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1) The stock market continues to dance to the tune of interest rates, with the S&P 500 falling 0.7% on Friday night as investors bet on central banks staying "higher for longer" as they continue to battle stubbornly higher inflation.
"We think the markets are too sanguine on rates after the first quarter," said Cliff Hodge, chief investment officer for Cornerstone Wealth on AFR.
The Federal Reserve meets this week, and is widely expected to hike US interest rates by another 50 basis points. Such a move would lift rates to a 4.25% to 4.5% target range, the highest level since 2007. Good news for savers. Bad news for the economy and share market investors, although much of the coming downturn is arguably already priced into many individual stocks.
2) The market will turn higher in anticipation of better economic news, be that lower inflation and/or central banks pivoting to hold or even cut interest rates in the latter half of next year.
I do not profess to having any great insights or opinion as to what may happen and when, other than to say – stating the obvious – we're much closer to the end of this rate hiking cycle than the start.
Writing in its November monthly update, New Zealand based Pie Funds are "fairly optimistic about the outlook for 2023," partly because they believe inflation and interest rates have peaked, but mostly because "after such a terrible year history shows poor-performing periods are usually followed by strong returns if you look out 12 months."
I love the simplicity of the thinking. No macro. No talk of soft landing versus deep recession. And it comes despite Pie Funds saying a widely expected general economic slowdown or recession "will impact corporate profits, on average, anywhere from 10-40%."
"Based on 15 years of managing client money, I know that investors won't start to return to stocks until at least six months after the bottom. So that means investor sentiment will remain cautious until at least April," said Mike Taylor, founder and chief investment officer.
3) One of Pie's holdings is little-known IPD Group Ltd (ASX: IPG), a national distributor and service provider to the Australian electrical market.
It is one of the few recent IPOs that is trading strongly above its float price, the IPD share price having risen from $1.20 to its current $2.93 in the 12 months since it hit the ASX boards.
"IPD Group held its AGM during the month and confirmed that strong double-digit growth has continued into 1H23 while margins have been maintained. IPD Group exemplifies the style of defensive growth business we look for with structural tailwinds in electrification, market share opportunities as they expand their portfolio of ABB products, and high levels of ownership by management," wrote Pie's Australiasian Growth Fund portfolio manager Michael Goltsman.
4) There have been many COVID winners turned losers, most obviously in the tech sector.
You can take your pick as the poster child for the huge round trip some of these stocks have endured, and just how much their share prices have fallen over the past 12 months…
Zip Co Ltd (ASX: ZIP) share price down 86%
PointsBet Holdings Ltd (ASX: PBH) share price down 75%
Megaport Ltd (ASX: MP1) share price down 69%
Airtasker Ltd (ASX: ART) share price down 62%
Kogan.com Ltd (ASX: KGN) share price down 61%
The share prices of all those companies got well ahead of itself, not to mention being aided by healthy doses of irrational exuberance from locked-down and bored retail investors.
Reality has hit, and hit hard, due to slowing or declining growth, excessive valuations and a market no longer willing to fund losses ad-infinitum.
One sector riding a genuine post-COVID boom is travel, with demand and prices riding high. The Qantas Airways Limited (ASX: QAN) share price is flying high, up 160% from its March 2020 low as continued strength in travel demand has resulted in profit upgrades.
So you'd expect the Flight Centre Travel Group Ltd (ASX: FLT) share price to also be riding high… except it's down more than a third in the past 14 months. Fellow travel agents Corporate Travel Management Ltd (ASX: CTD) and Helloworld Travel Ltd (ASX: HLO) are also on the nose, their share prices down 45% and 50% over a similar period.
Dragging them lower appears to be lower profit margins as airlines, most notably Qantas, announced during the pandemic they would cut commissions paid to travel agents.
Adding to sector woes are the prospect of a coming economic slowdown, something that traditionally sees consumers cut discretionary spending on luxury items like travel, and less corporate travel as companies cut costs and continue to use Zoom and Teams for their meetings.
In a trading update in late October, Corporate Travel said FY23 is expected to "remain choppy" but is expecting a "full recovery" in FY24, and underlying EBITDA of $265 million. Compared to today's market capitalisation of around $2 billion, that looks neither cheap nor expensive, but about right, especially given much can change over the next two years.
