December 2024 Update

December, 2024

They think it's all over…

The Republicans achieved a clean sweep of both houses, the White House and the popular vote. The equity market rapidly discounted a lot of the Republican team's rhetoric as if it were implemented and accepted policy. We're not so sure there won't be obstruction, compromise and change of mind. So, while they think it's all over, and the Trumpists get to do all they want, we're doubtful We think a "Tempered Trump" is more likely and frankly more desirable. Taking $2 trillion out of government spending may be an admirable objective but it has to be replaced with some sort of other spending or, preferably, private sector investment otherwise GDP will shrink despite inevitable rate reductions such a large public spending cut would induce. No one knows yet whether the cut will be achieved nor how it is to be replaced. Will tariffs induce inward FDI? Will corporate tax cuts drive higher capital investment? (they didn't last time). Will rate cuts provide impetus or stoke inflation?...

Our stance remains the same - favour the S&P 600 to the S&P 500. Favour Japan over what is becoming an alarmingly dysfunctional Europe. China is showing signs of life which means we have been nibbling at HK listed companies.

The capitalisation weighted global indices rose about 5% in A$ in November and the Value weighted about 4%. The Infrastructure index rose almost 4%.

Our strategies outperformed in the Value weighted and the Infrastructure, rising over 5% and nearly 7% respectively. The capitalisation weighted index returns remain very concentrated on only a few stocks. Our performance against this index in the last few years could be described as "hanging in there". We have underperformed the index on a gross basis by about 30 bps annualised in the last 3-4 years. Our approach to risk control has helped us remain this close to an index that is beating many if not most active managers due to its unusually concentrated returns.

A recent trip to Singapore and Hong Kong has us envious of the ability of the Singapore government to provide support for business while not intervening - the place is going 'gangbusters'. Watch and learn Australia. Hong Kong was looking surprisingly in need of renovation and the public services and spaces tired, but business confidence is returning and the Greater Bay area (Shenzhen etc) of 80+ million people provides decent opportunities for the service industries which now dominate Hong Kong activity. We added to Singapore Stock Exchange and CK Hutchison in Hong Kong.

Japanese companies continue to improve their balance sheets via share buybacks with one company, Tokyo Gas, in particular now quite aware of what it's like to be too complacent as the country adopts a more constructive approach to shareholders. Activist investors announced a stake, forcing the company's president to admit that the RoE target of 8% was too low and that some real estate is not highly capital efficient. The shares rose almost 20% in November. We hold in all 3 strategies.

Other holdings announcing significant buybacks included The Sumitomo Warehouse, Kamigumi, and Dai Nippon Printing.

Significant contributions to performance came from holdings in Sumitomo Electric Industries, International Paper, Emerson Electric and Cheniere Energy. Andritz and Evonik in Europe detracted.

As we finish this brief update, we learn the French government has lost another Prime Minister. They can't raise taxes and can't cut spending and with a budget deficit at 6% of GDP and debt to GDP over 100%, the room for manoeuvre is limited; and the ability of the Germans to underwrite the French debt issuance is compromsied by their own sluggish economy. It's "darkest before dawn" perhaps but we prefer the adage that you need to move from denial to recognition to action. Thus far we see only plentiful evidence that the French have a dose of "avoir la tête dans leur cul".

Please let December be quiet for markets and for no further increases in global bellicosity.

Delft Partners December 2024