January 2023 Update
WOW! What happened there?

February, 2023

The adage that the stockmarket is a mechanism to provide maxium pain to the maximum number of investors, was certainly relevant in January. After a horrible 2022 most portfolios would have been positioned defensively. So of course, equities rose and the most volatile underperformers from 2022 rose the most.

The global trust rose 2.4% in A$ terms and 6.4% in US$ terms as the Australian currency strengthened against the US$. The infrastructure strategy declined modestly alongside a decline in the benchmark. Defensive stocks were out of favour.

Earnings have clearly been under pressure from the compression of profit margins. Rising input costs are being joined by slowing revenues especially from consumer facing businesses. Consumer pain is evident in rising auto repos, falling house prices (albeit from VERY elevated COVID levels), and redundancies. EPS estimates will be downgraded further.

China appears to have decided not to return to the 1960s and a re-opening of sorts will help global demand. On the other hand the tech embargo which has been cemented by the USA, Japan and the Netherlands, will impact trade and FDI between China and the RoW. A pivot to domestic demand is likely in China and we are positioned for such.

Our "true tech" favourites such as Shin-Etsu chemical, and Tokyo Electron rose c.20% each. The tech embargo on China may serve to produce a 'double spend' whereby BOTH the USA and China have to invest in R&D and SPE of the non critical sort. Japan companies will benefit.

The real disappointment was Intel which missed again for the 5th time in 6 quarterly reports.

Basic Materials stocks will continue to do well due to market dynamics of supply demand and industry pricing power. Portfolio companies BHP rose c9%, and International Paper almost 20%.

Macro developments will dominate in February. Will official interest rates go higher? If so by how much? Is inflation peaking? Rather than position the portfolios for one outcome we prefer to remain diversified to these macro factors, and for each active factor exposure to be modest.

To that end we made a few trades at the end of January which have reduced our profitable and thus very large active exposures to Utilities and Energy, interest rates and other macro factors. Details available on request.

We couldn't resist a jibe about inflation and against all those who argued it was a good way to reduce the rapidly increasing debt. We quoted Ronald Regan in an article about 18 months ago. He said and was correct in saying, "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man". For those who prefer a more erudite commentator, Murray Rothbard on the same subject, "Monetary inflation not only raises prices and destroys the value of the currency unit; it also acts as a giant system of expropriation".

Not so much fun to have inflation expropriating your 'hard earned' now is it?

As investors we suggest you can ward off this expropriation, to some extent, by buying dividend paying stocks, with pricing power, whose products have low elasticity of demand, and with sound governance.

Delft Partners February 2023