Martin Crabb comes back to review his predictions from 2022!

Candice: [00:00:12] Hello and welcome to Talk Money To Me. I'm Candice Bourke. 

Felicity: [00:00:15] And I'm Felicity Thomas. Now, Talk Money To Me is a podcast where we draw on our extensive expertise and experience to help educate you on all aspects of your financial landscape. Now, today, we have a very special guest back again to discuss his predictions for 2023 and reflect on the year that we've had. 

Candice: [00:00:32] That's right, Felicity. So we were super excited to get back in the hot seat. Martin Crabb As last time we sat down to have a chat with him about all things in the markets, he gave us and our listeners so many great nuggets and predictions which have all mostly come true throughout 2022. So he's our very first guest to come back into the hot seat for the second time. And we were thinking, hey, this is such a fun episode and hopefully getting a lot of value out of it. Why don't we make this a yearly event in which we pick Martin's brains ahead of the New Year for investors? 

Felicity: [00:01:04] That's it. Next year we can even ask the listeners to ask some questions. Now, if you haven't actually listened to the first episode, it's episode 19 with Martin Crabb as the CEO. So we suggest you go back and listen to it before this episode. What we've had, I mean, some people have called it the worst year in financial markets in a long time. However, if you actually look at Martin's flagship managed account, the Australian Equities Large-Cap Core, which is your ASX 100, it's actually returned over this last year, 9.74%, yeah. 

Candice: [00:01:36] Pause for a fact Martin. Well done. We are virtually clapping you here on the podcast because as a portfolio manager you have killed it in a very tough market. If you're looking for a fantastic core Australian equities allocation, as Felicity said, to add to your portfolio. As always, guys, we love to hear from you, so please reach out to us in our team, which is the email address CFT group at Shaw and Partners with an S at the end of a plural icon that are you that will be also listed in our show notes for you to reach out to us so we can have a discussion about your portfolio. As always, guys, as a reminder, our chat today is not considered personal advice, even though we are registered financial advisors at Shaw and Partners and Martin is the CIO also running a couple of portfolios here at Shaw. As always, the podcast is General in Nature, and before you make any of your investment decisions, you should seek your own professional, appropriate advice. Now, with. 

Felicity: [00:02:31] That, welcome, Martin. It's so good to have you back on the show. 

Martin: [00:02:34] It's great to be back. Yeah, I can't believe it's a year. 

Felicity: [00:02:37] I know what a year it's been, honestly. 

Martin: [00:02:39] Yeah, it's the worst year ever. So one of the presentations I do, I've got the comic book guy from The Simpsons. He always says the worst thing ever, worst superhero ever, and he says the worst year ever. So the equity market and the bond market are both down 20% this year. That's never happened before, Felicity, ever. 

Felicity: [00:02:55] That's insane. And it just had to happen in 2022 after we've had COVID for two years and the market's already being so volatile. 

Martin: [00:03:04] Yeah, bushfires, floods, COVID and the worst investment market of all time. Fantastic. What more could you want? 

Candice: [00:03:09] At the end of 2021? You mentioned valuations were looking stretched and you were talking about if you had profits in the portfolio, let's take some risk off the table. Was your advice at the time to go more defensive adverse vacation where you can and think about adding inflation hedges to help protect the portfolio. So you were right. Hence why we wanted to get you back on the show. Let's take a quick listen. 

Martin: [00:03:34] Share prices are elevated, so that probably does set up a bit of a tougher 20, 22 or or probably a lower return 2022 than we saw in 2021. So we need to shift to a more not not sort of defensive, but a more cautious stance. So saying we've done really well, let's take some profits, let's diversify the portfolio. If we've got some gaps in our portfolio, let's make sure we've got those covered. And I think we need to start thinking a little bit more defensively within our equity portfolio. So I think about things that do well when inflation's starting to pick up well, companies that are well positioned for higher prices, that's kind of how we need to think about things. 

Candice: [00:04:11] So you nailed it on the head there, as you've also just outlined, you know, terrible year for equities and and the credit market down 20% or so. So it's the worst year on record. So I guess looking back on the entire year as a whole, do you think we've now bottomed or is there more downside to come? 

Martin: [00:04:28] Yeah, it's really, really difficult to do those things. You know, on a 12 month basis. We, as you know, manage portfolios on a very dynamic basis. So we've often looked at, you know, 12 months and say what's going to be like. So these are always really challenging for someone like a CEO like me. But I think the preconditions for getting, I suppose, constructive or bullish on share markets and equity markets, are not quite there yet for me. I think the parameters that we're looking for, you know. Global growth will stop slowing. So global growth is still slowing and we think that has implications for the earnings that underpin companies. So, you know, basically just think of a company as a profit number multiplied by some multiple of that profit. So as those profits are falling, the share prices tend to follow. So we see that probably bottoming out sometime in 2023, not kind of sure when specifically, but at some time, maybe towards the middle of the year, maybe towards the second half of the year, we see probably growth starting to bottom out as as we realise that central banks have done enough monetary tightening or interest rate hikes to slow down inflation. So I think I think we've probably got a couple of choppy quarters Candice where we are seeing company profits under pressure and we're starting to see some layoffs that's already happening in the tech sector and that maybe that broadens out and we'll get some really good buying opportunities in the in the first couple of quarters of next year. That's kind of how I feel at the moment. 

Candice: [00:05:57] Okay. And layoffs and also hiring freezes. Right. So we've definitely felt that in the last sort of three or four months as we close out this year. So essentially, you're agreeing with Earl Evans, one of our co-CEOs, who pretty much wrapped up this year as it was a bumpy ride and keep your eyes open and very cautious as we head into 2023. And it sounds like sort of, you know, the latter half of next year is when you're going to get more excited. 

