Blain’s Morning Porridge – December 12th 2023: An alternative outlook on Equities! Guest Post: Julian Wheeler.
“Before God, we are all equally wise, and equally foolish…”
Market predictions are hostages to fortune. Keeping an open mind and being adaptable is an alternative – but means missing the long-term benefits of conviction trades. This morning Bill and Julian demonstrate why markets exist: perspectives differ!
I did say there would be no porridge yesterday morning, but my great chum and equity markets expert Julian Wheeler offered to write something for me…
I am always delighted by Julian’s contributions, but I do consider the equity mindset to over-favour optimists who easily find six impossible things to believe before breakfast. Julian is a generally annoyingly happy stockpicker. I think he lacks the fundamental grumpiness that makes for a properly cynical market analyst. He can be frustratingly positive spotting upside and light! Bond players tend to be dour pessimists always anticipating the likelihood things will go badly wrong.
Julian is therefore a great foil to my overarching belief: In Bonds there is Truth. I’m giving him the “Spurtle” this morning:
New Year – what to gamble on: Julian Wheeler, Equity Markets; Shard Capital
The approach of a new calendar year is a time for thinking about your “New Year’s Resolutions” in terms of how to generate returns. Here in the City of London, the ‘done thing’ is to put your head on the block and make some suggestions, credible or otherwise, about what might make a good punt investment for the year ahead.
This is a selection from my maybe/maybe not list of possibilities for 2024. Whether they are ‘good value bets’ or ‘100-1 no-hopers’ is up to you to decide and weight accordingly.
1. There will be no US Recession and therefore no rate cuts by the Fed.
Last January, Bill kindly handed me the Morning Porridge “Spurtle”, an implement specifically designed by Scotsmen for precision porridge making. I decided to question his belief the world was headed into a downturn. My article was called “Recession? Says Who?
What Recession? Indeed. It turned out I was right, so I am going to stick to my guns and say it won’t happen again this year – as defined by consecutive quarters of negative GDP. Why? Because the US consumer still has a job, still has savings, mortgage rates have peaked and he is making tons of money in the stock market. Lower commodity prices will help the consumer, while productivity gains and cost savings from AI deployment will boost company capital investment and growth therefore the Fed will have nothing to do as ‘Goldilocks’ returns.
(Bill comment: Good grief… this is exactly the kind of basic cause and effect that we disagree on. No recession this year, but lacklustre growth is a downturn that equities have not acknowledged. The factors driving the likelihood of downturn next year will be persistently high interest rates and their lagging effect on savings, jobs, mortgages and stock-price unsustainability! We agree to disagree – that’s what makes a market!)
2. Confounding the sceptics and annoying the consensus Underweight, the S&P 500 once again outperforms other major market indices.
Considering the above points, US Bond markets will offer what they are supposed to do: boring but stable single digit returns, while the broader market moves higher climbing a wall of recession and political worries.
(Bill comment: Perversely I sort of agree. US stocks will outperform based on its resilience and size. Bond gains will stall as rates remain stubbornly high. The Political risk is high and will become a focus through the year.)
3. Copper collapses by at least 30%.
Contrary to popular opinion, EVs do not drive the greatest demand for copper. They are a nice add on (although even perma-bull Goldman is now saying the amount per car is set to decrease 10% over the next 5 years, while Musk said in future cars will use only ONE QUARTER of current use). No, construction is and has always been 40% of global demand and most of that for the last decade has been in China, where they have been building homes for no one.
I expect China growth to disappoint next year (whatever the ‘official’ figures might say), thus the greatest impact will be seen in copper, which will return to the price where it traded happily sideways in the few years pre-Covid, during a time when China recorded far higher growth rates. British Telecom alone could supply the UK’s annual requirement for about 15 years as they recycle their legacy network.
(Bill comment: See my comment on Kondratieff cycles yesterday: the whole globe needs to rejig electric grids to reflect the electrification revolution plus new AI, health and BioEngineering.. Copper isn’t just about construction…)
4. The boom in Private Equity comes to an end.
Just as the UK Government and financial institutions want to push PE into our pensions (who else is left to buy after all?) the reality will dawn that Public equity is much better value than Private. Stock markets in general have been revalued down over the last two years (on an equal weighted basis even the S&P is down 8%) while private valuations have not been subjected to the same level of price scrutiny or transparency. Faced with uncomfortable ‘Exit’ requirements to reach current assumed valuations, it could be easier for private funds to reverse their holdings into public peers leading to huge gains in small cap companies.
(Bill comment: PE has become less fashionable – money is no longer cheap to fund marginal investments based on levered returns. Private Credit is much more interesting.)
5. The FTSE 250 and S&P Midcap will be the best performing asset classes.
The cheap relative valuation of smaller companies in relation to their larger cousins has been well documented, but it will take a couple of takeovers from PE firms above, or someone like Warren Buffet announcing sizeable holdings in a range of companies, based in very undervalued Sterling to start a feeding frenzy into what are very illiquid stocks. They have been destroyed on the way down but will go back up just as fast.
