Chatting with a Global CIO in charge of $52B | The opportunities are everywhere

Candice: [00:00:12] Hello and welcome to Talk Money To Me. This is your need to know financial podcasts. Thanks so much for tuning in. I'm Candice Bourke. 

Felicity: [00:00:19] And I'm Felicity Thomas. Now, today we've got another very interesting episode for you. We're joined by Moz Afzal, the chief investment officer at EFG Asset Management, to chat about the global markets and to get his inside scoop on what we have in store for 2023. And did we get the scoop? Now, if you haven't heard of EFG International, it's a leading Swiss private bank renowned for its unique client approach with over 200 billion assets under management.

Candice: [00:00:48] And if you've ever visited our website showroom partners, you will see that we're also owned by EFG, which is fantastic as advisors, because we're able to tap into their global and macro economic data and research. So really great tool that we have here. And you could say today, our conversation with Moz, we're really sitting down with one of the big bosses today, so we're super excited. Now, AMG Asset Management is the asset management arm of EFG Financial, so they're the ones that give the advice to the global investors right at the end of the day. They have actively managed investment products and services to private clients, institutional investors and financial intermediaries, SES around the world. Moores joined AFC Private Bank back in 1994, so he's clearly got a long tenure at the bank and a wealth of knowledge and insights when it comes to the global markets, international equities and fixed income. As you'll get that sense when we deep dive into the conversation with him now, he has a really impressive resume and we have popped him in the show notes for you to read. 

Felicity: [00:01:48] That's right. So after you listen to this episode, you're going to see that clearly. He's an absolute expert in capital markets. So it was super, super interesting for us. Now, remember, our chat today is not considered personal advice. And even though we're registered advisors at shore and partners, please note that this podcast and the content discussed does not constitute financial advice, nor is it a financial product. Everything that we talk about is based on facts known at the time, which is the 8th of November 2022. So welcome to Talk Money to me. We're really excited to have you on the show. 

Moz: [00:02:21] Was great. Great to be here. Great to be in Australia. 

Candice: [00:02:25] Yeah. Welcome, Downunder. How's your trip been so far? 

Moz: [00:02:28] Well, I can't describe it. Lots of jetlag and very busy. 

Felicity: [00:02:33] And it's squeezing a lot in a short period of time, that's for sure. Yeah. 

Candice: [00:02:37] We appreciate you. You are squeezing in the time to sit down with us and have a chat about the global markets, because we know that you have a lot of insights in that space. So I guess we want to kick off our conversation by setting the scene on the current market conditions as you're seeing them play out, you know, how are you feeling about the market? Is there anything that you're really worried about in terms of bad news? More to come out like do you think more downside has to be priced into the market? As you're saying it. 

Moz: [00:03:05] We are in a kind of a strange situation in terms of markets as well as the global economy. And it's a very different playbook to what we've seen over the last ten or so, ten years or 12 years or so. The previous sort of ten or 12 years have been driven by deflationary forces. So the high unemployment rates worry about deflation, rather, inflation, negative interest rates and so and so forth. You know, this time around, we've got, you know, unemployment rates actually surprisingly low. So unemployment rates in many countries are near record lows. At one level, that kind of ticks a box. And then we've got, of course, due to COVID, due to the times of the labour market and this sort of sudden rush of spending leaving inflation just sort of trending higher. Obviously, the central banks then raise interest rates to tackle that. And the speed at which central banks have raised interest rates is unprecedented. Unprecedented. So something that we haven't seen since the seventies. So the market adjustment to that has been quite furious, particularly by the fixed income and the bond markets and that sort of speed, if you like, of adjustment has caused the uncertainty in normal environments. If that speed was a lot slower as we've seen in, say, previous interest rate cycles, for example, markets are usually able to digest that and try to sort of move forward in a reasonably, reasonably calm way this time round. So the message I don't really want to give is that the speed of change has been the development that caused the uncertainty in markets. But I think we're coming now to a point particularly when the US Federal Reserve is thinking about peaking of interest rates and so that will happen in the next month or two. And stock markets and fixed income markets and currency markets are actually and are starting to anticipate that. And so our view is that. Sending the short term stock markets, given the investor positioning, is so, so bearish that we could see a bit of a short term rally that could last for 2 to 3 months before we start to see economic slowdown next year as a result of those interest rate increases. 

Felicity: [00:05:25] That's always nice. A little bit of a Christmas rally, but I know in the US obviously we're coming to the end of the calendar year, so there may also potentially be some loss taking. Do you think? 