Martin: [00:06:22] Yeah, look, as I said, cash is really difficult to put your inner, you know, put your finger on the dates. But I think it's just kind of looking at a scenario and how a scenario unfolds. There's obviously a lot of wildcards in there, you know, geopolitical issues being the main amongst them with who knows what's going to happen with Ukraine, whether that escalates or escalates, whether, you know, China's COVID policy continues. And, you know, if they don't reopen, then that's a big risk to global growth as they continue locking down their citizens and trying to control COVID. So there's quite a lot of moving parts. And then you've got you know, you've always got elections and political issues like the U.K. that she's been in have been a basket case, for example, very difficult to predict things like that happening in markets. But yeah, so the narrative really is right. At some point the central banks will have done enough damage, for want of a better term, interest rates to cause a slowdown. The slowdown will happen next year. And as we know, markets tend to bottom before economies do because it's a forward looking indicator. The share market is trying to predict sort of 12 to 18 months out. So we should see a better, you know, better condition starting in the second half of next year, I think. 

Felicity: [00:07:32] Let's hope so. Now, I know no one has a crystal ball. However modern, some could say yours is potentially better than some, especially listening to last year's episode. So some of the key themes that you actually predicted for 2022 to consider for everyone's portfolio was energy. You also talked about inflationary hedges such as transportation and infrastructure, noting that a clear bridge fund actually has done very well, nine and a half percent for the year. You spoke about pricing power businesses and in particular, you did like large cap luxury brands like LVMH, which has only pulled back, you know, about 2.15% year to date. Then you mentioned US banks like Morgan Stanley. And then the final one was Gold, which was actually very interesting because year to date it's off about 8% now. We know that it's rallied over about 15% in the last month. So could you tell us a little bit more why you think gold has pushed higher in the last month and how it hasn't kind of really been the inflationary hedge that everyone is so used to? 

Martin: [00:08:35] Yeah, gold's really interesting. I think of two lenses to look at. One is the airbag lens. So most listeners would be familiar with, you know, airbags in cars. And if you get into a nasty situation, you have a crash, the air bags all in flight, and they protect you. And gold's like that for your portfolio. So if there's a really nasty shock to your portfolio, I think of the GFC or the COVID, you know, gold does really, really well. So it's kind of worth having it in the portfolio just as an air bag. The second one is, as you mentioned, Felicity is the inflationary hedge. So if you think of the cost of digging gold out of the ground, it's just going to keep going up over time because wages go up and fuel costs go up and equipment higher costs and all that sort of stuff. And even looking for it goes up in value. So that's why it goes in an inflationary hedge because it's a real asset and then flights over time. But there are times to want it and times not to the real time to want it was 2020 and 2021 when we were coming out of COVID and clearly there was a lot of inflationary pressures building up because of the lockdowns. So a rapid recovery in demand and very constrained supply, you're going to get inflation. So gold moved ahead of that as the I suppose adult the reality dawned on people that we were going to have inflation. Gold had done its job and it's been sort of in a little bit of a downtrend since then. So it's sort of going forward is probably not as important to have it in your portfolio and it's. Why missionary hedge? Because we think that inflationary expectations may have peaked and in fact, inflation may have peaked. In the last couple of months, we've seen a bit of a slowdown in some of the inflationary pressures in the US and is still going to be there, but it may not be rising. So I think sort of having gold as a tactical inflation hedge probably not needed as much as it was a year ago. So I think maybe that role has faded. But having said that, gold equities are in what we call the naughty corner, right? So if you look at stocks that are trading at their 52 week low and they're trading at a very low valuation relative to book value of fair value. They're all in the naughty corner. So you want to own mining stocks that sit in the naughty corner. And we've been doing that quite successfully actually for a number of years. You find the stocks that no one loves that sort that that no one loves that are sitting in that bottom corner and gold sort of in there. So there's a bit of a trade in gold equities, but I think gold itself, I'm not super bullish on the outlook to be honest.

Felicity: [00:10:58] And so gold equities like Northern Stars obviously rally quite a bit and Newcrest Mining is doing quite well. Should investors potentially be taking some profits off the table or do you think we have a little bit more of a run into 2023?

Martin: [00:11:10] You know, that comes down to positioning, I think. I mean, if you think of gold equities as maybe 2% of the market, so if you're a typical Aussie investor, you might have a 2% widening in the gold sector. And you mentioned a couple of names there, evolution's another one that we've been though we've been involved in. So yeah, if you've got a two or 3% weighting and that's got up to five or six because some of these stocks have done incredibly well, I think evolution's up, you know, almost 50% from its lows. So that two or three is now four or five tigers back to two or three. That makes a bit of sense. 

Candice: [00:11:43] Yeah, definitely being prudent in this volatile market for sure. And I guess what is causing a lot of the volatility and uncertainty, like you've said, is the inflation figure. So although we have the official US inflation number to come out I think next week, right. It is looking like the average figure that the US will end on is about seven and a half per cent if you kind of average out the whole year. So you mentioned last time we sat down to put you in the hot seat that the February figure of 2022 you thought was going to come in around 75%. Let's take a listen. 

Martin: [00:12:14] The official headline US inflation is 6.8% and we know just from looking at history that we'll probably get seven and a half percent inflation in February next year because the three months roll off that we're really low inflation and high inflation is going to roll. So we're going to have seven and a half percent headline inflation in America and zero interest rate. So that's kind of very abnormal historically. 

Candice: [00:12:38] So. MARTIN This is what I want to ask you. We're just around the corner from the US Federal Reserve release date the 13th of December. So what's the latest data and dot plot, you know, showing in terms of the US rates for 2023? What are we in for? 