(Bill comment: I favour investing in good companies that are cheap – big or small. Fundamentals..)
6. Amazon to split into 3 separate companies.
Partly to ‘head off at the pass’ the looming antitrust DOJ investigation, Amazon will take the pre-emptive move and break itself up. However, it would also allow the divisions to grow via acquisition once again. The Cloud infrastructure Web Services (AWS) pretty much operates separately anyway; that will now be joined by Amazon Prime which will house all the retail operations including Streaming and Advertising and finally Amazon Logistics, which will act as fulfilment for anyone and everyone in e-commerce now it is no longer a competitor. Instead, it would compete with UPS and Fedex, taking on its former colleagues as its biggest customer. The Banking Bonanza this will entail will have all of Wall St assuring us that 1+1+1 = at least 5.
(Bill comment: How to value that? Run for the hills on all three?)
7. BT to be the best performing stock in the FTSE. (Disclosure: Julian holds this stock PA.)
A combination of favourable Ofcom recommendations on growth pricing opportunities, higher interest rates stymieing wannabe competitors previously financed by cheap capital, plus being the biggest beneficiaries of the recent budget allowing capex to be set against tax means that BT will have its best year in ages. I see at least a 50% return in 2024.
8. Neither Biden nor Trump to be the next President.
While Trump may indeed get the Republican nomination (hopefully not, go Nikki), the reality of his proposed policies on immigration and tariffs this time around are simply so horrendous that no one will allow it to happen. But no, this is not a prediction for the Independent Robert Kennedy. To achieve a defeat of Trump, Biden will have to be persuaded to step aside, very sadly on ‘Doctor’s Orders’, leaving the field to Gretchen Whitmer who will win. Never heard of her? I believe you will have done by the Spring, although the Governor of Michigan is not yet even officially declared, so the odds are good! In private polling, it suggests that she can beat Trump and that is what counts.
(Bill comment: The most positive thing markets might hear in 2024 is that neither Trump non Biden is standing..)
9. Vladimir Putin dies.
Don’t assume it needs to be sinister – he might not fall out a window – but he is said to have cancer. Let’s say it claims him late in 2024, leading to a general view of optimism (rightly or wrongly) that whoever comes next is not willing to tie themselves forever to the war in Ukraine, nor the slow growth boat that is China. With scenarios 8 and 9 coming to pass, the markets have a bumper Santa Rally next year, leading the S&P to finish the year at 5400.
(Bill comment: Nope. In a power vacuum Russia will go deeper down the hole, subborned by something worse than Putin. The best we get is a united Nato vs Russian in a new cold war. More likely is a fractured NATO as the US withdraws and some Europeans hook back into their addiction to Russian energy. Ukraine starts to lose badly.)
Whatever happens.. 2024 will be interesting…
Julian Wheeler, with asides from Bill Blain..
And finally… (From Bill)
If you look on the Morning Porridge Website, you might spot an article: An Open Letter to Hampshire Country Council: Rejecting the Proposed Hamble Urban Quarry as Unsustainable and Unneccessary.
This is an ongoing saga or corporate greed vs residents. The UK homebuilder Persimmon wants to dig a massive sand and gravel quarry in the centre of our village on what is currently open parkland. They have repeatedly been denied planning permission to build new homes because of infrastructure and conjestion, but have realised they can arbitrage the “strategic resource” rules to dig a quarry and then fill it to make it Brownfield land – which is easy to get planning for.
The quarry plan imposes massive Environmental, Health, Welfare and Economic risks upon the local community. Local businesses have warned it make their business unsustainable as increased congestion, run-off polution and poor air quality will destroy the thriving marine, aviation, optical, and tourism businesses in the village. It will wipe out the local ecosystem including rare plants, owls and skylarks. It is right next to three local schools – where expert say air quality will be below minimum standards. Extracting clean gravel and replacing it with landfill will create a massive flooding risk – which will be uninsurable for residents. Rather than the gravel acting as filtration, waste will leach into the river – killing marine life (including new oyster beds). In short it will be a disaster for over 22,000 people living around the Hamble River.
There is no need for a quarry. There is over a decade of gravel already in stock around Hampshire. Thousands of tonnes of exactly the same gravel is dredged from Southampton Water and the Solent every year – and with very cheap treatment would be suitable as construction aggregate.
Construction is one of the highest CO2 emissions polluting sectors. The worst emitters are quarries. Most of the construction industry is seeking ways to mitigate carbon emissions. In the last month I have seen two business proposals seeking finance for the treatment of construction waste to turn it into low emission materials including concrete. Within a few years most construction will be built out of reclaimed waste. The need for mined gravel will substantially diminish. Yet, Persimmon and its partner, CEMEX, intend to proceed with a massively polluting quarry which raises a host of risks despite the fact there will be zero demand for the commodity.
Despite the utter insanity of the project, Persimmon look likely to get away with it. It will create 20 years of absolute misery and impoverishment for the residents. It will destroy the environment and economy. But it will make Persimmon rich.
If your firm invests in Persimmon – please think carefully and vote them down.
Bill Blain
Market Strategist
