Speaker 1: We're into an era now where politics Trump's the economy
Speaker 1: and trade, so there is a lot of uncertainty and
Speaker 1: baked into that.
Speaker 2: Healthcare is a bit of a beaten up sector are globally,
Speaker 2: mostly because of OURFK Junior getting into power.
Speaker 1: I mean, the one thing we can be sure about
Speaker 1: with the Chinese economic statistics is that they're basically lying.
Speaker 2: An area that I think is quite attractive at the
Speaker 2: moment is the smaller capitalization companies.
Speaker 3: Cure.
Speaker 4: Welcome to Shed Lunch, brought to you by Cheesy's. I'm
Speaker 4: Helen Madison. Today we look at what investors need to
Speaker 4: be thinking about as we navigate twenty twenty five. The risks,
Speaker 4: the opportunities, and.
Speaker 3: Plenty of unknowns.
Speaker 4: I'm joined by Harbor Asset Management's Christa Lever and Business
Speaker 4: Desk founding editor Patrick Smalley. Before we get started, here's
Speaker 4: some important information.
Speaker 5: Investing involves the risk lose the money you start with.
Speaker 5: We recommend talking to a licensed financial advisor. We also
Speaker 5: recommend reading product disclosure documents before deciding to invest. Everything
Speaker 5: you're about to see and here is current at the
Speaker 5: time of recorded.
Speaker 3: Welcome Patrick and Chris.
Speaker 5: Hi.
Speaker 4: Nice to be here.
Speaker 2: Thanks all.
Speaker 4: Let's start with the US. I must say for listeners
Speaker 4: and viewers that we are doing this on the inauguration
Speaker 4: of Donald Trump. Just with that caveat that we do
Speaker 4: know things may have changed since then. Chris would start
Speaker 4: with the markets. The US markets have gone incredibly well
Speaker 4: over the last little while. Many investors are sort of
Speaker 4: questioning how far can the US go?
Speaker 3: Is it overvalued?
Speaker 4: And the tech Titans do seem to have a dominance,
Speaker 4: So are there alternatives?
Speaker 2: Yeah, So, just touching on the US market first, valuations
Speaker 2: are high, okay, so we're currently trading it about twenty
Speaker 2: five times backward looking earnings. That is a very high multiple.
Speaker 2: The issue is multiples don't tell us a lot about
Speaker 2: returns for say twenty twenty five or even twenty twenty six.
Speaker 2: The real information that they give us is longer term
Speaker 2: than that. So we know that current valuations typically have
Speaker 2: led to at these levels quite subpar returns over ten years.
Speaker 2: So then we go back and look at the overall
Speaker 2: market valuation and say what's driving it. While the Magnificent seven,
Speaker 2: or the tech Titans or the AI hyperscalers they get
Speaker 2: all the press, what slips really far below the radar
Speaker 2: is Actually the valuations of US companies are quite high
Speaker 2: across the board, So there's very few sectors in the
Speaker 2: US that are not trading at their top decile valuation wise. Currently,
Speaker 2: lots of people talk about in Nvidia, Amazon, Apple, they're
Speaker 2: trading at about thirty times earnings. But if I look
Speaker 2: through the US market, there's companies like Walmart that are
Speaker 2: trading at over thirty times earnings, Constellation Energy, a nuclear
Speaker 2: energy company that's trading it over thirty times earnings. Financials
Speaker 2: banks they're trading at the highest valuation level that they
Speaker 2: had since the Global financial crisis, or obviously preceding the
Speaker 2: global financial crisis. So I think it's an oversimplified kind
Speaker 2: of narrative saying it's just the magnificent seven. So if
Speaker 2: you look at financials, you say, you know, why is
Speaker 2: that so expensive? It's because one of Trump's big policy
Speaker 2: platforms is deregulation, and that benefits highly regulated sectors outside
Speaker 2: of the US are a lot less pressing. An area
Speaker 2: that I think is quite attractive at the moment is
Speaker 2: the smaller capitalization companies. They're trading at a record low
Speaker 2: relative to larger cap companies, and the key thing that's
Speaker 2: really held these companies back has been that they tend
Speaker 2: to be more indebted with floating rate debt, so they've
Speaker 2: rarely felt the full brunt of those bond yields going up.
Speaker 2: Now we've probably seen the worst in my view, in
Speaker 2: the moves and bond yields, and that should benefit those companies.
