The usual suspects are behind the glass in the police line-up for the savage assault on the Aussie market. Some people reckon its yuan devaluation, which signals the beginning of the ascendancy of the redback over the greenback. Others point to falling oil prices, or the Chinese growth figures, or US interest rates.
This is gang-related violence, so all are guilty. But we also see an additional perpetrator: the dislocation in business models that accompanies significant change.
In this world, the opposite of broken isn’t fixed, it’s more broken. Meaning that when the delicate balance between the US dollar and the yuan is upset, the consequences are so large and so unforeseeable that investors take fright and start to sell.
So low oil prices should be a positive for shareholders, since a key input cost is falling. But when the fall gets large enough it doesn’t just change earnings but renders uneconomic whole industries – shale oil producers, and countries which are at the wrong end of the cost curve, like Venezuela, Iran and Russia. This has flow-on effects in terms of employment, capital equipment purchases and expenditure and the like, which spell problems for companies like Caterpillar, General Electric etc. In short, the broader economy is hurt. So not fixed, but more broken.
You can feel this in the price movements for the big banks in Australia too. They aren’t just falling for all the usual reasons – concerns about leverage in the property market, the need to lift capital, etc. Investors have seen the disintermediation that has occurred because of connectivity and feel uneasy that the valuations of the big banks are coming under threat as peer to peer lending takes hold.
There is an uneasy feel too in retail and entertainment. Walmart was on its year lows before Friday’s rout in the US, having downgraded again, just as Amazon overtook it in market capitalisation. Foxtel is struggling, and paying up massively for sport (double) to hold share as Netflix subscribers surpass Comcast, which was the largest operator in the US.
Sure, the US market has heavily sold down Apple, Google and Amazon – mostly because that is where the biggest yearly gains were. But going forward where is the best place to be? The world is not heading back to a coal-fired future, while outdated supply chains will collapse as businesses re-create their business models to be entire customer-facing.
Loftus Peak features in Tony Boyd’s (AFR’s Chanticleer) Super Fund Returns10/08/2021
The financial year in review, plus June Fund Performance14/07/2021
SQM Research re-affirms rating for Loftus Peak’s Global Disruption Fund08/07/2021
Investing in a better world; Loftus Peak and ESG21/06/2021
Share this Post