Always Good, Sometimes Great, Never Terrible

• 28 March 2024
• Barry Mendel

We have recently returned from an investment research trip, where we attended over 60 meetings, spending quality time in Zug, Zürich, Geneva, London, New York and ending off at a conference in Miami. We wish to bring our information to clients quickly so that we can discuss it in more detail when we undertake our quarterly reviews in April and May. The purpose of this letter is to provide you with a summary and provide a basis for our thinking and planning.

At the outset we found the costs in cities we visited had risen by about 50% from what we experienced a year ago (after converting to AUD). Certainly, the Australian dollar at about $0.65 to the US dollar or about $0.50 to the Pound Sterling does not go a long way and the cost of goods and services is becoming prohibitive overseas for Australians. Inflation, while it has abated somewhat from its peak, is still persistently high and has been driven by the printing of money in the western world, by huge rises in energy costs, and the rapid rise of interest rates and inflation over the past 18 months.

The economies of most countries are in a mess and cash is being depreciated at an alarming rate. The major cloud overhanging all investors is commercial property globally. The office market in the USA is severely damaged and not coming back soon. The commercial property markets in London are under severe strain due to the high interest rates but the biggest problem is that there are no transactions of commercial property taking place at all. Buyers are nowhere to be seen due to the curtailment of bank lending and valuations are being marked down to reflect this. We have had these cycles before and property will recover but we are going to require some patience and capital to reduce debt and therefore the cost of debt. While residential property is also affected by the high interest rates and the increasing capitalisation rates, it is generally holding up far better than commercial property.

Generally, commercial property in Australia is holding up significantly better than that in Europe, UK and the USA. Nevertheless, in many cases, even in Australia valuations have been subdued of late. This scenario also brings opportunities and there will be many great opportunities to acquire properties at a substantial discount during the next year or two. We have seen this shake out before but this time Covid has had a major effect on people working in offices and the return to office generally is way below that of pre-Covid.

Other than the above, there are many interesting opportunities out there in so many investments that the opportunities to increase the value of your portfolios are abundant.

In summary, we generally advise the following depending on your portfolio and risk tolerance:

Remember, if you overthink it, you end up sitting on the sidelines and miss the opportunities.

1. Buy more international – we want to earn more foreign income and gains which will increase your purchasing power over the long term. We also use the platform of four international banks and would suggest that for clients who do not have such accounts, it is worth considering. For those clients who already have such accounts, we should consider further international investments.
2. Buy Quality and Conviction.
3. Invest further in Equities, more overweight in Global Equities.
4. Convert paper Gold into Physical Gold.
5. Diversify into other Private Assets.
6. Diversify investments into currencies that may strengthen.
7. Get rid of “toxic assets” and assets that are likely to underperform.
8. Swap equities within the same sector for others that may have more upside.
9. Consider tactical asset allocations.
10. Consider Assets that are unloved.
11. Be cautious but be invested.
12. Look to back/invest in Founder-owned businesses.

We are probably at the beginning of three major investment cycles which could be positive for portfolios, if managed correctly.

1st Cycle:

Normalisation of the business cycle after Covid and 2024 is the first year.

2nd Cycle:

Innovation cycle, which will be driven by AI (Artificial Intelligence) and big data. This should result in company earnings increasing significantly and will produce a once in a generation type cycle.

3rd Cycle:

Fiscal cycle. This will be driven by government spending, earnings and balance sheet management. Fiscal policy is the use of government spending and taxation to influence the economy. What
happens in the first and second cycle will affect the third cycle.

Of course there are risk factors in every scenario. One risk, for example is during the next 12 months about USD $8 trillion needs to be issued by the Fed and the question will be whether there is still demand for US Treasuries. In the meantime, the USD is still the world’s reserve currency, and the USA still has one of the strongest militaries. It is in dire need of strong leadership, especially from an economic perspective.

One of our meetings was with a world renown international economist who shared his views with us, which included:

1. Some assets going from “awful to less good”.
2. Central bank interest rates to come down by at least 1% by end of 2025.
3. AI to give productivity gains up to 20% – 25%
4. USA economy overheated and over stimulated.
5. No natural buyer of USA long-term Bonds.
6. Gold is now decoupled from the US dollar.
7. Weaker US dollar with a stronger gold price.
8. Invest in Defence Technology.
9. Hold assets in good jurisdictions.
10. China has problems – Property, Banking and Demographics.
11. Australian economy to slow.
12. Even though office buildings are having a rough time, they are still a very long way below replacement cost.
13. Energy assets and resources still good, providing good cash flow with cash being returned to shareholders.
14. UK Equity market is almost half the PE of the USA Equity market – discounts in the small caps not seen in 40 years.

We met with many fund managers and banks whilst in the USA. Some key points to note from our meetings were:

1. USA Powers on.
2. Still the largest and wealthiest economy in the world.
3. Has more arable land than any other country.
4. Largest producer of Oil & Natural Gas Liquids.
5. Represents half of all semi-conductor sales.
6. USA earnings have been doubling versus ROW (Rest of World).
7. Labour income should continue to drive consumption.
8. AI enables ALL companies.
9. We have been superseded by a non-biological species. (AI)
10. AI will be the death of a lot of boring work and will make us more human as more mundane chores will be outsourced to a machine.
11. USA bull case for equity markets to continue, we’re in the Innovation Cycle led by AI, Technology and Big Data.

As stated at the beginning of this letter, the opportunities and risks need to be considered and whilst we could not mention them all now, we will list a few for discussion:

1. Investing in Royalties: low correlation to the markets, is boring, stable, steady and gives downside protection.
2. Increase investments into Private Equity.
3. Increase investments into Global Infrastructure.
4. Increase investments into Global Private Credit.
5. The Swiss, UK and Japanese markets are looking interesting.
6. Gold and Silver.
7. Be underweight Emerging Markets.
8. Crypto – just a touch.
9. Add to Growth – overweight technology.
10. Invest in AI.
11. Seek to DEFER Taxes on Investments.
12. Stay with Quality.
13. Real Estate could be locked upfor about five years.
14. Cash returns (interest earned) could quickly be eroded by faster than expected Central Bank Interest Rate cuts.
15. Wealthier clients are investing up to 90%+ in Equities as they are taking a long term {20 years) horizon, and equities always outperform over the long term.

Technology to drive future returns.

Forget the last 10 years, the next 10 years will be completely different.

In conclusion, we feel that BMF Wealth encapsulates the heading quote on this newsletter by Howard Marks “Always Good, Sometimes Great, Never Terrible”.

We look forward to discussing aspects of the research that may interest you and benefit your portfolio.