We're into an era now where politics Trump's the economy and trade, so there is a lot of uncertainty and baked into that.
Healthcare is a bit of a beaten up sector are globally, mostly because of OURFK Junior getting into power.
I mean, the one thing we can be sure about with the Chinese economic statistics is that they're basically lying.
An area that I think is quite attractive at the moment is the smaller capitalization companies.
Cure.
Welcome to Shed Lunch, brought to you by Cheesy's. I'm Helen Madison. Today we look at what investors need to be thinking about as we navigate twenty twenty five. The risks, the opportunities, and.
Plenty of unknowns.
I'm joined by Harbor Asset Management's Christa Lever and Business Desk founding editor Patrick Smalley. Before we get started, here's some important information.
Investing involves the risk lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest. Everything you're about to see and here is current at the time of recorded.
Welcome Patrick and Chris.
Hi.
Nice to be here.
Thanks all.
Let's start with the US. I must say for listeners and viewers that we are doing this on the inauguration of Donald Trump. Just with that caveat that we do know things may have changed since then. Chris would start with the markets. The US markets have gone incredibly well over the last little while. Many investors are sort of questioning how far can the US go?
Is it overvalued?
And the tech Titans do seem to have a dominance, So are there alternatives?
Yeah, So, just touching on the US market first, valuations are high, okay, so we're currently trading it about twenty five times backward looking earnings. That is a very high multiple. The issue is multiples don't tell us a lot about returns for say twenty twenty five or even twenty twenty six. The real information that they give us is longer term than that. So we know that current valuations typically have led to at these levels quite subpar returns over ten years.
So then we go back and look at the overall market valuation and say what's driving it. While the Magnificent seven, or the tech Titans or the AI hyperscalers they get all the press, what slips really far below the radar is Actually the valuations of US companies are quite high across the board, So there's very few sectors in the US that are not trading at their top decile valuation wise. Currently, lots of people talk about in Nvidia, Amazon, Apple, they're
trading at about thirty times earnings. But if I look through the US market, there's companies like Walmart that are trading at over thirty times earnings, Constellation Energy, a nuclear energy company that's trading it over thirty times earnings. Financials banks they're trading at the highest valuation level that they had since the Global financial crisis, or obviously preceding the global financial crisis. So I think it's an oversimplified kind
of narrative saying it's just the magnificent seven. So if you look at financials, you say, you know, why is that so expensive? It's because one of Trump's big policy platforms is deregulation, and that benefits highly regulated sectors outside of the US are a lot less pressing. An area that I think is quite attractive at the moment is
the smaller capitalization companies. They're trading at a record low relative to larger cap companies, and the key thing that's really held these companies back has been that they tend to be more indebted with floating rate debt, so they've rarely felt the full brunt of those bond yields going up. Now we've probably seen the worst in my view, in the moves and bond yields, and that should benefit those companies. Those companies are also more cyclically exposed, so they need
a strong economic cycle. And actually when we look at the US, their economic cycle looks really really strong. So that's for investors looking at a bit more for a bit more value outside the top end of the market, which is really quite expensive in historical terms.
With Trump coming in, though, there are lots of unknowns and maybe the deregulations, you say, is what is fueling this, But Pat, what do you think in terms of where it might go?
So one thing we know about Trump is that we don't know what Trump will do next. But the one thing we can be sure about is that anything that Trump does will be self interestedly pro American, so that whatever he does, you can bet on it being something which is basically nakedly self interested and therefore probably good
for the American economy. Notwithstanding the fact that. I don't quite see how unless he gets a different person to run the US Federal Reserve, you can cut taxes, impose tariffs, and chuck out a whole lot of people who are currently working illegally in your workforce and not have an inflationary burst. Now, I don't think that even Donald Trump
can stop inflation with that particular triumvirate. Perhaps the question is will the American economy, because it's so strong anyway, just kind of override that, and so you know that inflation becomes a bit of a break as opposed to a major problem for the growth trajectory for the United States.
Where does it leave will trade though, and probably more likely Australasia, I mean the tariffs. There's been a lot of consternation here about what might happen.
Well, Trump was a protectionist, Biden is even more protectionist. We've had more protectionist US federal settings now for the best part of a decade more of the same. I don't necessarily think makes a huge amount of difference to New Zealand's ability to sell exports into the United States. I'd be a bit surprised were to be heavily hit by a tariff's way. My impression anyway is that it's a manufacturing and goods play rather than a services play.
So to that extent, you know, maybe it's a good thing we never got a free trade agreement with the United States because we do know though that that in the last Trump administration we had steel tariffs put on New Zealand produced steel, which is sort of insulting rather than economically debilitating.
Though, Chris, do you have any thoughts on that just on tariffs.
Yes, he's doing it to be pro American, but we've got to be careful here because when we look at some of the large companies in the US, the amount of revenue that they generate from offshore is really quite high. And we know one of the other things we know about Trump is that one of the biggest measures of
popularity that he uses is the US stock market. So that gives me some comfort at least, you know, when I look at these and it's even the Magnificent seven, you know, the amount of income that they generate from offshore is really quite high. So yeah, since he does like the stock market, sees it as a good barometer, that might temper some of his enthusiasm when he's looking to hopefully not go all out reckless.