Moz: [00:05:38] Yeah, exactly. So tax selling, as it's called, is essentially crystallising. Your losses on some of the stocks are down the most. And essentially that gives you the tax loss which you can carry forward. It usually starts around kind of, you know, September, October and November. It usually stops right here. So we're probably coming to an end. 

Felicity: [00:05:58] Oh, that's good to know because people, you know, are trying to enjoy their Christmas break. So that's probably why I'm not looking at the market. I always find it kind of interesting and a little bit counterintuitive that, you know, unemployment is at record lows, yet, you know, the rest of the world sees that as kind of a bad thing. I mean, you'd like to think that low unemployment should really be a good thing. 

Moz: [00:06:22] That's a tricky part of, you know, the situation we're in and why it's very hard to forecast, you know, why markets are falling or even rising. But the fear is more about interest rates going up dramatically to kerb inflation. As we've seen, commodity price inflation, wage inflation has actually been picking up, you know, heavily because of that tight employment market. And the fear is that the cumulative interest rate increase is the Fed reserve and also down will lead to a slowing economy next year and potentially a recession. So that is where the fear is coming from. 

Felicity: [00:07:00] Okay. So speaking of fear and risks, the global economy and the market is very much a mixed bag when you look at recessionary risks. So can we do a little bit of a speed round and you give us a brief comment on the likelihood of going into a recession in the near term, because this is what our listeners continuously hear. This is what we see all over the news. So us is the first one. What are your thoughts?

Moz: [00:07:25] Yeah, more recession for next year.

Felicity: [00:07:27] What about Western European economies? 

Moz: [00:07:29] Well, they're already in recession now. So if anything, they will sort of bubble along, you know, round these sort of levels into next year. 

Felicity: [00:07:38] What about Eastern European economies? 

Moz: [00:07:40] That they're in a tough spot? Of course. 

Felicity: [00:07:44] Russia. 

Moz: [00:07:45] Russia is oh, that's an interesting one, because they created quite a bit already and they will probably stay very weak. But yet towards the back end of next year, given the base effects of, you know, a drop in economy, they could start to stabilise. 

Felicity: [00:08:01] Interesting. What about China? 

Moz: [00:08:03] Oh, China is just simply down to the COVID zero policy. So, you know, our view is that maybe time is when we think they will start to open up. So the Chinese economy could kind of wrap ahead of the back end of next year. 

Felicity: [00:08:18] That's interesting because they're already starting to loosen their policy at the moment, aren't they? And they're having an outbreak of cases. But that is good to know. Okay. Last two, we've got developing market economies and Australia, okay? 

Moz: [00:08:31] So developing market economies in general. So I think there will be a mild recession, but to be honest it may not even be noticeable because the employment situation is still relatively tight. So unemployment rates in general are the big driver of recessionary conditions. So kind of a mild recession is what we're looking for in Australia. From what I've seen so far, it looks to be pretty solid, pretty robust, but similar to the developed world, maybe in the short term a little bit weaker. But if China starts to pick up, then clearly Australia is a beneficiary of that. 

Felicity: [00:09:10] That's it. So we're the lucky country and skipped the recession once again. 

Moz: [00:09:15] Oh yeah that's quite lazy. It is one of the few economies in the world able to counter it but you know we have to be careful there's not too much complacency there. 

Candice: [00:09:25] That's true. Definitely. Good point. Look, Australia is not immune to inflation. We get the headlines, you know, just as much as the global markets do. 

Felicity: [00:09:33] But everything's just always expensive here though. That's the thing all the time and always increasing. 

Moz: [00:09:39] Yeah.

Candice: [00:09:40] What was interesting in a recent publication that you wrote at EFG was, and I quote, it was called The Winds of Change. It explored the issue of the market that you've just basically outlined. Right, that we're all battling with the big inflation, the big risk of inflation, I should say, and the path and how soft it's going to be. So naturally, that leads to the second part of the question, is it going to be a soft or a hard landing? And recently the Federal Reserve made a comment in Question Time that. May have been missed. I'm not sure if you heard it, but they sort of alluded to the narrow window for the soft recession is getting smaller and smaller. Do you agree with that? Do you agree with this statement? And I guess what's your take on inflation in the next? You mention in the next two months, we could have a bit of a Christmas, Christmas, you know, bear market rally. But more broadly, do you think there's a lot of commentary that we could have a really fast acceleration of inflation next year? 