Martin: [00:12:54] Yeah, look, the big fear that everyone has is that inflation moves from being in the goods part of the economy to the services part of the economy. So we've had goods price inflation. So we all go to the petrol station, fill up our car. So we see that goods inflation there. But it hasn't, it hasn't really flowed into services and that's the wages part. So that's what everyone's freaking out about. If you go back to the 1970s, the OPEC oil crisis and the Yom Kippur War and all that sort of stuff, it caused this massive spike in fuel prices and then it flowed into the services side of the economy via wages and rents and these other sticky things. That's the fear now, because the labour markets are really, really tight. So what a lot of people are looking at, me included, is not the level of inflation that's become the primary issue, it's the composition of inflation. So things like rents and anyone who rents a house or no rents, I'll ever go out. And wages tend to go up, not down unless you're in our industry when they're all over the place. But in most people, in most people's experience, wages go up and rents stop and never come down. So that's sticky inflation and that's the goods price inflation. We're all having to struggle with the higher electricity bills, the higher fuel costs, etc. We need a wage rise to pay for it and then it gets into the system. So the number on the 13th of December, I think it is in the US, it might actually be a little bit lower. The last couple of months have come down a bit from the peak in June. So it does look like this goods price inflation is coming out of the system. You know, there's lots of things you could look at in real time to look at, you know, inflationary pressures, things like freight rates and so forth. They're all coming down. But the concern is wages because the labour market is so tight and it's really tight here, you can't get workers. There's help wanted signs everywhere because the labour market is really, really tight. That wage pressure is what we're looking at. So we see signs that services inflation, which is basically wages and service price inflation, and that's starting to pick up. That's where we start to get worried because that means the Federal Reserve and the RBA will have to have. My rights, and I'll have to leave them there for longer. 

Candice: [00:15:01] Yeah. So can I ask you a follow up question on that? Because I feel like in the market there's this dislodgement of what actually is going on in terms of all the policy making to really cool off the economy and then the feelings and the sentiment that investors are consuming, having spending their dollars, the groceries, filling up the pump and then looking at the stock portfolio. So let me ask you this question. You know, if if if the number is, you know, kind of a bit softer on the 13th of December, do you think that's going to be a breath of fresh air and we might kind of run into the end of Christmas as these, you know, Santa rally, like, are we euphorically still kind of spending going into Christmas? But the reality is, like you said, it's a very different situation. So have we disconnect there? 

Martin: [00:15:44] Yeah, it feels a little bit like we have because I mean, it's also difficult to read the sentiment of consumers because, you know, we live in a little bit of a bubble here. We're in a global city. Tourists are coming back to Sydney. Restaurants are all packed and so it kind of feels great. And the spending data that's coming through, whether it's the Visa, MasterCard data or the ANZ card data, there's lots of data we get on a weekly basis that show us spending habits and everyone's, everyone's spending money. But you look into next year and kind of go, well, you know, inflation's running at seven or 8%. We've got, you know, petrol prices have gone through the roof. We know school fees will go up. They always do. We've got insurance costs. They all always go up. And then we've got this mortgage interest rate probably tripling from where it was a year or two ago. That's going to eat into consumption in a big way. It's going to take somewhere between a ten and 15% bite out of household budgets and a lot of not all households, but a lot of households are going to have this big chunk taken out of that budget next year. So where's the spending that comes from? I think the answer lies somewhere in the fact that there was over $250 billion of excess household savings that built up from, you know, from 2020 all the way through to today, because there was so much money being pumped into the system. A lot of people were getting assistance with a job keeper programme, but there was nothing to spend your money on. You know, the typical Aussie might travel overseas once every couple of years and spend ten or 15 grand on a holiday. That money went into the bank. And so because you couldn't spend on money, on travel and experiences and theatre and restaurants and stuff, the money's just built up. I think we're chewing into that and it's a global phenomenon not just here. The number in the US is probably two or $3 trillion, right? So that everyone's eating into their savings that they've built up. They're enjoying themselves for the first time in ages and travelling again. If you can get on a plane, that is, and I think once we chew through that money, Qantas, I think that's when you'll start to see the reality of the fact that everyone is a little bit pessimistic on the outlook, but they're enjoying themselves while they've still got the savings. And then I think that's probably what next year will look a little bit tough. 

Felicity: [00:17:54] That's right. That makes a lot of sense because you did say in our last episode we had a lot of dry powder. So it seems like that could potentially be drying up, but not until after we've had our summer. Comparing the Fed to Australia, what do you think the future is for the RBA cash rates? Because we kind of have pivoted a little bit from the US, obviously not increasing rates as high and as aggressively. So what are your thoughts for next year? 

Martin: [00:18:18] Yeah, well we're recording this just before the RBA decision on Tuesday. So we're going to get a 25 basis point hike this afternoon. Most likely there is no RBA meeting in January, so the next RBI meeting is in February and obviously they'll have a bit more data to look at. We'll see how the Christmas trading period went because that's really, really important for the Australian economy and we might get another 25 basis points in February. That's kind of where most economists think the RBA is going to stop. And the reason for that is that the delay between when you increase, right? So when you change rates and when it starts to impact people and I think it's about a 6 to 9 months lag, but there's no there's no true answer. It's kind of a little bit like touchy feely. I mean, my analogy, Felicity, is when I was young, a young analyst, I went up to the Pilbara in Western Australia and we went out to Dampier where they load the iron ore carriers and these big boats are massive and I put hundreds of hundreds of thousands of tonnes of iron ore in them and then send them off to China or Japan and they take about 25 kilometres to stop. So if you're driving that, that boat, you know, you can't wait till you see land. You've got to go, right? We're about 25 kilometres away. I'm going to hit the brakes and hopefully get it right and just smoothly come into port because if it's too late, you're going to destroy the thing and if it's too early, you're going to stop it. And that's the start of again. So I think driving the Australian economy with interest rates a little bit like that, so they don't actually know where land is. They think it's out there somewhere, they don't know what level they need to get right, they don't know how long they need to leave them there and they don't know how much damage they're doing. So they kind of think they want to pause because unlike the US, most of us have floating rate mortgages. So as soon as the Reserve Bank puts rates up, you know, the next week or the next day, the bank puts its rates up and the next month your, your, your mortgage payment goes up. The US is on fixed rate mortgages. They got 30 year fixed rate mortgages. So they almost don't care if you have 30 years to write in. It doesn't really matter what happens to the cash rate. Whereas in Australia with IE we've got $2 trillion of housing debt, but a lot of it's rolling off from fixed to floating. So we're becoming more rate sensitive and the Reserve Bank knows this, particularly as we get into next year. The amount of debt that's rolling from fixed to floating is increasing at about 5% a month. So it's going to be more of an issue for next year. So I think everyone thinks the RBA is going to pause and just say what happens to rates and I'm probably in that camp as well. Whereas the US, I think they're just going to keep going. We've already got 4% rates in the US, they're 2.85 here. I think that gap is going to continue to widen. 

