INSIGHTS WITH EVALESCO

TOPICS DISCUSSED

2022 is wrapping up and it feels a bit like a stagger to the finish line.

Countries are slowly moving into a new normal with Covid no longer driving the policies around tourism and travel – even China.

In gaming parlance, 2022 could be described as ‘the grind’.  Picture any number of sports where there is a period where no one is scoring but you know fatigue will eventually set in and one side will get the upper hand. Sadly, in rugby union, that is the All Blacks and outside of some moments of hope when it comes to State of Origin that is Queensland… but I digress.

Investing can be a little the same.

After what can only be described as a very rocky road, with:

• military conflicts in eastern Europe;
• energy concerns pretty much globally;
• ongoing supply chain and shipping issues;
• some dramatic changes in key political players (think the Queen, Boris, Angela Merkel (Dec 2021) and Shinzo Abe to name a few);
• rising interest rates;
• central banks unwinding fiscal stimulus;
• softening house prices; and
• inflation impacting almost everything.

It is not surprising that many are feeling a little worn down.

2022 from an investment perspective has felt like a lot of hard work with not a lot to show for it. Our team has been running pretty hard and seen some investment success, especially since March, but there is only so much you can do in this sort of year.

We continue to stress the importance of reacting but not overreacting and sticking to our disciplines while setting up portfolios for the next phase. Eventually opportunities emerge as they have in the last two months and suddenly the investment world can look far friendlier.

The Australian Share Market

Counter intuitively after a much disrupted year, the ASX200 was only down -2.17% in the twelve months, 20 Dec 2021 to 19 Dec 2022.  Different sectors within the market had very different results.

In Australia, our resources, energy and financial sector have done a lot of the heavy lifting while 2021 champions in the retail sector have struggled.

Some quick examples

Even Endeavour Groups, Dan Murphy’s had a twelve month return of -4.29%.

• Yes, a little surprised by this one but I keep doing my bit to keep their spirits up!

The Australian share market is dominated by resources and financials but we only make up 1.9% of the world share market.

The negative returns for retail stores and Bunnings is arguably due to reduced spending post the Covid bubble.  Their earnings were inflated by consumers bringing forward purchases with things like the job keeper payments and there was always going to be a more normalised period after this.

International Markets

The performance above has helped but the US is the market that really drives results.

The United States share market makes up over 59.9% of world share markets and its 2022 experience is very different to Australia’s. To put this in perspective the next largest player is Japan with 6.2% of the market, then the UK with 3.9% and China with 3.6%.

For the twelve months to 19 Dec 2022, the US S&P 500 Index is down -15.67%.  The big losers were in the technology sector with the NASDAQ (Tech Index) down -28.54%.

The US oil and gas and financial stocks had a good year similar to Australia’s but the examples below in technology give you a better idea of the landscape.

If you are feeling a little disappointed with the performance of the AAN Core model with a -8.43% for the year to 30 November 2022, you can spare a thought for Mark Zuckerberg, Elon Musk and Jeff Bezos who are probably feeling a little sorry for themselves at the moment.   I think they will be fine though?

So enough about 2022!

Let’s talk about 2023.

Not exactly clear sailing however there are lots of ‘known unknowns’.  Sounds a bit odd but it refers more to what surprises are out there versus what issues already exist and we are aware of.

• Interest rates are likely to continue upwards but the rises are tapering and the commentary is definitely changing.
• Residential property prices have peaked and declined moderately. It is likely they will soften further and interest rates will play into this. Alternatively we still have a rental shortage so the longer term impacts still have question marks. Commercial property tends to be impacted more negatively than residential in slowing economies and this has deeper investment implications.
• We have an energy crisis but we know that and there are solutions. They will just take time to relieve the immediate pressures.
• Supply chains are still an issue but are easing. The biggest bottleneck has been China and they are only just piloting their way out of Covid Zero but in the interim countries have been looking for alternatives and finding them. Our reliance on China is still a concern, especially with Xi’s very militant rhetoric, but he is pretty consistent so not exactly an unknown.
• Putin is definitely a concern and he has put himself and Russia in a very precarious position. There are far better informed commentators than me discussing his 2023 strategy and whether he can survive a perceived defeat. Once again this conflict is a known unknown.
• The US and Europe are likely already in recession, even if not a technical one, and that means slowing earnings, higher unemployment and reduced consumer spending. The post Covid buying spree has a little bit to run but consumers will tighten belts as they see job security concerns ahead.  This isn’t great news but recessions aren’t a new thing – just new to our younger generations who have never experienced an Australian one. (Australia’s last technical recession was 1991_92)
• We have inflation and cost of living pressures here, and pretty much through all westernised countries. These are actually starting to soften but will still be high relative to the last two decades. We have had inflation before, but we will need to get used to it again.  Some businesses will do very well through this period and it is the ones that adapt.
• Lastly, the world is reopening and we still have a lag while around the globe, people move towards the next normal. Australian international tourism is still down 77% September 2022 versus September 2019. The return to business as usual can provide a lot of economic upside and our relatively weak currency can be very attractive to the travelling population.

Resolve versus Optimism

We have talked in previous blogs about having resolve versus optimism and that is still a central theme for our strategies into 2023.  A large portion of investment returns are made when there is uncertainty.  Historically, once there is certainty, assets are fairly accurately valued and upside has diminished.

Resolve in this case means we can see opportunities and yes substantial upside.  That can play out in the next six months or could be further away.  It is unlikely to be a smooth ride and it is unusual if it is.  Adapting, but not losing sight of the objective is still the key and that is what we will continue to do.

Thank you for working with us in 2022 and we look forward to helping you through 2023 and whatever it brings.

To you and yours a very Merry Christmas and a very Happy New Year from the whole team at Evalesco.  Our office will be closed from lunch time on the 22^nd of December until Thursday the 5^th of January.

Yours Sincerely
Marshall Brentnall
AAN Investment Committee

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