Speaker 2: Those companies are also more cyclically exposed, so they need
Speaker 2: a strong economic cycle. And actually when we look at
Speaker 2: the US, their economic cycle looks really really strong. So
Speaker 2: that's for investors looking at a bit more for a
Speaker 2: bit more value outside the top end of the market,
Speaker 2: which is really quite expensive in historical terms.
Speaker 4: With Trump coming in, though, there are lots of unknowns
Speaker 4: and maybe the deregulations, you say, is what is fueling this,
Speaker 4: But Pat, what do you think in terms of where
Speaker 4: it might go?
Speaker 1: So one thing we know about Trump is that we
Speaker 1: don't know what Trump will do next. But the one
Speaker 1: thing we can be sure about is that anything that
Speaker 1: Trump does will be self interestedly pro American, so that
Speaker 1: whatever he does, you can bet on it being something
Speaker 1: which is basically nakedly self interested and therefore probably good
Speaker 1: for the American economy. Notwithstanding the fact that. I don't
Speaker 1: quite see how unless he gets a different person to
Speaker 1: run the US Federal Reserve, you can cut taxes, impose tariffs,
Speaker 1: and chuck out a whole lot of people who are
Speaker 1: currently working illegally in your workforce and not have an
Speaker 1: inflationary burst. Now, I don't think that even Donald Trump
Speaker 1: can stop inflation with that particular triumvirate. Perhaps the question
Speaker 1: is will the American economy, because it's so strong anyway,
Speaker 1: just kind of override that, and so you know that
Speaker 1: inflation becomes a bit of a break as opposed to
Speaker 1: a major problem for the growth trajectory for the United States.
Speaker 4: Where does it leave will trade though, and probably more
Speaker 4: likely Australasia, I mean the tariffs. There's been a lot
Speaker 4: of consternation here about what might happen.
Speaker 1: Well, Trump was a protectionist, Biden is even more protectionist.
Speaker 1: We've had more protectionist US federal settings now for the
Speaker 1: best part of a decade more of the same. I
Speaker 1: don't necessarily think makes a huge amount of difference to
Speaker 1: New Zealand's ability to sell exports into the United States.
Speaker 1: I'd be a bit surprised were to be heavily hit
Speaker 1: by a tariff's way. My impression anyway is that it's
Speaker 1: a manufacturing and goods play rather than a services play.
Speaker 1: So to that extent, you know, maybe it's a good
Speaker 1: thing we never got a free trade agreement with the
Speaker 1: United States because we do know though that that in
Speaker 1: the last Trump administration we had steel tariffs put on
Speaker 1: New Zealand produced steel, which is sort of insulting rather
Speaker 1: than economically debilitating.
Speaker 4: Though, Chris, do you have any thoughts on that just
Speaker 4: on tariffs.
Speaker 2: Yes, he's doing it to be pro American, but we've
Speaker 2: got to be careful here because when we look at
Speaker 2: some of the large companies in the US, the amount
Speaker 2: of revenue that they generate from offshore is really quite high.
Speaker 2: And we know one of the other things we know
Speaker 2: about Trump is that one of the biggest measures of
Speaker 2: popularity that he uses is the US stock market. So
Speaker 2: that gives me some comfort at least, you know, when
Speaker 2: I look at these and it's even the Magnificent seven,
Speaker 2: you know, the amount of income that they generate from
Speaker 2: offshore is really quite high. So yeah, since he does
Speaker 2: like the stock market, sees it as a good barometer,
Speaker 2: that might temper some of his enthusiasm when he's looking
Speaker 2: to hopefully not go all out reckless.
Speaker 4: Crypto is his big thing, though, isn't it. So that's
Speaker 4: one aspect of markets.
Speaker 2: Yes, and it's an aspect which it's an interesting aspect
Speaker 2: in the sense that you know, bitcoins at over one
Speaker 2: hundred thousand dollars and it's one of those esset classes
Speaker 2: where people like myself and traditional finance we sit there
Speaker 2: and scratch our heads and quite frankly, we've missed it.
Speaker 2: You know, if someone asked me five years ago, what
Speaker 2: did you think about crypto'd probably expouse the same views
Speaker 2: as the likes of Warren Buffett, who doesn't have a
Speaker 2: horribly favorable view of that particular asset class. But the
Speaker 2: really is, we've kind of all been wrong, right. It's
Speaker 2: gone on longer and been a lot more successful than
Speaker 2: anyone could have thought. And you know, that anti fe
Speaker 2: art or anti establishment sort of form of holding your
Speaker 2: wealth has found favor with a bunch of different people
Speaker 2: and even institutions in the US and here and here,
Speaker 2: and interestingly enough, you know, it seems that both Donald
Speaker 2: Trump and Millennia Trump have found a way themselves to generalize.