Felicity: [00:21:03] Yeah, there's definitely been a few conversations around the floor about rates pausing. Look, I know I'm quite happy with half my mortgages at 2% and that doesn't come off till 2024. Luckily, however, the other half is variable and I keep getting those letters in the mail every month. You've increased. You have increased, you've increased. And it's quite depressing. 

Martin: [00:21:23] Yeah, I took out a mortgage to do a renovation and fortunately lock that in for 2024 as well. So I don't want to think about what it looks like in 2024 for the I'll just I'll just put that to the to the to the side for the moment. 

Candice: [00:21:36] So using your freight boat analogy, I just love that I want to do a bit of a game with you, if that's okay. MARTIN So looking at the outlook for global interest rates globally, how quickly or not so quick central banks to react to inflation? Let's ask you this question. How do you think most major developing economies fare in that game of driving without seeing, you know, land about in 2022 to call off the economy and maybe escape a recession or have a shallow recession in 2023. So we've kind of started with the US and Australia by giving it a score out of ten that they killed it and obviously one being a horrible job and it's inevitable they're going in recession straight away. What do you think of the US efforts so far? 

Martin: [00:22:24] Yeah, it's really difficult to put a score on that because I think they do want to cause a recession. They can't come out and say that, but they need to create what they call slack in the labour market, which is code for millions of people losing their job. Right. So that's what they want to do because historically the only way to slow down inflation when they've got a tight labour market is to is to loosen the labour market. So that means that means putting people out of work. So, you know, by by doing that, a lot of people will say that as a policy failure. And how can you deliberately put millions of people out of work? What are you doing is supposed to have maximum employment, but I think that's the only way they know that they can get inflation down. So at the moment, the jury's out a little bit. On whether the Fed's been successful. With that, I think I'd give a very low score to the UK. That's just been an absolute disaster. The the Bank of England's whites, the whites are negative and then they have a government that comes out and tries to do a stimulus package at a time when they're trying to rein in inflation, and then and than 24 hours later reverse that. And that's just been a disaster. So I get the UK gets a one from both the central bank and the and the government and for and for Brexit in the first place, which is incredibly stupid thing to do. And I realise that now Australia is probably doing okay. You know, I think, I think we may avoid a recession, maybe not due to, to, to the RBA but probably due to the the Federal Government has have realised that the labour shortage is the biggest issue. Yes, they're trying to tinker with gas prices and coal prices and stuff, but I think they understand that the, the tight labour markets, the biggest issues are they've ramped up immigration. So they've they've lifted the cap to 200,000. They're probably lifted again above that. So all of a sudden we're getting all these workers, which is exactly what we need to do. So I think Australia maybe not the RBA, the RBA has done okay, they've been gradual and they haven't sort of tried to whack up rates too fast like the US as and you know, even though Governor Lowe did apologise to the Australian people for setting expectations on interest rates so low that people took out mortgages they now can't afford, he did apologise for that. But I think the way that they're handling the economy and the interest rates and the path of interest rates, you know, they're probably not as good as the Fed in terms of their messaging, but they're okay at the moment. So big thumbs down for that for the UK, probably a four or five for Australia, probably the five. The interesting ones. Japan. So Japan's done nothing to win. So I just left them. Of it. Zero. The long term bond rate's kind of zero. So they said we're not going to, we're not really we don't really care about inflation. They look at wage inflation in Japan and wages aren't moving. So they're just not fussed about it at all. So. I mean, their currency is going to hell in a handbasket because you can get decent interest rates on every other currency in the world except the yen. So no one wants it in the end. So the ends depreciated massively. But there's no signs of wage inflation in Japan, so they just don't care. So they're interesting. I wouldn't give them a lock at ten, but, you know, at least they're at least sticking to their guns and giving them credit for that. 

Candice: [00:25:33] And finally Martin, I just would love to hear your thoughts on China. 

Martin: [00:25:37] Yeah, well, China's obviously the most interesting country in terms of the markets in the economy in Asia. So, I mean, obviously, the third war. So there's three wars going on. There's the Ukraine Russia conflict. There's the central banks fighting inflation. That's another war. And the third war is China against the Taliban. And I think, you know, we're talking a very Western spin on this and go, well, you just need to get all this needs to go away. Population tripled and your health care system will take care of the rest. Well, that's a massive challenge in China. Firstly, the population is massive. It's, you know, over a billion people. Secondly, the health care infrastructure is not like a Western country. Maybe it is in the cities and along the seaboard. Shanghai, Beijing, Shenzhen and places like that do look a little bit like European cities in terms of their infrastructure. But once you get into the hinterland, it's third world stuff. In China, it's like it's like sub-Saharan Africa. So they don't have the health infrastructure and they've got an older, probably unhealthier population. There's a lot of smokers and a lot of respiratory issues with that. So I think China can't step away from Zero-Covid. Even though we look at them and go, Well, everyone else is opened up, why don't you? I think the health issues are quite specific and quite acute. They're also got a vaccine that doesn't seem to be as effective. The sort of X in most epidemiologists say, look, it's not as good as the hammer and I stuff. All the viral vector stuff is coming out of, you know, coming out of the western world. You should be using a different vaccine. So they've got a number of idiosyncratic industries around the health response, and that's going to make it difficult for them to open up. They will at some point because they'll get through it like China always does. It might just take them longer, but without China, you know, kicking into global growth, it does look pretty tricky next year. So we don't have China coming back online, even if the rest of the Western world starts to start to stop slowing. The global outlook doesn't look as good without China in it for sure. 

