Monday Espresso Podcast 1st August 2022

[00:00:00] Sheldon MacDonald: It is the 1st of August today. I've been away for a week and I've come home to what looks like some disappointing news we've got in the US, a GDP decline of 0.9%.

[00:00:11] Sheldon MacDonald: We've got a 75 basis point rate hike.

[00:00:13] Sheldon MacDonald: We've got companies missing their earnings estimates, and we've got record high inflation.

[00:00:18] Sheldon MacDonald: And yet, despite that we've got a market that performed really strongly, Nathan help me out here.

[00:00:22] Sheldon MacDonald: What's going on?

[00:00:23] Nathan Sweeney: Yeah. This is a classic example of bad news equals good news, but it's actually not that it's bad news it's that the bad news is less bad.

[00:00:33] Nathan Sweeney: So let me talk through that. So if we look at the S&P for last week, it was up 4%. And if we look at the moves for July, they're up 9%. So some really strong moves.

[00:00:44] Nathan Sweeney: And this is despite the fact, as Sheldon mentioned, that we have some bad news coming out.

[00:00:49] Nathan Sweeney: A good example of that would be the central bank in the US raised interest rates by three quarters of a percent last week, that's a big interest rate rise.

[00:01:01] Sheldon MacDonald: And of course, it's the second time in a row that they've done that.

[00:01:05] Nathan Sweeney: Exactly. And the market was considering the fact that the Fed may
increase interest rates by 1% because they didn't do 1% and they did 75, it was bad news, but it was less bad on the market liked that.

[00:01:19] Nathan Sweeney: But they also liked the accompanying statement from the central bank, which said that they were less likely to increase interest rates at the same pace going forward.

[00:01:28] Nathan Sweeney: It's all data dependent, but there's good news within the bad news and the same with the economy, we saw the economy shrinking by 0.9% or the economy contracting, but actually contracting less than people expected.

[00:01:40] Nathan Sweeney: So all that news that's been baked in, that bad news that's been baked into equity market prices.

[00:01:46] Nathan Sweeney: Markets are now starting to reprice the fact that the news isn't as bad.

[00:01:50] Sheldon MacDonald: So that's great. Most of what you're saying is on the US perspective. The UK last week, perhaps less strong. The UK market, only up about 2% up about three, three and a half percent for the month, but still remaining pretty much the only major market that is in positive territory for the year to date.

[00:02:08] Sheldon MacDonald: Now we've spoken about that a couple of times, the structural makeup of the UK market, the weakness of Sterling, that's providing a tailwind for UK equities, but still a decent week for equities last week in the UK. On the emerging markets side, though, things were flat in China really was a standout, weak market.

[00:02:26] Sheldon MacDonald: Scott's on the line. Scott, take us through what's going on in China.

[00:02:29] Scott Truter: Yeah. So there's been quite a few movements around the property sector this week. So we had Evergrande miss their self-imposed deadline for announcing the restructure. There's now a suggestion that it might be delayed until October before a plan's released and it does suggest that there's quite a disagreement between the major creditors on a resolution there.

[00:02:50] Scott Truter: We've also seen the boycott of mortgage payments. So there's over 320 residential projects across 95 cities that have stopped making their mortgage payments. So this process is slightly different cause their mortgage payments start when construction begins and their aim is to try and get this construction moving.

[00:03:06] Scott Truter: So what are the central bank doing, they've suggested to mobilize $148 billion equivalent of loans to help these stalled property developments, and really trying to end this downturn.

[00:03:17] Sheldon MacDonald: Okay. So some policy moves to try and stimulate things, but really no immediate resolution inside there, so perhaps a difficult period to carry on for some time.

[00:03:27] Sheldon MacDonald: Something else to speak about is, well, the heat wave that we saw that's really put the focus on climate change in recent weeks. Now, Nathan, you mentioned earlier to me a deal in the US.

[00:03:39] Nathan Sweeney: Yeah. So we've seen some really positive news coming out of the US. So they're looking to unlock $370 billion of investment for renewable energy, energy security, and climate focused initiatives.

[00:03:54] Nathan Sweeney: So I think a lot of people will welcome that. Given what's happening on the climate front and much of this investment is needed, as we all know.

[00:04:01] Sheldon MacDonald: Sure. Now the challenge for us really, as investors is to find opportunities where those initiatives can be monetized correctly. ESG remains, has always been, a strong part of our investment process, and we continue to look for managers who themselves then have a issue processes that can find, as I say, these opportunities.

[00:04:22] Sheldon MacDonald: Looking at the week ahead, a busy week, we've got quite a few Fed speakers and that might give some clues as to what the fed is thinking going forward. As noted chairman Powell of the Fed, he indicated that perhaps the pace of rate hikes might not need to be as steep as previously feared. We've also got the Bank of England meeting this week and a probable rate hike here as well.

[00:04:45] Sheldon MacDonald: And then we get jobs news, as we know, the jobs market has been especially strong in recent months. We'll wait and see the latest figures and of course we're about halfway through earning season in the US. We had some strong earnings numbers last week from some of the tech companies and we'll see what this week brings. Anyway, as always a busy week lot's going on and we hope you'll join us again next week.

[00:05:05] Sheldon MacDonald: Thank you.

[00:05:06] Nathan Sweeney: Thank you.

[00:05:06] Scott Truter: Thank you.