Moz: [00:10:37] Yeah. So base effects are actually starting to kick in quite a bit on the inflation front. So we'll see. Inflation is year on year. So whatever the prices were 12 months ago, you're taking that as your base effect. So what we're seeing is commodity prices over the next 3 to 6 months. Remember, they peaked in Q1 and Q2. So that base effect becomes quite a big hurdle for inflation to continue at the same rate. So what we're seeing in terms of just purely base effect impacts, they're about 0.6, 2.8% per month for US inflation. So if you queue like that over a 5 to 6 or seven month period, you're looking at inflation dropping, you know, somewhere between four and 5% over the next call it, 12 months or so. And of course, with the slowing economy and the Fed is caught in this sort of dilemma. If they raise rates too much and this is the point that you made earlier about the narrow pathway, if they raise rates too much, they'll cause a recession and then have to cut rates again. And money markets are really pricing in rate, a rate peak in their rate cuts by the end of next year. Now, that's not a great look. I would say in general, you know, if you raise too much and have to cut them because you made a mistake.

Candice: [00:11:55] It's mismanagement, right? 

Moz: [00:11:56] Exactly. And so I think they're quite conscious of that. And you've seen different Federal Reserve Board members starting to talk about peak rates. And that was interesting about the last Fed meeting is their statement seemed to be relatively dovish. But Powell was a hawk. And the way I think about what Powell is doing, he continues to stay a hawk. He continues to tell people that we're targeting 2% inflation. The Fed, by the way, hardly ever gets a 2% driver, overshoot it or undershoot it. So. So it's one of those things. But to me, it's all about anchoring. So the message you want to give to people and I think Powell speeches, rather than the text or, you know, soundbites are usually out there much more than the text is. And the messaging he's giving to the people is, look, if you go out and ask for a big pay increase, say, above 2%, the chances are we'll go into recession, which means you'll be out of a job. So he's trying to get people to really think about, you know, tempering their expectations, not sort of going out and asking for the five, six, 7% pay rises because that will cause inflation because it becomes entrenched. What you've really got to do, and I agree with everybody to do this, is to read the text yourself, the original source of tax, make up your mind and then just figure out what Powell is doing in terms of jawboning, is making sure that people, people's expectations don't go wild. 

Candice: [00:13:35] Yeah, it's an interesting point you've raised, because if you look at the intra day, minute by minute trading of, you know, the S&P and the NASDAQ when the speech is getting read. Exactly to your point, it was very positive. It started to reap at the first half of the statement, and then he brought it back down to reality, at least in the last announcement. So that's a really good key point you're saying is just to go back to the techs. It's a hard job. Nobody wants that job. Right. 

Moz: [00:14:02] The real challenge for the Central Bank, particularly if you're Jay Powell, is that everybody in the world listens here. So, you know, if you're, you know, maybe the ECB or the Bank of England or even the RBA have not really spent too much time around the world looking at what you have to say, because, you know, you're the leader of policy essentially in the US. So. So every, every word is taken very seriously. But they spend a lot more time on the text than they do on the press conference. So, you know, he's, of course, very well prepared, but he's trying to give you messaging that he wants you to think about where the text is, much more about the real economy. 

Felicity: [00:14:48] That's a really interesting point. So all our listeners actually read the text and then help, you know, make up your own mind. But to be honest, I think from all the things that I've been reading and listening to, a lot of people have just lost a lot of faith in the Fed anyway, because it is hard. Looking back on what has been done and you know. Wrong moves made, etc.. So following on from that, I think what we're all asking right is do you see the US dollar continuing to be really strong in the next 12 months? Because that's obviously done very, very, very well. 