Felicity: [00:27:37] Now in a moment, we're going to be hearing more of Moderna's thoughts on the travel sector for 2023. Does he still like it as a reopening trade or not? And we're going to be hearing his best ASX top 100 ideas for the new year. So stay tuned. You don't want to miss these investable ideas. You're going to hear straight after this break. All right, Martin, last time we had you in the hot seat and you quite rightly predicted the low hanging fruit of the reopening trade, mainly travel to benefit now in 2022, as consumers were keen to spend their savings built up from the pandemic. You did mention Qantas. Now that's actually rallied more than 20% this year. So that was an absolutely fantastic call. Now do you think there is much more to go in the travel trade? And is there potentially any other easy, low hanging fruit heading into 2023 for us?

Martin: [00:28:26] Yeah, I wish there were lots of low hanging, easy, low hanging fruit with the economy like that. I come along very often to do that. But travel's an interesting one because, I mean, the way I think about portfolios is that I like to have exposure to themes. So one of the themes you want to have exposure to is, things get better than you think and maybe you want to have exposure to things being worse than you think. So you call it hedging, hedging your portfolio to some respect. So I think Qantas stands out amongst the ASX 100 as the I suppose the cleanest reopening stock. I mean there's not those other stocks outside the 100 they can look at, but with which tends to well I tend to focus on the ASX 100. So I think Qantas still got some legs, but travel is not you know, travel is not a one stop shop. It's like this. There's business travel which I think will probably never return to where it was. It's a bit like, you know, people working in offices. I don't think we'll go back to the same level of people working in, say, days that we had pre-COVID. I think the world has changed forever and I think business travel has changed forever. Just because it's so much it's so expensive to do right now. It's like $15,000 business class return to the so the to the UK and a friend of mine was quoted $30,000 to fly to the US business class, which is just crazy, right. So and, and obviously there's the whole Zoom phenomenon. We can, we can communicate in a relatively, relatively fluidly via, via video conferencing insightful. So I don't think business travel is ever going to go back to what I was. So then you got, you know, commuter traffic and and and travel and travel and tourism and so forth. So will they ever return to where they were? I think people would like to. But again, the airlines are really managing their yield. So it's a really bad time to be a customer of an airline. A few ladies have travelled more recently, but I just did a sort of, you know, well, modern crab's world tour of Australia and the amount of times I got bumped off flights and the flights were overbooked and everyone tried to carry on. So there was no storage and it's just a just and everything's delayed and it's just a disaster. I feel sorry for the staff. So you want to on Qantas is an emotional hedge against being a customer because it's such a horrible experience being a customer, but at least the shares are going up so you don't feel as bad, right. So, I think, I think Qantas is still getting upgrades because they're expected to make $1,000,000,000 for the year and they came out saying we're going to make one and a half billion in six months and then I upgraded that again. So I think Qantas is making out like bandits and there's probably more upside in the earnings definitely. And the share price should fall. I think the easy money, if there's such a thing, has probably been made in Qantas, but I think it's got a few more legs to go. But I'd be wary of the corporate travel space. There's a few stocks that are leveraged to that. I'll just be a little bit cautious about them. 

Felicity: [00:31:21] Okay. Now, aside from travel, do you think there could potentially be some other low hanging fruit heading into 2023? I mean, what kind of things are you looking at? 

Martin: [00:31:30] Yeah, the one that was probably the standout. One is one is around the path of interest rates, particularly longer term interest rates and what that means for the valuation of what we call long duration stocks. So I think, you know, tech, healthcare, these sorts of sectors, they've been absolutely. Pollocks this year, some due to the fact that their earnings aren't as strong as we thought they were, but some just due to this pay compression. So people were paying 50 or 60 times earnings for really good quality growth. Stocks a year ago are now paying 20 or 30 times earnings. So companies are still the same, still making the same money. They are just the share prices. So there's a couple of, I suppose, issues around where we think longer term interest rates go. If the central banks complete their tightening process in the first half to the middle of next year, which is where we're thinking a lot of people in the market are thinking then the longer term bond yields should start coming down. We have a very inverted yield curve, which means cash rates are above long term bond rates. That's not normal. Normally you need a higher interest rate to invest longer term. So higher and longer term interest rates are higher than cash at the moment. It's round the other way. So we think those longer term interest rates will start to fall as cash rates peak out and that'll mean stocks that are long duration. So I think quality growth stocks, technology, healthcare, they'll do really well. So I think that's it. That's where you want to hunt, feel for your low hanging fruit. And the other area really is the soft landing scenario. Or is the recession already priced in? So there's a group of stocks. And, you know, I'll give you some names. James Hardie's one right side. James Hardie is a fibre cement producer. They're global, they've got Australian roots, but a lot of their earnings are in the US and Europe and they're the market leader in fibre cement manufacture there. Most houses in America are clad by vinyl, not fibre cement. So fibre cements a bit of cladding, but it's also much more energy intensive than using brick, for example. So if you think about a brick house, how much energy goes into making those bricks versus using something like fibre cement, it's much more energy efficient. So it's kind of it . Even though cement also uses a lot of energy, it's a green ply, if you like. The sun is cheap like that. Stock's down 60% this year because the US housing market collapsed. Interest rates have gone up to over 7%. No one can afford to build a new house. So housing starts have collapsed and it's taken James Hardie and every other US building stock down with it. So at some point we think the economy bottoms out, interest rates peak out and the market will anticipate a recovery in earnings in James Hardie. You can't see it at the moment or you can say is it going down? But at some point that'll bottom out and start going up again and the share market will probably move ahead of that. So it's really difficult to time that because we're talking about something we bought today. We'll leave it for you. It might go down 20% and then go up, right? So I'm not saying put all your money to James Hardie today. It's more about that's the stuff that's been absolutely beaten up. It's down 60% this year. It could easily go back in the other direction at some point. So I think that it's a combination of it's a quality guys stock is trading at a very low pace on about 13 times. It normally trades on 2025, so it's halved its pay but also its earnings have halved as well. So you could get this this double whammy. So I think that if there is low hanging fruit and the never is, there always is in hindsight. But I think those stocks have been beaten up over their pay, but also have some sort of cyclical pick up. So that's certainly one stock I look at now. 