Speaker 1: I actually think that's that's quite dangerous for both of them,
Speaker 1: because it reminds me so much of the n f
Speaker 1: T when you're sitting all sitting around in COVID and
Speaker 1: everyone was buying an f T S and saying it
Speaker 1: was going to be having this mouse thing in a
Speaker 1: digital form was going to be incredibly valuable. Where are
Speaker 1: they now? I don't think anybody talks about or trades
Speaker 1: NFTs and like Yu gi O cards or something like that.
Speaker 1: You know, So there's crypto and there's crypto. I mean,
Speaker 1: bitcoin is one thing, some meme, stock meme crypto that
Speaker 1: that has been made up around around particular individual. I mean.
Speaker 1: The reality of Trump is that he's, as they've described
Speaker 1: in the New York Times to day, he's actually starts
Speaker 1: as a lame duck in the sense that the longer
Speaker 1: his his term goes, the less significant his influence will
Speaker 1: be because he can't stand again. So he will be
Speaker 1: you know, he's going to flood the zone with all
Speaker 1: kinds of populist and economic things in the first nine months,
Speaker 1: twelve ninety twelve months because he has to get going fast,
Speaker 1: and because he also just wants to overwhelm such opposition
Speaker 1: as there is just have too many things going at once,
Speaker 1: sort of Roger Douglas style. Nobody knows what's coming next,
Speaker 1: and so you're in a constant stut of fusion and terror.
Speaker 1: But as time goes on, he becomes less and less influential.
Speaker 1: Somebody has to replace him. What happens to your crypto
Speaker 1: mean crypto at that point.
Speaker 4: AI has had a phenomenal amount of success in recent times,
Speaker 4: and we can't not talk about that when we're talking tech.
Speaker 2: Yeah, I mean, there's two things with megatrends. You know that.
Speaker 2: The first one is to decide whether they are a
Speaker 2: megatrin Right now, with AI, we're going through the capital
Speaker 2: expenditure cycle. There's very little revenue being made from it
Speaker 2: outside say co pilot with Microsoft and some search engines
Speaker 2: and companies. Over the next years are going to determine
Speaker 2: whether this is a good use of capital or not.
Speaker 2: Because you read the headlines and there's hundreds of billions
Speaker 2: of dollars going towards AI. At the end of the day,
Speaker 2: there needs to be monetization to justify that capital expenditure. Now,
Speaker 2: the other thing to bear in mind is we're so
Speaker 2: bad at picking mega trends in an early stage. And
Speaker 2: I always think of the example of at and t
Speaker 2: asking Mackenzie to go out there. This is in the
Speaker 2: lad eighties. They said, look, mobile phones are taking off.
Speaker 2: How many will there be in the year two thousand.
Speaker 2: Mackenzie came back and said, look, we think there'll be
Speaker 2: about nine hundred thousand mobile phones. In the year two
Speaker 2: thousand there was well over one hundred billion mobile phones.
Speaker 2: So even very smart people at Mackenzie struggled to figure
Speaker 2: that one out. That's the overall trend. But then there's
Speaker 2: making money from the trend, and that's a really tough
Speaker 2: thing too, because in the late eighties early nineties, you
Speaker 2: would have said Motorola or Nokia, that's going to be
Speaker 2: the pre eminent phone company. In the early two thousands,
Speaker 2: I remember my first work phone. It was a BlackBerry,
Speaker 2: was great, and they look like they were going to
Speaker 2: assert dominance. And then out came the iPhone. When the
Speaker 2: iPhone first came out, people were laughing at it. They said,
Speaker 2: oh God, such an expensive phone. It doesn't have a keyboard.
Speaker 2: Our thinking changes so much with these trends. So that's
Speaker 2: the cautionary note. With these new mega trends.
Speaker 1: I think you may disagree with me about this. Chris,
Speaker 1: I don't know, but I think there's also an opis
Speaker 1: question with AI. You know, artificial intelligence to produce an
Speaker 1: answer has to use energy to produce the answer. The
Speaker 1: deeper the question, the more energy it uses. And these
Speaker 1: things are starting to suck an enormous amount of electricity
Speaker 1: out of grids everywhere that they're being used. So I
Speaker 1: suspect that there will start to be a metric which
Speaker 1: will be what is the cost per answer for your question?