Moz: [00:15:22] Yeah. So yeah, that's a really good point. I think one of the messages I've been giving on this trip is that, you know, the dollar over the last decade, you know, has been very strong, partly because the Federal Reserve has by far been the most credible central bank, you know, in the world. But there are things developing now, i.e. higher inflation, not just in the US but elsewhere, but also actions that the US government took both in terms of fiscal policy. So spending a lot of money, that's obviously a dollar negative. And then by taking the reserves of Russia, if you're Chinese, if you're Middle Eastern or if you Japanese, you're not going to think twice. Am I going to leave my reserves in the dollar because they could just confiscate them if they didn't like what I did or or didn't like any policy that I was proposing. And I think that to me is, you know, the first you always looking for what is a chink in the armour, because so far that dollar has been absolutely strong and certainly over the last well since 2008. And you've got to start to think that if the world is turning, say, more normal, as you will say, global financial crisis, that came with a period of actually a strong Aussie dollar and a strong and a much weaker dollar. So if we're returning to a more normalised environment, then, you know, it's not necessary. The dollar will continue its strength. So that's one message I don't want to give. There are kind of geopolitical impacts of happen over the last 12 months that are going to make it less appropriate for the dollar to be stronger. Fiscal austerity will come along. And, you know, most governments have been spending far too much money, which is also going to put some pressure on the dollar. And then finally, that last point, if we're moving to a more normalised environment, then it's not necessarily dollar positive. So, you know, I think we definitely have to look at our kind of portfolio allocations and be more widespread, you know, think about. But it was quite funny as I've been travelling, I'm talking to people about UK equities or European equities. Nobody's remotely interested. Yeah. And, and that's because it's been all about the dollar and US equities over the last 12 or 13 years, but it's a big wide world out there and there's some great European companies and great UK companies that are devalued by sort of 20% or so just from the pound dropping off. And the UK economy is now going to get as competitive as it as have ever been. You know, I run a global team and it's cheaper for me to hire people in London than it is in the US or in Switzerland now. And that, you know, is something that really adds to the competitiveness of the UK. 

Candice: [00:18:21] Definitely. You mentioned, you know, going back to normalised kind of rates and economic environment. So what's normal do you think in the Aussie dollar like we love a good prediction here at Talk Money to me we do. So you know what you think that Aussie dollar is going to trade around and on and second part of that is your global portfolio manager in equities. Any interesting Aussie companies that you think might benefit from a falling Aussie dollar and potentially a stronger Aussie sorry, a falling US dollar and a stronger Aussie?

Moz: [00:18:52] In that sort of environment, you really want to be in both domestically focussed companies. So you know, banks are having a bit of a renaissance, right? Because as interest rates go up, you know, they're making net interest margins like bandits at the moment. So that we think will continue, you know, for the time being. And they don't necessarily pass on those those interest rates that you probably know to current accounts are still quite low relative to the RBA rates. So that's all going into that into their profit margins at the moment. So we have a bit of a sweet spot certainly for the next 6 to 12 months in that and the economy is not exactly in deep recession. That means that they need to write off credit loan losses. So we have a bit of a sweet spot for financials and they of course are very domestically oriented so and they do their business in, in Aussie dollar. So, so it's important to, to focus on that, on those types of companies. Um, I've kind of a mixed views on, on obviously the next obvious questions on, on the commodities because if we do have an economic slowdown next year, then obviously be less demand for commodities. But obviously we've got China potentially. Coming out of zero COVID. So that offers a bit of an offset there. So I think the the commodity and resource stocks will will do reasonably well. But there are some headwinds in a slowing global economy. 

Felicity: [00:20:23] Yeah, I mean, we believe that we're going into a really a commodity supercycle here at Chevron Partners. So that's a really interesting comment as well. I guess what we want to know is when is our Aussie dollar going to be at parity with the US again so that we can actually travel there without spending an absolute fortune like it is in the foreseeable future? 

Moz: [00:20:44] No, obviously, no. I think it's going to take a little bit more time for that to happen. But it needs rate cuts in the United States, maybe at the back end of next year or 2024. And then, yeah, so start saving for the next 12 months and you might be able to afford it. By the way, with the pound down as weak as it is, I suggest a trip to the UK. 

Felicity: [00:21:07] Yes, that is an even better idea. I do love Europe. 

Moz: [00:21:12] And the UK, yet we've got lots of lots of tourists coming over because certainly with the pound as weak as it is in the UK, I find it probably even worse than the new. I find travelling outside of the UK just really, really expensive and shopping outside the UK is really expensive because the pound is so weak everything looks much harder to be able to afford for us. Likewise comes the UK. Everything is so much cheaper. 

Felicity: [00:21:42] Sounds like a plan will come and visit you, but you might wait until after our summer when it's your summer again because it might be a little bit too cold for us. 

Moz: [00:21:51] Yeah, well, certainly. May-June time is usually the best time in the UK. 

Candice: [00:21:55] So while we plan a summer vacation to visit you in Europe, we're going to dive deeper into your thoughts on more about the interest rate hikes that we're pricing into the market. Geopolitical risks as well. Big topic and touch on the US earnings seasons, which is pretty much now coming to an end. But before we do all of that, we're just going to take a short break to hear from our sponsors. 

