Making sense of investment markets in a changing world

In the first event of our seminar series, we co-hosted an intimate conversation with Don Braid, Group Managing Director at Mainfreight, and David Poppenbeek, Chief Investment Officer at K2 Asset Management in conjunction with Tompkins Wake.

Investment markets have been volatile this year as global growth slows, investor sentiment becomes increasingly negative and concerns range from inflation to rate hikes, commodity prices and geo-political risks, particularly how the war in Ukraine will play out. Against this backdrop, many asset classes have delivered negative returns in 2022 and even cash has lost real value with increasing inflation. With interest rates and inflation likely to remain at these levels throughout 2022, we thought it was a great time to hear from David, a seasoned investment professional with over 30 years of equity market experience and Don, who is the MD of Mainfreight to get a front-line perspective on supply chain issues and current and future outlook for global trade.

The Q and A hosted by our CEO, Donna Nicolof, was wide-ranging including the following:

The JP Morgan Chase CEO, Jamie Dimon, recently said to ‘brace yourself’ for what he called an ‘economic hurricane caused by the Fed and Ukraine war.’ What he’s referring to is quantitative tightening to remove liquidity and impact on commodities from the war. Shortly after, JPM’s chief economist argued that there is no real reason to be worried about a recession, that growth will continue, although at a slower pace, the global economy will do OK in the second half, with the US slowing and the rest of the world doing better. If these guys can’t agree, what’s everyone else to think? How much worse do you think it can get?’

No-one could have predicted this time last year, what we’ve seen play out this first half and the multiple impacts creating volatility in markets. Given what we know now, how do you see the next 12 months playing out?’

In summary, the key points were:

  • There are three relevant themes for investment markets today; inflation expectations, how central banks respond, and the ultimate consequences of their actions.
  • Inflation has been the result of a number of factors – some forecastable and others less so.
    • Inflationary drivers such as Covid and the subsequent lockdowns, and supply bottlenecks were the initial factors that gave inflation its pulse and were near impossible to forecast.
    • The increasing cost of food and oil were inflation factors more prone to a shock given their significant underinvestment over the last decade. Supply has ultimately come under significant strain since the war in Ukraine and lockdowns in China.
    • A number of developed countries have increased minimum wages, which has added to inflationary pressures.
  • One of two important questions investors should be thinking about is what actions central banks ultimately take next.
    • David covered three distinct periods of inflation and monetary policy over the last 60 years that may help investors frame the next steps for central banks – the great inflation between 1966-1982, the great moderation between 1982-2001, and the great intervention since 2001.
    • Today, central banks are a lot more visible than they were 20-30 years ago, with their views being well communicated, giving investors one less thing to worry about. It’s possible that central banks continue to intervene and keep target cash rates at half of the inflation rate.
  • The second important question investors should consider is the consequence of central banks response to inflation. This is either going to be in the form of a hard or soft landing. With equity markets down around 20% in less than six months, there is a clear feeling in the market for a hard landing.
  • At this point in the cycle, it pays to be contrarian, as fear is widespread and share markets are driven by emotion.
  • Freight volumes are still high, with freight prices increasing given demand and businesses adopting a just-in-case approach to stock rather than just-in-time.
  • The supply chain crunch is likely to continue for some time to come. With the costs of doing business increasing, this is often passed through to consumers, adding to inflationary pressures and the increased costs being borne by all.
  • Times like this however, also create opportunities, particularly for long-term investors. In the short-term, share market valuations can be heavily influenced by emotion. In the long-term, earnings drive share prices so investing in good businesses that can sustainably grow earnings over time still makes sense. As Warren Buffet once said, ‘The stock market is a device for transferring money from the impatient to the patient’.
  • K2 look for companies that have pricing power and have the ability to benefit from supply bottlenecks rather than suffer from it. Companies that win over the long-term are those that stay true to their values, that find solutions for their customers, provide opportunities for their staff, offer rewards for their shareholders and benefit the community. Companies demonstrating these qualities are hard to find but deeply sought after.
  • Companies that have a strong culture will continue to win market share and deliver outsized returns. Mainfreight have been a great example of this with their focus on being a 100 year company with a strong culture of local accountability and their ability to export and grow this within new markets.
  • Central Banks globally may be getting closer to the end of the tightening cycle than what the forward curve is suggesting, particularly given consumer sentiment is weak and business leader confidence is starting to fade.

With many of the key economic and market issues likely to persist for some time yet creating ongoing volatility, it has become more important than ever for investors to review their portfolio and ensure they are appropriately diversified and positioned for the future. If you would like any further information or would like to speak with one of our advisers to review your portfolio, please do get in touch with us.

Speaker Bios:

Don Braid has over 40 years’ experience in the freight industry, including 26 with Mainfreight. Don has led the Mainfreight team through a significant period of change and expansion to become the successful global supply chain logistics provider it is today, with businesses operating throughout New Zealand, Australia, Europe, Asia and the United States.

David Poppenbeek is the Chief Investment Officer for Australian fund manager K2 Asset Management. David dedicates his time managing an allocation of K2’s Australian and Global equity strategies. David has been with K2 for 18 years and has 30 years of equity market experience. David previously held senior roles at Macquarie Group, Bankers Trust Australia Ltd and Daiwa Securities Ltd. David holds a Bachelor of Applied Science (Mathematics) from RMIT.

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