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1) After the euphoria of early last week – with the S&P/ASX 200 Index (ASX: XJO) jumping 3.75% higher on Tuesday followed by another 1.74% on Wednesday – it's hard to find any green shoots, especially after Friday's hotter than expected US payroll numbers, which sent shares sharply slower and bond yields sharply higher.
- "Fears are rising that the global financial system will seize up."
- "JPMorgan CEO Jamie Dimon Expects US Recession in Six to Nine Months"
- "Cathie Wood Warns of 'Serious Losses' in Automobile Debt"
- "Australian Consumer Sentiment 'Deeply Pessimistic,' Westpac Says"
- "A global bond sell-off is gathering pace…"
Even Treasurer Jim Chalmers joined in the chorus, as quoted in The Age…
"It's increasingly becoming the expectation of the global economic community that we could be facing what would be the third substantial global economic downturn in the past decade and a half…"
This inflation shock – and ensuing financial and economic damage – has got some way to run.
On the brightside…
a) We're closer to the end than the beginning, and a lot of the damage to share portfolios has already been done.
b) Stock markets turn before the economy.
c) Unlike post the COVID Crash, where stock markets roared higher in the blink of an eye, this time you have time on your side… time to research, time to steadily deploy capital, time to wait for AGM updates.
2) Despite all that doom and gloom, despite stocks on Wall Street falling for a fourth day in a row, and despite US futures turning down, in late afternoon trading, the ASX 200 index is flat on the day, a modest gain in the BHP Group Ltd (ASX: BHP) share price saving the day.
Australia is expected to dodge recession, saved once again by high commodity prices. That might save investors in commodity stocks, but does nothing to help those outside that narrow band of companies. For us, the pain goes on.
3) Helloworld Travel Ltd (ASX: HLO) today reaffirmed its FY23 guidance after reporting a "strong first quarter," with all three months of the quarter delivering positive EBITDA.
The year on year comparisons – total transaction volume was up 352% on the same period last year – are virtually meaningless because last year's trade was severely restricted by the pandemic.
As ever, it's the outlook statements that provide most value, with Helloworld – stating the obvious – saying travel is improving, adding "despite the economic downturn, travel continues to be regarded as a non-discretionary component of the family budget."
The market reacted with a collective yawn, with the Helloworld share price virtually unchanged on Tuesday, trading at around $2, some way off its pre-pandemic highs of over $6.
The dream of the locked down share traders post March 2020 was a v-shaped recovery in travel stocks like Helloworld and Webjet Limited (ASX: WEB). Yes, like just about every other stock, they jumped nicely off the COVID bottom, but both the Helloworld and Webjet share prices are essentially flat over the last 16 months.
It remains a long road ahead, with the COVID headwinds now replaced by an upcoming economic downturn. At 13 times forecast EBITDA, Helloworld shares hardly look cheap.
4) Speaking of economic downturn, although I'd suggest many households haven't directly yet felt the impact of the RBA's interest rate rises, they know there's pain ahead.
JP Morgan CEO Jamie Dimon took it one step further, quoted on Bloomberg as saying he expects "serious" headwinds are likely to push the US and global economies into recession by the middle of next year. Excerpt:
Dimon said the S&P 500 "may have a ways to go" in its decline, and that "it could be another easy 20%." The index is down almost 25% this year. "The next 20% will be much more painful than the first," he told CNBC. "Rates going up another 100 basis points are a lot more painful than the first 100 because people aren't used to it."
Ouch. Dimon's no perma-bear, and as the head of one of Wall Street's biggest and most highly respected investment banks, has seen how such violent moves in markets can lead to something cracking.
"The likely place you're going to see more of a crack and maybe a little bit more of a panic is in credit markets, and it might be ETFs, it might be a country, it might be something you don't suspect."
5) We've already seen some cracks, with the ill-fated inflationary UK budget seeing government bonds (aka gilts) spike higher, resulting in some forced selling by pension funds.
Such unexpected behaviour in what is supposed to be a stable and safe bond market has already had reverberations as far as Australia, with funds managed by both Magellan Financial Group (ASX: MFG) and GQG Partners Inc (ASX: GQG) being hit with redemptions from UK domiciled institutional clients.
The Magellan share price continues to trade around 9-year lows as it struggles with a brutal cocktail of poor performance, a falling stock market, management changes, a loss of a major institutional mandate, client redemptions, and now this UK panic, the latter being completely outside its control.
Magellan shares currently trade at $10.25 giving the company a market capitalisation of around $1.9 billion. Measures on how far the once mighty Magellan has fallen can be seen from today's valuation metrics based on its last reported results, for the year ended June 30th 2022.
- 2.1 times net tangible assets
- $963 million cash, financial assets and investments
- 4.4 times net operating cash flow, 4.8 times earnings
- Fully franked dividend yield of 17.5%
- No debt
Loathe as I am to consider investing in a business that's clearly struggling at the moment, I've put it on my radar. Should Jamie Dimon's "more of a crack" come to pass, Magellan shares could easily trade at not much more than book value. It wouldn't be the only bargain, but it would probably be one of the higher quality stocks on sale.