Felicity: [00:34:59] We can look at high quality growth. Tech and healthcare might come back into favour and potentially look at James Hardie. But do the dollar cost averaging strategy that Candice and I always talk about on the podcast? 

Candice: [00:35:10] But caveat here, low hanging fruit comes with also the falling catching knife. So it's really hard to slice and dice that fruit salad talking about, you know, trying to catch a falling knife. And one thing that I've kept my eye on throughout 2022 is the volatility in the foreign exchange market. You know, you mentioned the yen earlier. And one thing that us Aussies, if we do have a lot of savings at the moment is we're looking at travel, so we're looking at the conversion rate. You also predicted that it was going to be a really tough time of volatile year for the Aussie dollar. Let's take a quick listen. 

Martin: [00:35:43] In the medium to longer term, I think sort of $0.70 up to $0.75 is kind of what seems like the correct trading range for it at the moment. But it is a little bit of a cork in the ocean of the Aussie dollar. So when everyone's buoyant and positive about world growth, everyone buys commodities and Aussie dollars and so at rallies and then when everyone's a little bit concerned about, you know, slowdown and world growth or there's another variant outbreak, all those concerns about lockdown, everyone sells the Aussie dollar. So from a trading perspective, it's a very tricky thing to try to do. 

Candice: [00:36:13] So. Martin, as we kind of round out the year, you know, that is pretty much the range that we look like. Again, who really knows anything can happen at a whim here. But, you know, you kind of nailed it, right? So it has been stuck in. It did see two spouts of really intense volatility throughout the year. What's your, I guess, thoughts on our Aussie dollar going into next year? 

Martin: [00:36:36] Yeah, I'm in the bottom end of my range, which is probably a bit high. I think it traded down to sort of 62, $0.63 at one stage. So maybe I should have set my bar. It's a bit wider. Look at it again, it's really difficult to predict this and there's quite a lot of moving parts with the dollar. The one that's really influenced that this year has been the interest rate differentials. So the difference between what you can get and the US dollar bank account, what you can get with an Aussie dollar bank account. So that's now positive, you know, one and a half percent which typically, you know, Aussie banks have to offer better interest rates than US banks to attract money. So it's normally around the other way. So it's a little bit abnormal and because of US interest rates, which are much higher than everywhere else in the world, like 4% higher than Japan, for example, the US dollar has just gone up against everything. So it's been the one, you know, positive asset class that everyone's been on board with in the past four months has been the US dollar. That started to change now because all of the central banks are catching up to the Fed. The Fed is starting to talk about maybe tapering the increased rate increase. So they've been going up by 0.75% every time we've been going up by 0.25. So every right decision is 50 points higher for the US dollar. So that's been happening around the world. That is now looking a lot maybe. Making out. So we're probably saying 5% US cash rate scammers in Australia will get up to three in a bit and the UK will go up and the EU will go up etc. And so those interest rate differentials are stops and narrow and that'll take some pressure off the US dollar going up all the time. And so we're derivatives of that. So everyone looks at the US Aussie as a stock, we're a second or third derivative. It's what the US dollars doing more broadly that's important then in Australia what's the outlook for. Right. See I, you know maybe they stop at low trees and then we've got the economy and commodity prices, iron ore, coal. So they've been really, really strong iron ore and coal, iron ore in particular has had a really strong run of lights and coal prices are probably three or four times their long term historical average. And then we've got the whole agriculture thing. The Ibis crop report this morning upgraded the crop again, massive amounts of money coming to the farming sector. So all the stuff we sell is doing really, really well in global markets and a guy that's positive for the currency. So you've got this, you know, there's different forces that are at work and it's difficult to see how they play out next year. So that's why most people say, look, roundabouts here are sort of high sixties, low seventies feels like the right level. It's not too hot, not too cold. But we're a cork in an ocean and as you know, we will go up and down a lot on the back of sentiment around the US dollar and also what's happening in China. Look, if China looks like it's coming out of its lockdown, then you can imagine the Aussie dollar and other commodity sensitive currencies like the New Zealand dollar, the South African rand, the the Norwegian krone, all those commodity based currencies will catch a bit, but that's difficult to to say that playing out. So I think in terms of travel, look, the currency is not going to really impact the outcome. That's where you stay. It's what you fly and it's what you see when you. 

Candice: [00:39:48] Sit on the plane. 

Martin: [00:39:49] That's the deterrent factor of the costs. A couple of cents on the currency is not going to really matter. Either way, I think I totally agree. 

Candice: [00:39:57] What is really at the forefront of my mind as we close out this year is we saw, as you've said, that the US did a great job of being really aggressive at hiking throughout the year. Right. And in a response to safe haven was the US dollar. So the flip side, if rates fall aggressively, if and when that happens, maybe it's next year towards Christmas or whenever. 24. Do you think the dollar will follow? 

Martin: [00:40:20] Yeah, I think so. So, I mean, interest rate differentials are only one part of the puzzle. You know, there's obviously times in history where that's the real driver like at the moment, but there's other times in history the Aussie dollar just follows the iron ore price. It's almost like one for one. So, you know, I'm not sure why the market focuses on one and sometimes and one on and other times. I couldn't tell you, even though I've been studying, I remember doing a paper at university about currency a long, long time ago. So I've been looking at this issue for a long, long time. I still haven't quite worked it out. But I think, yeah, the interest rate differential will be one of the key drivers of the currency going forward. 

