious and innovative. Notably, the fast iterative product cycles meant the improvement in quality was rapid.

Geely Auto (in Chinese Geely means prosperity) quickly accumulated technological knowhow. This was achieved through mergers and acquisition, rigorous investment in research, and sheer hard work. For example, they acquired several companies that have fallen into difficult times - including Volvo, Lotus, London Electric Vehicle Company (London cabs), Renault drivetrain JV amongst others. Now they have developed brands of their own, such as Lynk&Co, Polestar, Zeekr, the Smart Car JV with Mercedes.

The Polstar 5, needs no introduction, is in fact ultimately owned by Geely.

One of the highly automated auto plants in China

Apart from Geely, another surprising success story is BYD. What's remarkable is that BYD started out as a manufacturer of lithium batteries for PCs and smartphones. The company then chose to transition into electric vehicle production and has now become the largest EV maker in both China and the world!

BYD is early in its growth trajectory

Firstly, BYD spends around USD8 billion a year on research and development. Its product quality and technological leadership is unparalleled. BYD's latest plug-in hybrids have superb fuel efficiency of around 2.9L per 100km. Fully charged and a full tank of fuel, these BYDs can travel in excess of 2000km according to online bloggers!

Second, BYD is only getting started in its ambition to conquer the auto market in China and abroad. Despite its success, BYD has only a 10% market share in China's passenger car market. With cost and quality leadership, its domestic Chinese sales is likely to be resilient in coming years. Further, export momentum is strong, with BYD only exporting around 300,000 cars a year, growing at 150% year over year in the month of June. To achieve long term success in global markets, BYD is not standing still, and it is building manufacturing plants in Hungary to supply Europe, along with Thailand and Mexico for ASEAN and Latin America, respectively.

Third, prices of BYDs sold outside of China are typically at significant premium to the domestic market. While this higher price tag may partially be a result of transportation cost and tariffs in some cases, profitability per car is likely to be significantly superior in the export market. This is an interesting insight that will drive growth in profitability for BYD going forward.  

An older BYD rendition.

Twenty years after its first car, BYD is now gaining significant tractions in the global market through a few of its model. For example, BYD Seal 06, the current best-selling sedan, is growing rapidly overseas. Starting price tag in China USD25,000!

Funds operated by this manager:

Ox Capital Dynamic Emerging Markets Fund

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Hedge Clippings | 26 July 2024

The US economy picked up in the second quarter, rising 2.4% - buoyed by consumer spending on services, which in turn were supported by wage increases - up from 1.5% in January to March. Overall, 2nd Qtr GDP rose 2.8%, but with inflation subsiding it's looking as though the Fed could start cutting interest rates when they next meet.  

Given that FOMC meeting doesn't occur until September 25th, there's plenty of water to flow under the bridge by then, but virtually all (as in 82 out of 100) of the economists surveyed by Reuters in the States are predicting that outcome, and most are then expecting another cut before the end of the year.

If that's the outcome - (and surely 82% of economists couldn't be wrong?) - then the FED would appear to have achieved the soft landing they've been aiming for.

Closer to home, the outlook is not so clear, but at least we'll have an answer - like it or not - sooner when the RBA meets in early August. Between then and now we'll have CPI inflation figures for both the month of June, and the June quarter, both due next Wednesday, along with Retail Trade. Following that, and with plenty of time for the RBA to chew over them, will be June's Labour Force figures on Thursday, and both PPI and Household Spending on Friday.

While locally economists aren't all in agreement on the need for a rate rise, there aren't any we've heard calling for a cut - unless you include the Treasurer Jim Chalmers, who one might suggest has his own agenda and motivation for doing so. As a result we expect that the RBA will still be trading that well worn, but increasingly narrow path, not helped of course by the government's support of above inflation wage rises, and their recent tax cuts.

The Last Word

This week's Hedge Clippings includes a new video segment, "The Last Word" which we'll be recording and distributing each Friday in conjunction with Finance News Network. We'll take an overall view of markets and global economic issues over the last week, along with politics, with a dash of customary cynicism as appropriate - or in some cases, probably inappropriate, as we try to end the week with literally, the last word.

News & Insights

Investment Perspectives: Why are we listening to central banks? | Quay Global Investors

Attention shifting from inflation to the growth outlook | Magellan Asset Management

June 2024 Performance News

Bennelong Concentrated Australian Equities Fund

Digital Income Fund (Digital Income Class)

PURE Resources Fund

Equitable Investors Dragonfly Fund

PURE Income & Growth Fund

ECCM Systematic Trend Fund

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