The Savvy Yabby Report distributes our institutional grade model portfolios to paying subscribers on a monthly basis. The current list includes these strategies.
Australian 20 Stock Model Portfolio
USA 20 Stock Model Portfolio
International (non-USA) 20 Stock Model Portfolio
Global Best Ideas 25 Stock Model Portfolio
There are no changes for the Australian model this month.
Late Cycle Conditions in Australian Markets
In general, global markets are churning on performance chasing. There are clear signs we are now late cycle in Australia, with housing weak, but inflation sticky. We expect further interest rate rises from the RBA in the coming meetings.
The reaction to a soft earnings report from portfolio holding JB HiFi, signals potential weakening across the broader consumer markets, although sustained high levels of wealth in Australia are propping up spending among older consumers.
Due to rising, but comparatively low levels of unemployment, we do not expect there will be a recession. However, the Australian economy is stuck in low gear as it shifts from a housing investment led phase, to belatedly address productivity issues.
The politics is likely to become increasingly fractious as the electorate looks to find someone to blame for what is (frankly) a self-inflicted predicament.
Making houses more expensive does not produce sustainable wealth gains.
The housing shortage is likely to persist, in spite of slower immigration, and there is no easy way out of the bind. You cannot fix ten to fifteen years of neglect towards productivity enhancing capital investment that is intensive and not extensive.
The essential problem for Australia is that it bet too heavily on scaling up, in terms of population growth and public infrastructure to support that, without any clear policy focus on how to improve unit economics and productivity within the economy.
There is a solution to this problem.
Less intrusive regulation for the sake of regulation.
More effective government planning to mitigate obstacles to investment.
Adoption of more proactive business attitudes towards R&D.
There has been much written on the government side of the equation, but there is a clear problem with business also. Australia has very low levels of corporate R&D and poor outcomes on the development of new products, processes, and technology.
This problem shows up in global metrics of economic complexity, where Australia rates among the lowest of all nations. The issue is one of complacency.
It is not enough to simply mine minerals and speculate on house prices.
Having said that, the only part of the Australian economy doing very well right now is the mining industry, and the one clear area of shortage is housing construction.
Australia has a quality economic problem to solve.
Even the folks who think they have correctly diagnosed the disease are reluctant to move capital away from the three areas that benefited from globalization:
Mining to provide the resources for global development.
Finance which recycled the export dollars earned into domestic credit growth.
Housing which booked the capital gains from excessive credit expansion.
In our own portfolios, we have stepped back from finance to underweight, but are overweight minerals and energy, and housing and data center developers.
This positioning expresses a pragmatic viewpoint.
Australian mining will continue to do well because it does not depend overly much on the health of the domestic economy. However, Australian banking is already looking somewhat shaky, due to slowing credit demand, high valuations, and weak housing markets. While we are now in the early stages of a construction shake out, due to overleverage in players like Baltha Group, there is a supply shortfall of housing.
In our view, it will take some time for Australia to find a new economic growth model. Perhaps it involves Artificial Intelligence in some way but the path to that outcome is fraught with risk to near-term employment, and the generally low appetite for R&D among Australian corporates. I have had 40 years exposure to R&D at a high level. With that experience, and knowledge of how Australian corporations operate, I am not optimistic that the transition to a new growth model will be smooth.
It will take serious effort to be remotely competitive in R&D led business, when you have the USA and China both fiercely competing at the cutting edge.
There are models that might work, such as what Singapore, Switzerland, or the Nordic nations do, but Australia does not seem to have the application to pursue that.
We do have a quality Higher Education sector, but the capacity was diverted towards rent seeking from the foreign student trade. This has proven to be short-sighted.
While Australia did train many foreign students at a high level, we did not develop the domestic industrial base to exploit that talent once educated. This is in contrast to the United States, which has been a huge beneficiary of imported talent.
Now that the Australian political conversation has regressed to anti-immigration, and not rationally directed immigration policy, there is little prospect of the local polity suddenly fastening upon any good plan of what to do next.
Australia sleep-walked into two full decades of rising prosperity based almost entirely on the recycling of foreign earnings into credit expansion to fund a housing boom.
The inevitable bust is now upon us.
Since very few market players could correctly diagnose the proximate reason for the good conditions on the way up, I doubt that very many will see the way out.
The way out is time, a painful period of adjustment, capital preservation against the market volatility, and a clear weather eye on the search for new opportunity.
In the Australian market, we think minerals for the energy transition remain key, and we also have the benefit of a large quality gold sector, the third largest after China and Russia, plus iron ore, copper and uranium in majors BHP Group and Rio Tinto.
The Australian banks used to be a good place to invest, but we have shifted our focus to Asia, with Singaporean and Hong Kong financials among our key bets.
Domestically, the Australian economy still needs energy infrastructure, through firms like APA Group, providing gas pipelines, and rail transport, via Aurizon.
In real estate, we think the parameters of government policy will settle on new build, as we have already seen with the negative gearing changes. There is a housing slump in progress, but Australian housing would need to fall about 30% to be fair value.
This will not happen, but the construction shakeout now in progress will benefit those developers with stronger balance sheets in growth corridors like Stockland Group.
Concerning the rest of the Australian market, not much interests me. The technology of tomorrow is being built in China and the USA, not Australia. Our market has a very nasty habit of paying a global premium for indifferent technology exposures that will collapse in valuation once the global leaders correct. That time looks close upon us.
Due to the housing correction, and wealth effects coupled with a clear retrenchment in high rates of immigration, the Australian consumer sector is unattractive.
The Australian health sector is also small, by global standards, and faces the serious challenge of more aggressive US policy to force concessions on pharmaceuticals.
These factors will likely pile up once China makes further inroads into developing its own for export medical devices and pharmaceuticals industry.
Oddly enough, the one great positive I see for Australia is the diverse ethnic ties our large immigrant population has with other parts of the world. This matters in the age of connected informational markets that depend on local knowledge and contacts.
Australia has hybrid vigour that will likely see it adapt to the new conditions from the ground up. I cannot see this happening at the corporate level. There are too many large and sluggish oligopolies in Australia that were wedded to “Just scale up!”
The just-scale-up mantra will not work anymore.
Who knows what adjustment pathway Australians will choose?
While my tone may appear negative towards many of the leading companies of today, I am not negative on the Australian project. Australians will figure out something.
In between, I am resigned to a period of largely counterproductive bickering.
Until that fog clears, I will hide out in Australian miners and those areas of the economy where I perceive a clear shortage and demand support.
The updated performance and current portfolio are given below.