Felicity: [00:22:19] So we've just heard the Fed recent November announcement. So I guess what is your take on the raise? Too much? Not enough. Too little, too late. And one additional question here. So there's obviously been a lot of market talk as of late that the Fed may actually pause or pivot. I know that Aussie's kind of decoupled a little bit with that 25 basis point rise. What do you think is going to happen in the next December meeting? Show us, you know, your crystal ball. Yeah. 

Moz: [00:22:48] So I think the 75 basis points that they did were well priced in. And I think it would have been a bit of a shock and a surprise if they didn't do that. I'm more of the view that they will probably do so the 50 basis points at the next meeting. We've got two inflation prints before that meeting. And so we're starting to see those base effects that I talked about earlier, kind of starting to kick in. So that will give them, if you like, the air cover to kind of do 50. Now, the market is pricing in 75 at the moment or a high chance of a 75? I think that's a bit too much. And I think, you know, we'll start to see some of the inflation prints coming out. We'll hear from different Federal Reserve Board members, the guys who actually wrote the text. You know, starting to feel a little bit more concerned because they've done a lot in a very short space of time. And that creates a huge amount of uncertainty, certainly around, say, pension funds. We saw that in the UK those pension funds had to deleverage very aggressively because interest rate expectations obviously went through the roof. And so they're starting to feel a little bit more conscious that if they go too fast without really seeing those lagged impacts of the rate increases they've done already, for example, 30 year mortgage rates in the United States were above 7%. Yeah. And, you know, that's already starting to impact the housing market. So they will probably want to, you know, if it was up to them, they probably would have loved to pause right now and kind of see what impacts they've already had because those lags, 3 to 6 month lags need to kind of stop playing through. And so they are now conscious of making a mistake, you know, raising too much. And then as we talked earlier, having to cut them again is not a great look. It kind of shows you you're not really in control of things. And they came under a lot of criticism for being too slow when they did raise rates and didn't do it earlier. And so I think they're starting to feel a little bit more nervous about, you know, keeping up this kind of 75 trajectory. And investors are markets now. They like straight lines. So if it's down 75 last time, we should do 75 again. And I think at some point, you know, interest rate expectations are working exponentially. So every rate increase you've done has a bigger impact than the previous one. And so we're hitting that sort of peak exponential impact now.

Candice: [00:25:23] That's a very good point. 

Felicity: [00:25:24] That is a good point. And you just mentioned the U.K. pension funds. So kind of just want to touch on that briefly because what a disaster. Can you explain kind of what happened to our listeners? 

Moz: [00:25:35] U.K. pension funds? Typically, the legacy pension funds have what is known as defined benefit schemes, so they're guaranteeing a certain amount of cash flows to the scheme members. And so what the U.K. government did actually some time ago put new legislation forcing these pension funds to kind of match the cash flows that they're supposed to give to those pensioners. Now, unfortunately, those derivative contracts that most of the leverage leveraged derivative contracts and with the big sell off in the bond market, which was accelerated by Liz Truss and failed policies meant the interest rate expectations really shot up and the gilt market, i.e. the long term UK gilt market, collapsed to the point that those bonds had collapsed 40%. And remember the government bonds, which means that they're supposed to be risk free now. 

Felicity: [00:26:33] So 30%. 

Moz: [00:26:34] To 40%. So if you're a pension fund, it is suddenly hit by its loss in capital reserves. They had big margin calls to make these derivative contracts. So that deleverage very, very fast. And so that caused all sorts of havoc. Obviously, it stabilised now with the impact that the Bank of England intervened as well as now Rishi Sunak in trying to calm the markets nerves. Now the message for everybody else in the world is you can't spend too much money now going forward. So the bond vigilantes, as they know now, now, now I know that's coming in and saying, look, we are not going to fund you. You're extra deficit spending. And so that's a big message for everyone in the world to for governments to start reining back their government spending. So it's, you know, the UK is like a canary in the coal mine for everybody else. 

Candice: [00:27:34] So the parties essentially overwrite we've had a decade of just an insane amount of QE. Right? And we're coming to the end of this steam train. We've been driving with our eyes closed almost. And I guess another risk that the market is really tackling and battling is the geopolitical risks. So, you know, how can investors, in your opinion, best protect for the little bit unknown, right? In terms of their portfolios positioning with these conflicts, in particular with China and Russia, Ukraine and so forth. So what's your message there? 