Felicity: [00:40:56] Now, before we hear your top picks from last year, we kind of just want to set the scene about what you're potentially expecting in next Australian corporate earnings season in February. March. Do you actually think that we're potentially in for more earnings downgrades overall for Australian listed companies? 

Martin: [00:41:14] Yeah, I think the short answer to that, Felicity, is yes, not because I think the economy's disastrous or anything like that. I just think expectations are way too high. Analysts still have companies growing their profits globally by 6 to 7% next year, and most macro commentators suggest the world is going to be in recession next year, which means, you know, low to negative growth for most companies. Some companies will have significantly negative growth. So there's a big mismatch between what macro people like May who are looking at the big picture are talking about company earnings and what analysts are saying they're doing the bottom up stuff for coming with so that that gap is quite significant at the moment. And, you know, look, the economists could all be wrong and the stock analysts could be right. And maybe next year is going to be really, really good and everyone's going to guide their profits by 10%. I suggest that's probably around the other way. So I think expectations are too high and I think a lot of companies will disappoint because they'll come out with not so much the number but the outlook statement. You know, we've all been in markets long enough to know about. It's not it's not necessarily the number that reports on the day. It's more about the outlook and the current trading conditions because that's the stuff we can't see. The company can see it, but we can't see it. So that gives us an insight into how this started, how the first six weeks of the financial year are going or the new year are going. And what they're saying in terms of their order book and that's kind of where I think the reality of a really tough consumer market next year is going to dawn. some stocks are pricing in as we talked about but a lot of companies haven't. So now Woolworths is on 25 times earnings. It makes no sense. We're going. A big slowdown in consumer spending. Why are people paying 25 times for a retailer? Makes no sense. So I think there'll be some opportunities next year to maybe look at those companies. But I think the next earnings is going to be a pretty rough one. 

Felicity: [00:43:10] That's it. So I guess that's the first quarter, right? So build up your cash on the side at the moment coming into the end of the year and kind of take profits in this little bear market rally while you can. 

Martin: [00:43:21] You know, the bears have nice shares, right? So you don't succeed as an investor by staying out of the market. Right. And that's a real, real, really important lesson to know. If you invested in the share market over long periods of time, you make about 9% a year, right? So every year out of the market, the odds of you, you lose 9%. So you. 

Felicity: [00:43:40] Take time. 

Martin: [00:43:41] Be invested. And if you're going to be out of the market, not be out of the market for too long and have this problem that a lot of investors have it if you've sold it for a dollar and you sat on the sidelines and it's gone up to a dollar $10.20, you wait for it to come back to a dollar again. It's not going to come back to a dollar again. It's going to keep going. And you know, I always felt that I saw Whitehaven at $2, now it's ten and all that sort of stuff. It is better off having a broadly diversified portfolio, mostly in the markets. And then in listening to, you know, your advice is there's times to lean out and times to lean in and now's the time to lean out, take some cash. And as we said, there'll be some really good opportunities next year. 

Felicity: [00:44:20] That's right. We always stay invested, but we do take profits when they arise and have a little bit of dry powder so that we can actually take advantage of these dips. Right. And minor corrections that we might have early next year. 

Candice: [00:44:32] Now, if our listeners did listen to your stock pitches last year, Martin, when we end the episode, they'd be up and hopefully they've taken profits along the way. So just to recap, you pitched in the ASX top 100, the following three names within NRG. You went with Santos over Woodside. If you had to pick one Santos one E performance is about 13.88%. Let's round up to 14. We like round numbers, but Woodside one year is nearly 70% upside in, so not sure if you're kicking yourself there with that one. 

Felicity: [00:45:07] Well, Candice, he actually did say that he had Santos and Woodside in the portfolio, so he actually had both. He just preferred Santos over. 

Candice: [00:45:14] Woodside, correct. Correct. But anyways, both killer energy trades that one. And then transport. You went with Transurban, which was also pitched just recently at the Sloan Hearts mine conference. That's up pretty much flat for the year. But you have obviously collected a dividend payment throughout the year because it is an income stock and Brambles also up about 16% for the year. So all in the green, well done. I guess my question for you is, do you still have that preference in the energy sector or has it changed throughout the year? 

Martin: [00:45:45] Yeah, good question. So not a bad performance. I think if you average size out, you probably did what, ten, 12% or something when the market's down two and there's another publication called Livewire. And they did a stop digging thing at the start of last year or the end of last year sorry. And the average stock was down 20%. So we've done, we've done pretty well. Let's, let's see if we can do that next year. But to your question on energy, I mean obviously energy was the poison and the cure is the phrase we're using this year is, is the poison because it causes a lot of inflation and therefore central banks have to put up rates, therefore cause a recession. So when you get a spike in oil prices, it's usually followed by a recession. And this current environment looks exactly like that. So we wanted to own oil just in case it kept going up and kept going up and kept going up and doing more and more damage to the future of your portfolio. So it was the poison, so you had to have an allocation. Things have changed a little bit. As you know, the situation in Russia and Ukraine is becoming complicated. The Russians can now sell oil under a cap. You know, they're coming back on stream. Global growth is slowing, which is impacting demand for oil. You know, OPEC is mucking around with production cuts, which is a bit odd. So there's a lot of moving parts with oil. I still think it has a place in the portfolio, but probably not as compelling as it was 12 months ago. It made a lot of sense to have energy. There is still a risk that energy goes nuts again, i.e. we get, you know, an escalation of conflict in the Ukraine and energy markets become unstable or, you know, the Europeans run through their gas supplies a lot faster than people think because it's cold winter. And, you know, we've got shortages again and the oil price and the gas price can spark again. So all of those things can still happen. So it still makes sense to have a healthy weight. You know, we're thinking somewhere between five and 10% of your portfolio in the energy sector. And a guy will probably go back to those two names, but probably not as compelling as it was a year ago. 

Candice: [00:47:51] Yeah, and I agree with you 100% and we talk a lot. About assuring partners the rise of new energy as well. So have you got any names that you're liking in that thematic? 