Speaker 1: And it will be the person with the life cost
Speaker 1: per answer in energy terms and therefore sense per question
Speaker 1: who will win. And if it becomes clear artificial intelligence
Speaker 1: just becomes more and more of an energy chew, it's
Speaker 1: going to be harder and harder to make the case,
Speaker 1: as you said, for where the use cases are where
Speaker 1: it's actually sufficiently valuable.
Speaker 4: That climate question is pretty intense. I mean, there's lots
Speaker 4: of consternation about what might happen. I suppose it's a
Speaker 4: bit of a wait and see. I mean, some of
Speaker 4: the bigger players are saying they're working towards mitigating that.
Speaker 4: I don't think we've seen a lot though. It just
Speaker 4: seems to run ahead of its own steam.
Speaker 1: If you like, well, I suspect we're in for a
Speaker 1: couple of years anyway where the whole focus on climate
Speaker 1: change sustainability, the idea that the brand value and so
Speaker 1: forth in climate change action is actually diminished because of
Speaker 1: what we're seeing in the United States, because of the
Speaker 1: push to the to the right of the political spectrum,
Speaker 1: you know, Black Crop, American banks, all these big players
Speaker 1: pulling back from a kind of a breast beating approach
Speaker 1: to their climate change obligations. I mean basically that the
Speaker 1: United States is at the moment, as the world's most
Speaker 1: powerful economy, is saying we've stopped caring, and a lot
Speaker 1: of people are going to take a lead from that
Speaker 1: because ultimately it's difficult to get about climate change. So
Speaker 1: I worry about that that the sustainability trend is going
Speaker 1: to be quite hard to sustain it, particularly as a
Speaker 1: branding proposition, and quite the way that it has over
Speaker 1: the last ten years.
Speaker 4: Even here in New Zealand. I mean they're looking at
Speaker 4: changing the climate reporting. That could have consequences there too. Yeah.
Speaker 4: Just thinking too about other trade partners besides the US.
Speaker 4: I think they're our second biggest trade partner, but China
Speaker 4: obviously is the big powerhouse, and there's obviously been a
Speaker 4: lot said about the slow down there, but it'd be
Speaker 4: quite good to get an idea of where that is
Speaker 4: actually at. To get anything out of the Chinese government
Speaker 4: is quite tricky. I've seen a number of reports about
Speaker 4: economists and like being muzzled when it comes to gross
Speaker 4: domestic product, which is, you know, a typical measure of
Speaker 4: an economy good or bad. Where do you see that going,
Speaker 4: particularly for New Zealand but also for Australia too.
Speaker 1: The one thing we can be sure about with the
Speaker 1: Chinese economic statistics is that they're basically lying. You know
Speaker 1: that the Communist Party wants us to believe that they're
Speaker 1: growing at about five percent. They'll be lucky if they're doing
Speaker 1: two two and a half. So the Chinese domestic economy
Speaker 1: is weak. If there are tariffs imposed at the sixty
Speaker 1: percent level, will be that much weaker. But at the
Speaker 1: same time, I can't see circumstances under which the Chinese
Speaker 1: Communist Party government doesn't hold hands in such a way
Speaker 1: that it continues to keep basic consumer demand in the
Speaker 1: Chinese economy ticking over and to the extent that New
Speaker 1: Zealand anyway perhaps less so Australia where they're into hard
Speaker 1: minerals and so forth. But New Zealand we're selling protein,
Speaker 1: and we're selling commodity protein mainly. Unless that unless the
Speaker 1: Chinese decide that I want to stay healthy, or that
Speaker 1: they are earning so little that they can't afford protein anymore,
Speaker 1: I think we're probably okay. And I suspect that if
Speaker 1: the flow of Chinese goods to the United States is
Speaker 1: cut off to some degree, we'll probably see cheaper stuff here.
Speaker 4: Chris, have you any thoughts on that.