Moz: [00:28:07] Yeah, obviously, you know, I always call these events low probability, high impact events. Right. So, you know, if you worry about them too much that your investment portfolio will be a bit of a mess. They're sort of low probability. But if they do happen, you know, they're high impact. So what we try to say to investors is, look, we have geopolitical risks always around. Before it was Trump and in geopolitics before that, it was terrorism. You know, so these events are out there, you know, constantly. And you just need to be wary that they're aware. But just don't let it ruin your investment portfolio, because I think people overestimate the impacts that they have on their portfolios. Typically, what I always tell people to do is think about the risk you're trying to or that you're worried about. So a good example is the China Taiwan development. And again, low probability. I don't think the Chinese government wants to create a huge amount of instability in their own population by invading Taiwan. We think of Taiwan as a singular event, but the most important thing for the Chinese Communist Party is civil stability. And you could ask yourself if they did today or tomorrow, attack Taiwan or eBay, Taiwan, what that would mean in terms of reaction from the Western world on, you know, banning, you know, imports, stealing their reserves and so and so forth. That would cause a huge amount of civil stability, instability in China, which is what the Chinese government does. Not what you've got to think about sort of the hierarchy of needs and civil stability in China is the hierarchy here. So I think that's quite important to kind of understand how these things play out. So how did you hedge yourself if that were to happen? And now we kind of think about, for example, the Hong Kong dollar. So the Hong Kong dollar is pegged to the US dollar and has been forever. If there was an invasion, the first thing that would come under attack is that Hong Kong dollar peg, if reserves are confiscated, cannot continue. And so you could see a huge drop in the Hong Kong dollar and Hong Kong dollar. Hedging, for example, today is very, very cheap because it's always been, you know, pegged. And that peg has never broken over the last 40 or 50 years. So, so you got to kind of think, be smart about hedging yourselves and not ruin your portfolio by, for example, not owning any Chinese stocks or something like that because that's also not a great idea.

Felicity: [00:30:50] What was also really interesting is your points around not looking at the macro too much, kind of like cutting down the noise and actually looking at the individual companies because that's what we're trying to do at the moment. So with the US earnings season still underway, I guess, what are your key takeaways so far? Are there any stocks which stood out to you either in a positive or negative light? We know that there are some big names still to come out like Cisco, Home Depot, Walt Disney and Nvidia. Do you have any thoughts on these stocks as earnings seasons comes to a close in the US?

Moz: [00:31:24] Sure. I think probably the big takeaway from this earnings season is how poor the outlook. So some of the big growth and tech companies has been. So now Apple again sort of put up a bit of a warning on overall iPhone sales just yesterday. So and the same thing, the outlooks of Amazon and Google better have all been relatively poor. And I think that what they're kind of telling us is that the sort of big growth spurt they've had over the last two or three years is now firmly drawn to an end. They're all cutting costs. They're all laying low, laying off people. And, you know, that expansionary phase of win over the last two or three years is starting to hurt them. So I think they're going to be looking to consolidate and then rather, the focus will remain. New growth. They're now starting to focus on earnings growth. That means cutting costs, stopping the spending on some of these sort of crazy projects that they had that quite frankly, we all knew would never, ever make any money. So I think that a bit of discipline is coming in. So these companies are going to consolidate. But the good news is these companies are really good at producing earnings. If they just cut some of their excess spending away and the valuations have come down quite substantially. So, no, they're probably not huge buys right now. They're more sort of consolidated positions. Those earnings will come through over the next couple of quarters and they will probably end up revisiting them, you know, towards the second half of 2023 that the companies are really focussed on right now are around the consumer. So consumer discretionary in general is down quite violently over the last 12 to 18 months because this fear of a recession is being quite, quite, quite severe as high interest rates and so and so forth and higher commodity prices have kind of eaten away at consumer savings that they had and consumer spending. That's the fear. But what I think the market is missing is that the consumer is still relatively healthy. They've still got cumulative later savings, and more importantly, they're still in jobs. And even with a mild recession next year, we're not going to see unemployment rates going up very much. So we think the valuation anomalies are really in those types of companies. All right. Give me an example. Not us. Homebuilding stocks are trading at very low single digit p e multiples. And when I look at those companies the down quite a lot but you know there's a big structural shortage of homes in the U.S. and actually most countries. You think their long term fundamentals are actually pretty much intact. And they will still continue to build homes because there is a need for the shortages in most of those larger countries. So some of those areas are really undervalued relative to those expectations. And you can see why they've done so badly, because people are thinking about 7% mortgage rates in the United States. Oh, that must be really bad. But that is all priced in. So we look at defensive stocks versus consumer cyclical stocks. And on our measures, you know, they're looking as cheap as they've done in the last 30 years. So they're looking particularly attractive to us. 