Martin: [00:48:01] We're probably into my second stock pick, but we really like the RV story electrical vehicle. There's a little bit of speculation currently that Tesla's cutting back production in China because demand is not strong, but they've come out and denied that overnight. But, you know, as 4800 electric vehicles were sold last month in Australia, it's a small number and it's going to escalate. It's going to go to 100,000, right? At some point in the future, it will all be a value. So we're going from 5000 a month to 100,000 a month in Australia, right? So multiply that around the world. They're going to be hundreds of millions or tens of millions sorry, of EVs produced every year. And we just don't have the materials for that. So we're going to have to find the materials for that. We're going to have to innovate, are going to have to have better, you know, better fuel systems, better batteries, etc.. But they're all going to use stuff that's in Australia, whether it's nickel, cobalt, copper, lithium, graphite, rare earths. They need lots and lots and lots of that stuff. So once again, Australia is the lucky country. Yeah, I was away for a while as wool for a while was iron ore for a while and now it's battery raw material. So we've got a lot of them in our market. There's, there's six stocks in the ASX 100, there's two in rare earths being Luca and Linus and then there's four in lithium and other and nickel and so forth. So you've got independent scope, which is lithium and nickel, you got Pilbara, which is lithium, you've got all chem which is lithium, you got mineral resources which is iron ore, some services and lithium as well. So Pilbara is the one we own in our portfolio and that's another stock look. It's already up 65% this year. In fact if you pick the low in the high of the year it's probably 100%. So this is not for the faint hearted. But I just think over time the lithium price has to stay high to encourage new production to come on stream. And it's not like gold. We just take it out of the ground and process it. These mines take a decade to get up to steam. It's really, really complicated metallurgy. So it's not that easy just to find it and stick it on a boat and to get it. It's a battery grade. It's got to be a specific kind of lithium product. So I think that space Australia's really well placed. You can buy an explorer and that's really where you can make a lot of money. But for our clients, ASX 100 found a producer that owns 100% of the mine and does its own marketing and that's what Pilbara is. So it's already up 65% this year. It's been one of the best performers in the ASX. But I think it's a stock I want to own and you know, not knowing a start and end point for when the lithium cycle plays out. I want to own Pilbara. So Payless is the ticker that's the stock for the new energy economy. 

Felicity: [00:50:45] Okay. Amazing. So Payless is one of your stock picks for 2023 now Min's had an absolute cracker lately, you know, it was over $90 and it has also been absolutely smashing the market. So what are your other two ideas or themes for 2023? 

Martin: [00:51:03] Yeah, one is James Hardie. So I think the theme is that it's a soft landing and or the recession is already priced in. So there are, you know, building materials stocks that are really, really cyclical apart from maybe mining stocks that are probably the most cyclical part of the market. And as we know, interest rates impact housing probably faster than everything else. Right. As you were saying earlier, Felicity, get your statement from the bank and all of a sudden the interest rates gone up. It's pretty it's a pretty blunt instrument and it tends to hit housing. So James Hardie is considered a US housing stock as it's the biggest housing market that it's exposed to. It's also authorised you're Australia, UK, Europe, etc. but it's considered US housing. So you look at US housing and it's collapsing. It's absolutely collapsing. Right now. New home starts are falling. Lots of home builders are struggling. So it's like, why am I why am I investing in this? Because the share price has already reflected a lot of that. The earnings have come down along with why the share price has come down a long way. At some point that's going to level out and pick up. And I don't know when the right time is, but James Hardie is the one. So we've got James Hardie Pilbara. The third one is Domino's. So again, thinking back to this long duration, long duration asset, Domino's has a significant fast, you know, fast, quick service restaurant and it's building up its franchises. It's acquired the one sort of the German franchise it didn't own and it's adding other franchises around the world. So it's part of a global system, the Domino's system, and it's a very successful operator now. It's been smashed this year. Two things, really. One is food price inflation. So just think of the price of cheese, the cost of cheese in the supermarket. So Domino's, one of the biggest uses of cheese in Australia, so it's been smashed on a lot of the raw ingredients. Now they've tried to keep their prices. Pretty stable because it is obviously a value proposition. The other thing is just drivers getting people to get the pizza from the store to your house, which they are guaranteed to do in 30 minutes. So that's part of the price promise. That's been really hard for them to do just because drivers. But that's starting to loosen up. I think there's one rod company that shut down in Australia. 15,000.

Felicity: [00:53:16] Yeah, delivery. 

Martin: [00:53:17] Delivery or delivery shut down. So it's a whole bunch of people driving for Deliveroo who can now drive Domino's and others. So I think those two issues go from being headwinds to being tailwinds next year. But the most important thing really is just the valuation. As I said, the stock's down 60% this year, their profits are down 60, they're nothing like that. And I think there has been some headwinds in terms of their earnings which we should see recover next year. But more importantly is that rising? It's a quality global growth business. They execute really, really well, with a good management team. So I think that stock you want to own an exchange. 

Felicity: [00:53:50] Pays a dividend and we all love a good pizza don't we. 

Candice: [00:53:55] We use it to see it. Well that was fantastic. All right to summarise Pilbara place James Hardie the ticker for that one J Ajax and Domino's, one of our favourite stocks here. And talk to me DMP now to finish off the awesome chat with you today. Martin We already have asked you the famous question that we do, which is to kick off your day here. So we're going to throw another one at you if you were to pick any ASX company for you to be and why as in the business profile that best suits your personality, what company would that be? 

Martin: [00:54:31] So on the stock. The stock, this. 

Felicity: [00:54:33] Yeah, you're the stock. You're the company. 

Martin: [00:54:35] It embodies me, I'd have to say Treasury Wine Estates, because I'm like a bottle of wine. I just get better as I get older. 

Felicity: [00:54:46] So lately, that was a fantastic answer. Well, thank you so much, Martin, for coming on the show. That was such a great episode and we really look forward to getting you back on next year. 

Martin: [00:54:57] And it's been a pleasure to.