Speaker 2: Structurally, China's still in such a hard spot. I think
Speaker 2: we're so used to out of China waiting for these
Speaker 2: big Berzuka stimulus announcements, and essentially since COVID, they've just
Speaker 2: disappointed and disappointed and disappointed. And that's because there's some
Speaker 2: really big structural issues there. The mechanism of which they
Speaker 2: provided stimulus to their people was through property, but unfortunately
Speaker 2: that can only go on for so long, and it
Speaker 2: went on to a point at China where they inflated
Speaker 2: quite a large bubble and they don't have the population
Speaker 2: growth anymore to paper over the cracks. So I think
Speaker 2: it's not a one year, two year kind of cycle
Speaker 2: that you have to think about. In China now, I
Speaker 2: think it's the next decade. I think they're really struggling
Speaker 2: to starve off deflation. It's starting to look a little
Speaker 2: bit like Japan did in the late eighties, and they're
Speaker 2: economic case study of just how tough it can be
Speaker 2: to get your economy going after you've had quite a
Speaker 2: substantial asset price bubble. There's we can kind of fear
Speaker 2: in New Zealand, there's probably some parallels with property. As
Speaker 2: I talk, I think, oh goodness me, my house price
Speaker 2: hasn't done actually hasn't done anything. It's gone backwards over
Speaker 2: the past three years, and like most keys, I look
Speaker 2: at it and go, well, I feel less wealthy. People
Speaker 2: definitely aren't going to the insurance broker like they did
Speaker 2: in the twenty twenty twenty twenty one and going hey,
Speaker 2: I'd love to put a sparple, a new car, boat,
Speaker 2: insert fancy shiny thing here on my mortgage. So you know,
Speaker 2: us as key as we understand the positive stimulus that
Speaker 2: a rising property market can give us. And that's where
Speaker 2: they're really struggling in China, and some of the multiples
Speaker 2: of house price to income rental yield in some of
Speaker 2: the Tierwan cities looking just as acute as Japan in
Speaker 2: the late eighties. So I don't think it's an easy
Speaker 2: fix in China. I really like it when I hear
Speaker 2: governments talking about diversifying our trade partners and looking at
Speaker 2: what we can what we can do to decrease our
Speaker 2: alliance there, because I think it's going to be pretty
Speaker 2: tough going in China for quite a while. I completely
Speaker 2: respect what you've said Patrick about I'd much rather be
Speaker 2: exporting what we do to China than what Australia is exporting,
Speaker 2: which is far more aliant on the construction cycle. Maybe
Speaker 2: it's the thing we can't expect is for Chinese tourism
Speaker 2: to recover. Domestic budgets and Chinese households are stretch. They're
Speaker 2: not going to be going let's go to New Zealand
Speaker 2: for a couple of weeks.
Speaker 4: So again, alternative markets, that's what we need to focus on, Chris,
Speaker 4: what about Australia.
Speaker 3: I mean, with.
Speaker 4: Lots of investors think in the US is the best thing.
Speaker 4: There's not a lot happening in the z X for
Speaker 4: a lot of people on shares is anyway, ACEX has
Speaker 4: always been known for its miners, but is that changing
Speaker 4: and is there value in some of the other types
Speaker 4: of sectors and stocks.
Speaker 2: Do you think yes, I'd break apart Ralia into three parts.
Speaker 2: So they've got these two really big sectors. So you've
Speaker 2: got you've got banks, and the yield curve is steepened
Speaker 2: over the past six months. That's great for banks. It's
Speaker 2: great for their business model of that they tend to
Speaker 2: lend long, borrow short. A steep yield curve is exactly
Speaker 2: what they want. That hasn't been lost on the market.
Speaker 2: Australian banks at the moment are more expensive than they've
Speaker 2: ever been relative to history miners. Again, it's that it's
Speaker 2: that China link. We're a little bit apprehensive there on
Speaker 2: the reliance. And then there's kind of everything else that's
Speaker 2: a third bucket. It's quite a few healthcare names we
Speaker 2: like in Australia. Healthcare is a bit of a beaten
Speaker 2: up sector globally, mostly because of RFK Junior getting into
Speaker 2: power and in the US in that key healthcare role
Speaker 2: that's kind of sent shockwaves through the healthcare sector. The
Speaker 2: other one is the impact of the g LP one
Speaker 2: weight loss drugs that was tipped to impact a lot
Speaker 2: of healthcare companies. So any company involved in the likes
Speaker 2: of kidney dialysis for example, completely sold off because GLP
Speaker 2: one was seen to be quite a promising healthcare development
Speaker 2: in that particular area. But yeah, there's a number of
Speaker 2: companies we like in Australia in that healthcare space that
Speaker 2: have been I suppose caught up by that negative global
Speaker 2: health care narrative.