Candice: [00:35:18] Yeah, and I agree with that statement because if you look at certain parts, if we just look at the U.S. economy, you've already had the massive sell off and the bottom, so to speak, as it has happened. Right. And then the recovery. Whereas the mega tech and the fangs of the world, like you said, are only now kind of feeling the pinch. But what stands out would be mirror slash Facebook. They don't seem to be putting their foot off the gas when it comes to reducing costs. Right. So that's a good kind of segway if we can go there with you, Miles, just to kind of wrap up this really great episode with you. What do you think's in store looking ahead for 2023? Like if we tackle the big end of town like the mega tech and those consumer discretionary tech names, you know, those those mammoth companies and, you know, more potential defensive names that you do like, you know, we haven't talked about health care, but that's a good place to hide out in volatile markets. So just generally, you know, give us your flavour of 2023 for the equity markets. 

Moz: [00:36:22] The key thing is, is that we are in the short term thinking about the next couple of months going to be reasonably good for for equities, particularly if the Fed starts to hint that they are indeed starting to think about peak interest rates and starting to slow the ascent. That'll give the market a bit of an excuse to rally out. That could last possibly into January. Then I think we go back into consolidation phase because then the fear is, oh, earnings are going to start to come down because the economy is going to be weaker. And so health care will continue to be pretty strong. We're also starting to see biotech is doing quite well. And you saw Johnson Johnson's purchase of Abiomed is a really good example of how cheap biotech has got. The large farm is starting to take them out. In this case, nearly 50% premium. So valuations in biotech do look really attractive. And so the. Health care complex continues to look like a winner, certainly for the next 3 to 6 months. And then we'll start to get your pencils ready for those consumer discretionary stocks. And really look for those companies that are down 50, 60% from their peaks that are sensitive to interest rates starting to fall and the economy staying, you know, reasonably reasonably strong rather than a deep recession. We don't believe in a deep recession. So if not for the next couple of years. So. So, yeah, get your pencils ready. And shopping for finding some really good consumer discretionary names that you can start to add to in, in, in Q1. So that will be my sort of, you know, kind of sector playbook and tech, really. We've got, you know, the one stat that I'll leave you with which I think is quite interesting is Apple's market cap is equivalent to all of the Russell 2000. You kind of think that even if there was a bit of rebalancing in investor portfolios from those mega caps further down the market cap scale that, you know, we'll probably see this continued outperformance we've seen over the last couple of months in the small and medium sized companies because they're a lot more agile and put particularly history tells us that we're much more agile at fighting higher inflation rates as well. So, so. So I think that that will be really interesting and in the end think more globally. You know the world is not just the U.S. in thinking about Japan, you know the U.K. think about Europe. Great companies, luxury companies in Europe are performing really well. You know, the LVMH is the Hermes, the Ferraris, you know, and if China reopens, guess what? They love their luxury items. 

Felicity: [00:39:15] What are your thoughts on the semiconductor industry? Because that's been spoken about a lot at the moment, as well as your thoughts on, I guess, credit. Obviously, after everything that happened in the bond market in the U.K., you know, what are your thoughts on government bonds, private credit, etc.? 

Moz: [00:39:31] Sure. Right. So let me start with the fixed income side. So we recently upgraded our outlook on investment grade credit because yields are actually very high, in fact, the highest they've been since 2005, 2006 in some cases, obviously excluding the global financial crisis, of course. But the yields are actually very high. An investment grade yield, something like 6% at the moment in US dollars, which is very attractive. I mean, you know, we haven't had that sunny weather over the last decade. And the spread, i.e. the extra credit you need to get over government bonds, is also in the top 25% of the historical range of the last 20 years. So we're being adequately compensated for taking on investment grade credit. So that's where we've been leaning in over the last few weeks. We upgraded and we'll continue to lean in over the next few weeks and next few months. So we think that's quite an interesting opportunity in terms of high yield we think is a little bit too early because if the economies around the world do indeed slow next year with the way to those rate increases, you know, there is a chance that default rates will continue to start to pick up, although nothing like what we've seen over the last decade. That means that there's more uncertainty around the high yield and the spreads are not in the top 25% of the historical range. So probably less interested in private credit and high yield. Right now, we get more interested in that probably in the new year. So that's on the fixed income side. And, you know, some of the sort of other areas we're kind of discussing in consumer discretionary international equities that continues to be, you know, our kind of favoured areas more strategically over the next 5 to 10 years as we have maybe a little bit more of a level playing field. 

