Market Commentary for November: Don't chase the rally

December 14, 2022

The Global Trust rose 3.2% in November and the value biased Global 30, rose 4.7% - both in A$ terms. In US$ terms, 8.1% and 9.7% respectively. The US$ declined against the A$ and Value outperformed Growth. The infrastructure strategy rose 1.9% in A$ terms.

All strategies outperformed their benchmarks.

Following from an unusually strongly postive October, November also saw a rise in equity indices as the inflation prints are not getting worse, and there is the hope or expectation that further rate increases will be smaller if they come at all.

Real interest rates however are still negative and the fiscal policies in most countries are working to the detriment of monetary policy. Unlike the late 1970s and 1980s when inflation was squashed, the supply side is not helping. Crushing demand while reducing supply is a recipe for stagflation.

Philip Lowe the RBA governor said it best when he stated in the most recent release that . . . ."Inflation in Australia is too high, at 6.9 per cent over the year to October. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. Returning inflation to target requires a more sustainable balance between demand and supply." [our emphasis in bold]

This comment could be applied to most Western Economies.

Net zero is not helping since the subsidy of "green" energy is using resources that would otherwise be better deployed in growing the productive capacity of economies. Our basic stance remains that oil and especially gas will be rehabilitated by policy makers and the stock market.

We also expect rate increases to keep coming and that the mistake investors are making is to not realise that they are not coming down, certainly to where they have been in the bubble period.

Earnings expectations are falling finally and will act as a counterweight to any interest rate euphoria.

Asia bounced strongly and the Hong Kong companies Ping An and Alibaba, in which we have remained invested, rose c.40% and c.30% respectively. China is reopening after a strangely futile attempt to reach Zero Covid and we therefore also suggest that Basic Materials will benefit as global demand improves.

We added BHP and Schlumberger recently to our global strategies.

Delft Partners December 2022