Speaker 3: So you're saying they're cheap at the moment, Yeah.
Speaker 2: They are cheap relative to history, but we're kind of
Speaker 2: our style is to not kind of you go up
Speaker 2: to purely cheap companies. The growth has to be there too.
Speaker 4: Thinking about our own market then, z X, it's no
Speaker 4: secret that it has been having a tough time. We
Speaker 4: did an index just recently, the Chezies Index, which is
Speaker 4: a quarterly sort of litmus test of what investors are
Speaker 4: thinking where they're putting their money in terms of confidence.
Speaker 3: And nine out of ten of.
Speaker 4: The stocks that people were investing in they are no
Speaker 4: longer because it is inz X and the US and
Speaker 4: to a lesser extent, Australia is taking their money. Just
Speaker 4: wondering what you think about where things could head for
Speaker 4: the inset X. There's been a lot of people talking about,
Speaker 4: you know, we need to put fire under it, we
Speaker 4: need to do something else or alternatives.
Speaker 1: What's your perspective, So this is not just an INSIDEX problem.
Speaker 1: Lots of exchanges around the world, publicly traded equities generally
Speaker 1: have been out of favor of me in so much
Speaker 1: private equity activity. Now inst x is a very small market.
Speaker 1: I mean, I've been reporting the enertisecs since nineteen ninety three,
Speaker 1: so I've now carbondated myself and the daily turnover it's
Speaker 1: not that much more today than it was then from
Speaker 1: my recollection anyway, my personal view is that we've it's
Speaker 1: got to get closer to the AASEX. You know, if
Speaker 1: it's got to be called the NZX, fine, but we
Speaker 1: need to be part of a much bigger, more liquid market.
Speaker 1: And you can see New Zealand companies voting with their
Speaker 1: feet on that. We've got a number of the more
Speaker 1: interesting New Zealand companies. I think of Aroa Biosurgery for example,
Speaker 1: good example of a company which should have a lot
Speaker 1: of growth potential in the health sector, based in Auckland,
Speaker 1: listed in Australia and those companies which make it into
Speaker 1: the big indicies for passive fund and indexes and so
Speaker 1: for passive fund managers and so forth, are almost all
Speaker 1: dual listed on the AX. So I think we've just
Speaker 1: got to get over ourselves a wee bit. And so
Speaker 1: it's a small market, how to get a multiplier effect
Speaker 1: out of it? While also saying, yeah, it's important that
Speaker 1: we have a capital market that works in New Zealand.
Speaker 4: What about our currency? We know the key we've been
Speaker 4: tanking if you like the Aussie hasn't me doing that
Speaker 4: well either? Watch and investors think about there.
Speaker 3: I mean, good for our.
Speaker 2: Exporters, but we're just looking at levels now. The way
Speaker 2: to think of the US dollar is it kind of
Speaker 2: operates like a smile. So what I mean by that
Speaker 2: is when the world is fearful, things are going really
Speaker 2: really badly, the US dollar is really really strong. So
Speaker 2: that was like twenty twenty, right, And when kind of
Speaker 2: the global economy is kind of trucking away, okay, the
Speaker 2: US dollar will tend to weaken. But then there's another
Speaker 2: scenario when the US economy is really really strong and
Speaker 2: other global economies are really really weak. People want to
Speaker 2: hold the US dollar. That is where we are today,
Speaker 2: the theme of US exceptionalism. At the end of last year,
Speaker 2: We've got a stack of outlooks from all the global
Speaker 2: and banks. I couldn't find one of them that thought
Speaker 2: the US wasn't going to be the best performing economy
Speaker 2: in the world, and that's really showing in their currency.
Speaker 2: At the moment. You've got economies like here in New
Speaker 2: Zealand that have priced in a fairly aggressive rate cutting
Speaker 2: cycle to around three percent. We've got inflation relatively under
Speaker 2: control the US. It's not quite there yet, you know,
Speaker 2: they're still printing high two s, low threes, depending on
Speaker 2: the measure of inflation that you're looking at. Our view
Speaker 2: at the moment is that actually is a lot of
Speaker 2: good news priced in to the US dollar, a really
Speaker 2: high consensus view that the US is going to go
Speaker 2: very well, and that means that at current levels we
Speaker 2: actually see it as relatively attractive. I think for investors,
Speaker 2: the key thing they've got to consider is that your
Speaker 2: share aren't the only thing that generated you returns last year.