Felicity: [00:41:26] Great. So you have a fixed income. I mean, so basically investment grade at the moment, that's what you're looking at rather than high yield. And did you have a little comment on the semiconductor industry? Because Candice and I are very interested in that sector and it's all the talk at the moment because they've really been sold off horrifically. 

Moz: [00:41:44] So I'm a bit of a semiconductor long term fan and we've made for our clients huge amounts of money over the years in semiconductors. So we tended to be a lot more bearish last year, partly because we're worried about the overall ordering by companies. And I think that has happened. And then you talked about in video a little bit earlier and NVIDIA suffered due to the crypto bust because a lot of their cards were used by crypto miners. And that is all, as we know, kind of washed out. But in video, for example, it just came out with the latest kind of gaming card and it just looks absolutely awesome. But they warned last quarter and I suspect they might warn again. But after this earnings season, you know, I'll start to warm up on the whole semiconductor area because they washed out. Inventories are very, very low levels. Again, the down 50, 60, 70% from there from their peaks. So valuations are now much, much more reasonable. And then we'll start to go back to a normal cycle in 2023 and 2024. They'll start to bottom out over the next couple of months. So yeah, I mean, you know, it's starting to look interesting again. So there will be a net buyer now then being a seller over the last 12 to 18 months as we were. 

Felicity: [00:43:20] That's good to know. I mean, there's essentially everything and everything that we do. So it does make a lot of sense. Now, Candice has one last question for you. I know we said that last question about three questions ago, but, you know, we're really trying to make the most of our time with you. So Candice, what's this question?

Candice: [00:43:38] Hardest one you'll hear all day. What is your preference? Coffee, tea or tequila? 

Moz: [00:43:44] Oh, gosh. Right now is definitely coffee. 

Felicity: [00:43:49] Right off the jet lag. 

Candice: [00:43:50] All right. Here's another tough one. Is the coffee better so far in Australia or the UK, would you say?

Felicity: [00:43:55] Yes. 

Moz: [00:43:57] Oh, well, that's a pretty tough one. I mean, there's lots of these specialist coffee shops opening up in the UK.

Candice: [00:44:06] Are they run by Aussies?

Moz: [00:44:08] Of course. 

Felicity: [00:44:11] Always the case.

Moz: [00:44:12] How funny. Absolutely. Yeah, I've had some pretty good coffees. I've been well treated here since I've been here. So I've had some really good coffee. So. Yeah. Go legit to Melbourne so far. 

Felicity: [00:44:25] Sounds awesome. Well, thank you so much for chatting with us today. It's been extremely insightful and we hope you enjoy the rest of your trip in Australia. 

Moz: [00:44:34] Thank you.

Felicity: [00:44:36] What a fantastic episode. Candice. Honestly, we managed to get so much information for our listeners and it was just really insightful to see what next year is going to bring and I guess his thoughts on the various economies. Yeah, a. 

Candice: [00:44:49] Lot to unpack with that episode. I'm personally going to really listen to it a couple of times because there were so many good little insights and I guess the sharpen your pencil moment really is massive for 2023 because he is right, it has been a really uncertain time, super volatile. The playbook is completely different for 2022. So let's wash away this year and hopefully we see a recovery for 2023.

Felicity: [00:45:15] That's it. I think it's global. Right, global opportunities that don't just look at Australia and don't just look at the US. I think that was a really important point. 

Candice: [00:45:23] Yeah, he's obviously bullish on the UK. Now before we sign off guys, please remember although Philistine I Financial Advisors at Shoring Partners, please note our discussion today with Maus does not constitute personal financial advice because we don't and neither does he know your personal circumstances. So as always, if anything in these conversations sparked your interest, reach out to us, but don't take it as personal financial advice. And it's all based on the facts. Known for a recording which is the 8th November 2022. 

Felicity: [00:45:54] That's it. And make sure you follow us on the app Talk Money to Me podcast for daily market updates. And if you enjoyed this podcast, please give us a five star review on Apple Podcasts or Spotify. Now remember you can always ask us various questions as well at tmtm@equitymates.com and we're super excited that Candice and I have actually cracked over a thousand followers on Instagram. I know it's not that many and our fake account did have a little bit more than us. However, we're pretty excited about it. We're not the best Instagram market. We'll be back next week. Until next time.

Candice: [00:46:28] Enjoy your coffee.