September 2024 Update

September, 2024

If you can keep your head when all around you are losing theirs?

Markets whipsawed but finished higher as the Fed statement from Jackson Hole essentially said, "keep taking the Hopium". Hope it's a soft landing, hope we can fund the fiscal deficit at the imminently lower rates, hope that inflation is going to behave even though we will cut rates into a booming asset market, and hope that we can keep these asset prices up with more monetary stimulus. Being logical doesn't always pay off in a market where your positions can be swamped by other investors' needs to liquidate and hedge especially when leverage is very high. The global diversified strategy declined 2% in August which was due to the decline in the Japanese equity market ad our overweight. We're still matching the benchmark in this strategy on a gross basis. The global listed infrastructure is comfortably ahead on a gross and net basis.

"We believe the policy makers' Zeitgeist is still to worry about wealth effects or widespread asset price falls and that inflation remains of secondary importance. Consequently, interest rate cuts are now likely to be accelerated, and further rate rises in Australia and Japan unlikely. The 'wealth effect' on inflationary expectations will be used as justification. This strikes us as a sell-off in the froth but with unexpected consequences. As an example of the illogicality of thinking, the Yen / US$ cross rate is only up year to date by 2% and over 3 years the US$ has actually appreciated by over 25% against the Yen. To argue that the Japanese companies have lost competitive positioning due to an overvalued currency after an 8% rise, is unsound to put it mildly. What we do from here with portfolios is to re-run our stock selection models since relative prices and valuations will have moved to an abnormal extent and think about the macro-economic consequences if we get rapid rate cuts. We will most likely make more trades than normal."
Due to the greater number of opportunities that arise in highly volatile markets we did indeed make more trades than usual.

Nvidia's results kept investors calm, but little was revealed regarding the new Blackwell 'killer' product. We remain invested in other tech names but did luckily sell LAM Research before the tech market wobble in early August. Other trades we made were to invest in MGIC, MDU Resources, DWS, the German fund management company, F5 Tech and Japan Aviation Electronics. We sold Atkore, Covestro, LAM Research, Elevance and trimmed Sprouts Farmers Market after a price rise of 300% in the last 3 years.

Notable positive performance in August came from Best Buy, Advantest, Dick's Sporting Goods and Teradyne all up over 13%. Detractors were Amada, Hillenbrand, Emerson and Valero.

In mitigation, we note that Intel, which has failed to re-invest adequately to stay ahead in the MPU field, is now teaming up with Japan's National Institute of Advanced Industrial Science and Technology (AIST), to push harder and faster into Extreme Ultraviolet Lithography, or very narrow bandwidth (faster) processing chips. (EUV). AIST, which operates under the Ministry of Economy, Trade and Industry, will run the facility, while Intel will provide expertise in chip manufacturing using EUV technology. This announcement came early in September. We do not own Intel. We draw a few conclusions from this.

Since the Japanese AIST operates under the Ministry of Economy Trade and Industry (MITI), a government 'bureaucracy', it shows that the Japanese government is skilled at helping private enterprise become more competitive by remaining on or at the cutting edge. Japanese technology is pretty good, and the USA does not monopolise the opportunity set (ASML in Europe is the leader in EUV but its share price got smacked in early September as the EU decided that export licences are required to export the technology to China). Japan and the US are going to cooperate strategically at a national level in technology which has clear implications for Chinese companies and the government; for European semi-conductor tech too, such as it is. If governments everywhere are going to become more involved in directing capital, regulating, and promoting "key industries" (they most certainly are) then why not choose to invest more in a country where that has been a successful playbook for over 40 years? MITI is an experienced government partner for private enterprise. We remain overweight Japanese sourced technology. Intel is presumably moving to an open platform to compete against TSMC as a foundry and presumably wishes to have some of the NVDA market adulation as a global provider of manufacturing to client specified design?

It's time to hedge political risk. Regardless of which side wins the White House it's very likely we'll see more re-onshoring and 'National Industrial Policy'. The Democrats will continue to subsidise 'Green' or Renewable Energy, and the Republicans will attempt to encourage organic/carbon-based fuels and reduce regulation. Our stance is to invest in the companies that will power the energy transmission regardless of its generation and to capitalise on the re-industrialisation theme. We have written about this and our holdings at length. At some point Industrial REITs in the USA especially in low tax states, will become attractive as the combination of demand for space and lower cap rates works through positively for NAV calculations.

Delft Partners September 2024