Speaker 2: It was the currency that your shares were held in.
Speaker 2: So a lot of people who are holding these US
Speaker 2: shares directly, they've got a great return, they've got twenty
Speaker 2: odd percent, but then they've got another you know, call
Speaker 2: it twelve from the currency on top of that. So
Speaker 2: while we focus so much on the picking a good stock,
Speaker 2: actually the currency that you're picking it in is really
Speaker 2: key as well. So I think for investors that is
Speaker 2: the key thing they have to take into account. You know,
Speaker 2: how much of my money is wrapped up in a
Speaker 2: currency that is quite expensive relative to historical levels.
Speaker 4: Thinking about coming back to New Zealand and we can't
Speaker 4: have a conversation really to think about the year without
Speaker 4: talking about infrast rates. Here it's easing and it's looking
Speaker 4: like we're going to get another rate cut in February.
Speaker 3: Pat, Just what's your perception.
Speaker 4: On whether or not that has provided the relief that
Speaker 4: businesses who have been torink quite hard here and needed
Speaker 4: mortgage holders, you know, they're the next ones on the list.
Speaker 1: I suppose my presumptions on that are pretty pretty bog standard.
Speaker 1: You drop interest rates far enough and it will have
Speaker 1: an impact on economic sentiment and you will see something
Speaker 1: of a recovery. I just worry a little bit that
Speaker 1: in New Zealand have got something a little bit more
Speaker 1: deep seated going on. You know, we had a round
Speaker 1: of tax cuts last year, which nobody seemed to notice.
Speaker 1: We've went through we's all reasonable electronic card spending over Christmas,
Speaker 1: but wasn't anything write home about. But it's coming back
Speaker 1: a wee bit. But I sense more that I was
Speaker 1: trying to contrast the American inauguration. We've got a president,
Speaker 1: no matter what you think of him, who is telling
Speaker 1: a big story about what America is going to become.
Speaker 1: In New Zealand, we have a government that that is
Speaker 1: struggling to tell a story about what New Zealand is
Speaker 1: going to become. And a lot of New Zealanders are
Speaker 1: worried that New Zealand is becoming a place that people
Speaker 1: will leave. You know, we go through these cycles. You know,
Speaker 1: this reminds me, has been reminding me for a long
Speaker 1: time about the sort of three or four year period
Speaker 1: around early nineteen nineties when it just felt as if
Speaker 1: New Zealand was going down the drain and it was
Speaker 1: never going to get better. And then sort of one
Speaker 1: day the sun came up and I thought, ah, actually
Speaker 1: it's not that bad. But there's still not a narrative
Speaker 1: or a sense from this government as yet that they
Speaker 1: actually know what to do to make the place grow.
Speaker 1: Just rely on interest rates to get everybody back into
Speaker 1: the warehouse in mine attend isn't enough.
Speaker 2: I think there are some green shirts though, I mean
Speaker 2: a measure that we look at a lot as the
Speaker 2: own activity measures within business confidence surveys. They've bounced off
Speaker 2: lows and typically that has had quite a strong forward
Speaker 2: looking relationship with GDP. I think how's is just so
Speaker 2: key here. So if we get those interest rates coming down,
Speaker 2: if I look across the Reserve Bank, I look across
Speaker 2: the main bank economists, if we get the between five
Speaker 2: and say, you know, high single digit house price appreciation,
Speaker 2: that starts getting a back a bit of bit of
Speaker 2: wealth effects, a little bit of animal kind of spirits
Speaker 2: into the into the market and into the economy. So
Speaker 2: I just we can't underestimate just how strong our alliances
Speaker 2: on property in New Zealand and just how intimately our
Speaker 2: wealth effect is tied to that. I think the good
Speaker 2: news for a lot of investors is within the interidets,
Speaker 2: a lot of that is priced in. So you look
Speaker 2: at our cyclical companies, they're trading at really low valuations,
Speaker 2: So you know, think of the likes of the likes
Speaker 2: of Fletchers. You know, they're a key one where you know,
Speaker 2: people don't have high expectations for our cyclical companies. Same
Speaker 2: with the retailers, you know, Warehouse, cat Man, do Briscos
Speaker 2: the other day. You know, it's all been relatively weak
Speaker 2: that's now baked into share prices. So yeah, while the
Speaker 2: New Zealand economy doesn't look particularly good, I can remember
Speaker 2: being here on previous episodes and I wasn't confident enough
Speaker 2: to kind of pick a turning point for New Zealand.
