CFS Market Insights: April 2024

Welcome to CFS Market Insights. I'm Jonathan Armitage and I'm joined by Al Clark, the head of investment here at CFS. 

We want to start off by talking about what's been happening in the US. Economic data there has been very strong and that's also led to some very strong returns from U.S. securities. What's behind the strength in US equities?

You're right, US equities have performed very strongly, which is great because we've got quite a large allocation to global equities in our portfolios. US equities were really the only equity market that was doing well late last year and early this year. So, the lead was really taken by the US.

That's changed and now we're actually starting to see other equity markets that had lagged the US starting to do quite well. This growth is now spreading outside of not just the US but other countries. And we're starting to see a broader level of equity market performance, which is great. So, it's giving us an opportunity to move outside the US and to look elsewhere.

The returns from equities have been very good news for our investors. One of the things we've talked about historically has been a potential recession in the US. Now, given the stronger economic performance that seems to have been, pushed back a little bit. 

The question is whether or not we could still see a recession, this year or whether we're completely out of the woods?

Economist guaranteed us a recession. There was going to be a recession in 2022 that got pushed to 2023. Now it's being pushed to late 2024. The reality is that the window is closing for a recession. There are a few indicators we use internally to give us an idea of whether the probability of recession has increased.

Those indicators tend to have a sort of a window or a shelf life that's somewhere between 12 to 24 months. The yield curve is a good example. Once it inverts 12 to 18 months after the inversion of the yield curve, you get a recession. 

Well, that window is actually closed. And a lot of those indicators that we know are already closing. We're starting to see the chance of a recession in 2024 actually dwindling as a reality.

Markets seem to be discounting an awful lot of good news. It would be interesting to get your insights into Nvidia's extraordinary share price performance and whether or not that is sustainable.

Extraordinary share price performance, no doubt. But extraordinary growth as well. To put it in perspective, Nvidia's sales grew from $16 billion to $60 billion, which is quite large, from 2021 to 2023. They're expected to grow this year by another 50 billion. 

Now, to put that in context, 50 billion is the revenue that BHP delivers all over the world. So, they're expected to grow a BHP just this year. It's not just extraordinary share price performance, it's incredible growth. 

But a lot of that growth as you're intimating is in the price. A lot of US equity markets are actually quite optimistically priced. So, a lot of shares like Nvidia are expecting significant amounts of growth. And the share price already reflects that.

For us, the better opportunity with this broadening of growth are outside the US. So, we're looking at equities in emerging markets. We're looking at equities in small cap land. So those types of equities that have not really kept up with the US for a number of years now look particularly attractive.

And that's where we're looking to spend some of our capital. And I think that really feeds into one of the things that we think is very important here at CFS, which is proper diversification in our investment funds, both in terms of investment opportunities, but it also helps manage the risk within our diversified investment portfolios as well.

Thinking about that diversification theme, we've said in the past that we don't expect the next ten years to look like the last ten years from an investment perspective. What do you think that's going to mean for our portfolio?

I think one of the things that, and we've alluded to this already, is just looking for different ways or a wider variety of components that feed into investment portfolios. One of the things that we've added to the portfolios in recent times is private debt. That is looking at more lending to companies outside liquid markets or listed markets.

And then we think the return opportunity there is pretty significant yields are quite high, even if they've come back a little bit over the last sort of 4 to 6 months or so. But we think that that offers a really good opportunity for diversification and also a little bit of protection if you see weakness in economies, whether or not it's in the US or Europe or here in Australia.

We've talked a lot about some pretty positive things. Anything we look at that gives us pause for thought about the future direction of markets, given that, equities have had a very strong run in the last six months or so?

They have. It's hard as an investor not to get nervous when you've when you’ve seen markets do what they've just done the last six months. It's hard not to get nervous, albeit all the things we've talked about have shown how it's broadened out. It does feel like a less fractious environment. 

The bit that's making me most nervous, to be honest, is that the gold price has just recently broken out to significant new highs. What does that tell us? Why are these investors not going for defensive assets like treasuries or bonds? Why are they preferring gold? That is something that makes me nervous. 

We're watching what's going on and looking to see whether there's a need for us to get a little bit more protective, a little bit more defensive. Because something like the gold price breaking out should ring a few little alarm bells.

And I think that's happening at a time when the views of a lot of market participants about the risks from inflation and also the risk from recession seem to be receding. So, a lot of good news is being factored into particularly US markets, but some other parts of the capital structure as well.

Thanks for watching CFS Market Insights. See you next time.