Key points
- If you can successfully visualise (forecast) the interest rate, currency, commodity and GDP growth points of 18 months from today, then you give yourself every chance of being a successful investor.
- This short-covering bounce in the A$/US$ cross, on what is unbelievable Chinese GDP data, is just another chance to get more cash into US dollars and British pounds, the only two currencies in the world that will see interest rate rises this year.
- ASX listed industrial US dollar earning stocks have positive consensus earnings revisions pending.
It has been a very volatile period with global and local markets reacting to every “Twitter headline” on Greece or China. In fact, on Tuesday in America, Twitter shares themselves spiked 10% on a fake takeover rumour from, you guessed it, a tweet!
Pricing the present…
This simply reinforces my view that markets price the present. In fact I can never remember a period (outside of the GFC) where markets were reacting so violently to headlines.
With advances in telecommunications and the fact 60% of all daily turnover is high frequency trading (HFT), it should be no surprise to any of us that this is now the case.
In my opinion we all need to adjust our investing styles to accommodate for these “pricing the present” markets. I don’t think it’s possible to beat the “machines” and the now very level playing field in instant information.
My approach is to take advantage of the present by focusing 18 months out. I’ve written this before but I believe the sweet spot in investing is 18 months forward. If you can successfully visualise (forecast) the interest rate, currency, commodity and GDP growth points of 18 months from today, and also how the “herd” will react to those settings, then you give yourself every chance of being a successful investor.
It’s much easier said than done as the short-term noise can easily distract you from the main game. It’s almost too easy to be put off by the short-term noise and start questioning your medium-term investment strategy.
You also have to be able to tolerate markets moving against you in the short-term, which again, is easier said than done.
…but investing for the future
In reality most currency, commodity, interest rate and equity market trends are long cycles. Sure, they can have short-term volatility, but the trends tend to be longer and deeper than anyone ever forecasts.
The biggest change I have noticed in my move from stockbroker to fund manager is I now have far more time on my side to research and think about ideas. Broking needs action on a daily basis, that’s the nature of the industry, while in funds management you need to get more right than wrong over the medium-term.
I’m really enjoying the change as you realise you don’t need to do anything to portfolios on a daily basis. In fact, when you do act, it is adding to a position you have for the medium term when the market is giving you another short-term risk adjusted chance.
A classic example of this earlier this week was the kneejerk bounce in the Australian dollar. As you know I think the Australian dollar/US dollar is in structural decline and my medium-term price target is 65 US cents. The long-term chart below confirms the decade long uptrend is clearly broken and there is clear technical air below.
[1]Of course that doesn’t mean the A$/US$ can’t have short-term trading bounces. That happened yesterday due to the combination of weaker than expected US retail sales and stronger than expected Chinese GDP data for the second quarter. The A$/US$ cross gained about 1.00% on that combination on trader short-covering.
Clearly Beijing wasn’t going to print a bad GDP number after the massive correction in Chinese equities, and unsurprisingly the number came in at “7%” versus the consensus view of “6.8%”. It remains beyond belief that Beijing can collate GDP data from 1.2 billion people just 15 days after the end of the quarter!
Honestly, all Chinese data is utterly incredible. They wouldn’t be cutting rates up there if the economy truly was growing at “7%”, neither would steel prices be at 20-year lows and commodity prices collapsing.
Take advantage of volatility
The way I see it, this short-covering bounce in the A$/US$ cross, on what is unbelievable Chinese GDP data, is just another chance to get more cash into US dollars and British pounds, the only two currencies in the world that will see interest rate rises this year.
Currencies are broadly about interest rate differentials. When the A$/US$ was 106 US cents, the interest rate differential was 4.50%. Today the interest rate differential is 2.00% and the A$/US$ is 75 US cents.
When I look out 18 months, I see that USA/Australia or Fed/Reserve Bank (RBA) cash rate differential being 1.00%. That could either be our cash rates holding at 2.00% and US cash rates rising to 1.00%, or our cash rate falling to 1.50% and the US cash rate rising to 0.50%. Either way, I can see no scenario where Australian cash rates rise, and under both scenarios the A$/US$ will have a 6 in front of it. To me it’s just a matter of when.
It may well be faster than anyone currently expects. I remain of the view that the Federal Reserve will start raising cash rates this year. That was again reaffirmed by Fed Chair Janet Yellen last night.
While current consensus is for December “lift off”, I wouldn’t rule out September. I note that Fed “insider” Jon Hilsenrath of the Wall St Journal also seems to feel September is still the Fed’s target.
I also wouldn’t rule out the RBA cutting cash rates in August. It could actually be the “double-whammy” which nobody currently forecasts. Note well the Bank of Canada cut rates by 25 basis points to 0.50% last night. The Canadian economy is quite similar to Australia and they have cash rates 1.5% below ours.
Betting on the currency
Unfortunately for Australia and the Australian dollar, the outlook for our key commodities looks over-supplied for the next few years minimum. It’s hard to see what changes that scenario unless the commodity producers themselves curtail production. At this moment in time that seems unlikely.
As a nation we simply need the currency to adjust to drive growth. It will adjust further and I am betting that we will all be surprised how quickly it happens in the second half of this year. Just look at the New Zealand Dollar, Canadian Dollar and Brazilian Real for guidance on what comes next for the Australian dollar.
On that basis I continue to use days of strength in the A$/US$ to sell Australian dollars and switch to US dollars and GB pounds. I also believe that ASX listed industrial US dollar earning stocks have positive consensus earnings revisions pending. In a market broadly lacking EPS growth for FY16, any upgrade, even a currency driven one, is an upgrade.
The list of US dollar earners includes Westfield (WFD), Brambles (BXB), Macquarie (MQG), CSL, Amcor (AMC) in the ASX20 Leaders Index.
Australia for income, rest of world (ROW) for growth. That remains my strategy.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.