Speaker 2: We kind of we have picked a turning point for
Speaker 2: New Zealand over the past few months and actually moved
Speaker 2: to relatively finding the New Zealand market more attractive than
Speaker 2: the global share market. So yeah, just a little warning
Speaker 2: out there. You know, New Zealand economy may not look great,
Speaker 2: but actually if you look at our share market, it's
Speaker 2: not a great reflection of the New Zealand economy at all.
Speaker 2: And actually the individual companies within there are quite reasonably priced.
Speaker 2: And although it's hard to find a turning point for
Speaker 2: those cyclicals, you're not paying a high valuation to be
Speaker 2: in them at the moment.
Speaker 1: If we are at the battle of the cycle. Then
Speaker 1: this ought to be the time to be thinking hard
Speaker 1: about whether a cheap stock is was buy it.
Speaker 4: So what is the recommendations for investors?
Speaker 3: Do you think this year?
Speaker 2: Then with all of that, I think bonds actually still
Speaker 2: look good, so yields, and you've got to think about
Speaker 2: the risks that they're hedging you for. So if you
Speaker 2: look back to twenty twenty two, everyone says our bonds
Speaker 2: didn't work. My equities went down, my bonds went down.
Speaker 2: It was just horrible. There's no diversification. Bonds don't ensure
Speaker 2: you for an inflation shock. They ensure you for a
Speaker 2: growth shock. And right now the consensus view is that
Speaker 2: everything goes along really, really well, and that's why bond
Speaker 2: yields are higher than they are us growth will be
Speaker 2: pretty robust, but the world mysterious place where things like
Speaker 2: COVID nineteen happen, and then you need your bonds to
Speaker 2: ensure your portfolio. You are getting paid to be there
Speaker 2: at the moment. The one caveat I'd really give is
Speaker 2: that the additional return you're getting for buying a corporate
Speaker 2: bond or a corporate bond fund is really really low
Speaker 2: at the moment, So i'd favor. I do favor in
Speaker 2: portfolios having more of a sovereign bent than a corporate bent,
Speaker 2: because that's rarely going to help you with your downside protection.
Speaker 2: So yeah, I think they look good. As I said,
Speaker 2: New Zealand a bit more relatively attractive compared to global shares,
Speaker 2: and that's largely because of just how wide the breadth
Speaker 2: of expensiveness goes, particularly in the US to a lesser
Speaker 2: extent Gladly as well.
Speaker 1: You know, when you talk about downside protection, I think
Speaker 1: it's worth thinking hard about that because the one thing
Speaker 1: that I think has changed from in the last say,
Speaker 1: three or four years compared to almost the whole of
Speaker 1: the rest of my career is we've been through a
Speaker 1: period of globalization, trade liberalization, internationally accepted rules. We're now
Speaker 1: into where economy kind of trumped politics. We're into an
Speaker 1: era now where politics trump's the economy and trade. So
Speaker 1: there is a lot of uncertainty and baked into that.
Speaker 1: You know, it can just be Trump saying something different
Speaker 1: every day, or it can be the Chinese economy tanking
Speaker 1: so badly that they need to create a distraction and
Speaker 1: decide to invade Taiwan. You know, all sorts of things
Speaker 1: can happen when politicians rather than markets are driving things
Speaker 1: which you don't see coming. So I do think that
Speaker 1: while there's a lot of upside there in the US story,
Speaker 1: and I really take your point about new Ual, it
Speaker 1: may not look very exciting, but if it's cheap enough,
Speaker 1: it's always exciting. I would be taking a lot of
Speaker 1: cognizance of the potential for something to come created by
Speaker 1: our fellow man and women, but mainly man, which will
Speaker 1: up end the applecart, and which has nothing to do
Speaker 1: with actual economic conditions and has everything to do with geopolitics.
Speaker 4: On that note, I think we'll leave it there. Thank
Speaker 4: you so much for coming in and giving us those insights,
Speaker 4: and thanks everyone for tuning in.
Speaker 3: You can watch Share Lunch on YouTube or follow.
Speaker 4: Us on your favorite podcast app, leave us a rating
Speaker 4: and comment about what you'd like to hear next.
Speaker 3: And until next time, ma TWA