A Free Market Update
Updated: Apr 4, 2022
Welcome to our first market update of 2022 but firstly let say I hope everyone reading this managed to have a fantastic Christmas and New Years (hopefully staying Covid free).
Rather than start by talking about local markets, today’s update is going to start by covering with what is going on in Global markets.
The technology heavy NASDAQ index has pulled back just cover 10% since January 1st, to officially hit correction territory. This pullback is the result of the market anticipating significantly higher yields and interest rates as a result of central bank efforts to fight mounting inflation. Interestingly, one statistic that we have found particularly interesting is that over the past year nearly 50% of the gains attributed to the NASDAQ and S&P 500 have come from the performance of the giant technology leaders within the FAANG group of stocks. For those who aren’t familiar with the term it refers to Facebook (now called Meta), Apple, Amazon, Netflix and Google.
However, last night Netflix reported disappointing growth figures and the stock has sold off heavily in the aftermarket, looking set to open tonight down in excess of 20% from yesterday’s close.
As we have repeatedly mentioned, there is a major differential between the value of a stock and the market price of the underlying business. Netflix, is an example what happens when a high quality and ultimately highly priced business does not meet the market’s expectations of growth.
Local News The ASX 200 has also had a disappointing start to 2022 with the benchmark being down approximately 5.00% for the year so far. That’s not to say that there have not been interesting announcements and updates before we hit the ever busy February reporting season.
As you can imagine in an environment of Omnicron, inflationary pressures, potential interest rate rises and worries about the earnings season we are about to face, the market appears to be nervous about what is yet to unfold.
Our view going reporting season is that high quality businesses with more defensive earnings streams are positioned to do well and some of the more expensive businesses with long drawn out earnings dreams are likely to disappoint.
One of the highest profile floats of the past couple of years was the partially Macquarie owned (and floated) NUIX. However, since floating to much publicity in December 2020, the business has continued to face numerous issues with growth, legal challenges, staff turnover and more. Most alarming for investors from its high of $11.05 this time last year, the stock has fallen to $1.68 and following today’s incredibly disappointing trading update is down an additional 20% today.
Even following the extreme fall in market value, we believe the shares are still incredibly expensive and the business will require a major turn around before it starts to offer any interest. Again, businesses that are being priced for extreme growth that do not execute on these plans and forecasts effectively are a pocket of danger for investors.
It would not be prudent of us to talk about high priced tech names without mentioning former market darling Afterpay following it’s acquisition by the Jack Dorsey, of Twitter fame, lead company Square (or Block as it is now known). At it’s peak last year the company was valued at $158 per share and on it’s final day of trading before the acquisition closed at $66.47.
It has not been all disappointing news for Australian companies, with global mining giant BHP rising 9% for the year following the rise in Iron Ore prices but also it’s announcement to remove it’s dual listed structure between the UK and Australia. Without going into the technicalities of what this means, in a nutshell it means that the Big Australian will be listed only on the ASX and will comprise approximately 10% of the value of the ASX 200 upon completion.
The commodities space has been interesting so far this year with Oil hitting recent 7 year highs and Gold starting to make gains as inflationary fears grip market participants. Interestingly for investors within Woodside Petroleum (WPL), this is year to really flow onto the share price despite being up nearly 11% year to date. While, Oil, Gas and Coal, will continue to be controversial sectors to invest, we believe that are opportunities present within the space as markets do not react to higher prices appropriately.
Whitehaven Coal, has disappointed with their update today sighting lower production numbers and slightly higher costs than anticipated. However, with Indonesia refusing to export coal, spot market prices being significantly elevated and by our predictions being in a position to be debt free in the immediate future offer value to investors who are less concerned about greenhouse gas emissions.
Considering the Long Term
Once again, we feel it prudent to mention that our strategies are designed for the long term and the fluctuations of markets over the course of a day, week, month or often even a year are of limited concern. What matters to us and our (ultimately your) strategies is being positioned with the long term in mind.
Considering this, there are a few factors that we should always consider.
1. Our ability to predict short term market fluctuations are ultimately useless. A great deal more production can be achieved by focusing on the long term and letting shorter term volatility fall by the wayside
2. Markets are always going to be irrational. When they are overtly optimistic we aim to reduce exposure and when they are increasingly pessimistic we aim to increase exposure but ultimately we will be invested across all periods of market variance.
3. For our direct equity investors, the underlying quality and resilience of your investments is the most important aspect. Again, we can not predict the short term but we know that businesses that are truly exceptional, lead by the highest quality management teams are likely to compound your capital over the longest time periods.
4. Our goal is to deploy cash when opportunities appear to be compelling. When compelling opportunities are not present, we would rather hold additional cash than expose your funds to investments we are not confident in.
5. We have been entrusted with your capital, it is our responsibility and ultimate obligation to ensure that it has been invested with your future best interests in mind. We never forget the level of trust that our clients show us and our obligations to you.
6. There are areas of investment that are far beyond our capabilities. We openly admit that we have no idea what a Bitcoin is worth or the odd’s of an early stage biotechnology company finding the cure for cancer. We feel it is most prudent to stick to investments that we are capable of developing deep understanding of. Even if this means your portfolio becomes a little boring and you do not have a hugely speculative (although exciting) investment to talk about over dinner with your friends.
7. When a compelling, appropriately valued and lower risk situation occurs we must have sufficient capital available to act.
Outside of Investing
This year has resulted in an unprecedented number of insurance claims our office has been processing. The most surprising part of this is that the median age of claimants is 32! We understand that when things are going swimmingly holding insurance can appear unnecessary but so far with notional claim value comprising of over $1,500,000 for this year (with being the combined expected value of Income Protection payments for the year plus Trauma payouts), it has displayed exactly how valuable this service is when things go wrong.
Please stay safe over the coming period and as always, thank you again for entrusting your capital with us.