Crypto is his big thing, though, isn't it. So that's one aspect of markets.
Yes, and it's an aspect which it's an interesting aspect in the sense that you know, bitcoins at over one hundred thousand dollars and it's one of those esset classes where people like myself and traditional finance we sit there and scratch our heads and quite frankly, we've missed it. You know, if someone asked me five years ago, what did you think about crypto'd probably expouse the same views as the likes of Warren Buffett, who doesn't have a
horribly favorable view of that particular asset class. But the really is, we've kind of all been wrong, right. It's gone on longer and been a lot more successful than
anyone could have thought. And you know, that anti fe art or anti establishment sort of form of holding your wealth has found favor with a bunch of different people and even institutions in the US and here and here, and interestingly enough, you know, it seems that both Donald Trump and Millennia Trump have found a way themselves to generalize.
I actually think that's that's quite dangerous for both of them, because it reminds me so much of the n f T when you're sitting all sitting around in COVID and everyone was buying an f T S and saying it was going to be having this mouse thing in a digital form was going to be incredibly valuable. Where are they now? I don't think anybody talks about or trades NFTs and like Yu gi O cards or something like that.
You know, So there's crypto and there's crypto. I mean, bitcoin is one thing, some meme, stock meme crypto that that has been made up around around particular individual. I mean. The reality of Trump is that he's, as they've described in the New York Times to day, he's actually starts as a lame duck in the sense that the longer his his term goes, the less significant his influence will
be because he can't stand again. So he will be you know, he's going to flood the zone with all kinds of populist and economic things in the first nine months, twelve ninety twelve months because he has to get going fast, and because he also just wants to overwhelm such opposition as there is just have too many things going at once, sort of Roger Douglas style. Nobody knows what's coming next, and so you're in a constant stut of fusion and terror.
But as time goes on, he becomes less and less influential. Somebody has to replace him. What happens to your crypto mean crypto at that point.
AI has had a phenomenal amount of success in recent times, and we can't not talk about that when we're talking tech.
Yeah, I mean, there's two things with megatrends. You know that. The first one is to decide whether they are a megatrin Right now, with AI, we're going through the capital expenditure cycle. There's very little revenue being made from it outside say co pilot with Microsoft and some search engines and companies. Over the next years are going to determine whether this is a good use of capital or not. Because you read the headlines and there's hundreds of billions
of dollars going towards AI. At the end of the day, there needs to be monetization to justify that capital expenditure. Now, the other thing to bear in mind is we're so bad at picking mega trends in an early stage. And I always think of the example of at and t asking Mackenzie to go out there. This is in the lad eighties. They said, look, mobile phones are taking off. How many will there be in the year two thousand. Mackenzie came back and said, look, we think there'll be
about nine hundred thousand mobile phones. In the year two thousand there was well over one hundred billion mobile phones. So even very smart people at Mackenzie struggled to figure that one out. That's the overall trend. But then there's making money from the trend, and that's a really tough thing too, because in the late eighties early nineties, you would have said Motorola or Nokia, that's going to be the pre eminent phone company. In the early two thousands,
I remember my first work phone. It was a BlackBerry, was great, and they look like they were going to assert dominance. And then out came the iPhone. When the iPhone first came out, people were laughing at it. They said, oh God, such an expensive phone. It doesn't have a keyboard. Our thinking changes so much with these trends. So that's the cautionary note. With these new mega trends.
I think you may disagree with me about this. Chris, I don't know, but I think there's also an opis question with AI. You know, artificial intelligence to produce an answer has to use energy to produce the answer. The deeper the question, the more energy it uses. And these things are starting to suck an enormous amount of electricity out of grids everywhere that they're being used. So I suspect that there will start to be a metric which will be what is the cost per answer for your question?
And it will be the person with the life cost per answer in energy terms and therefore sense per question who will win. And if it becomes clear artificial intelligence just becomes more and more of an energy chew, it's going to be harder and harder to make the case, as you said, for where the use cases are where it's actually sufficiently valuable.
That climate question is pretty intense. I mean, there's lots of consternation about what might happen. I suppose it's a bit of a wait and see. I mean, some of the bigger players are saying they're working towards mitigating that. I don't think we've seen a lot though. It just seems to run ahead of its own steam.
If you like, well, I suspect we're in for a couple of years anyway where the whole focus on climate change sustainability, the idea that the brand value and so forth in climate change action is actually diminished because of what we're seeing in the United States, because of the push to the to the right of the political spectrum, you know, Black Crop, American banks, all these big players pulling back from a kind of a breast beating approach
to their climate change obligations. I mean basically that the United States is at the moment, as the world's most powerful economy, is saying we've stopped caring, and a lot of people are going to take a lead from that because ultimately it's difficult to get about climate change. So I worry about that that the sustainability trend is going to be quite hard to sustain it, particularly as a branding proposition, and quite the way that it has over the last ten years.
Even here in New Zealand. I mean they're looking at changing the climate reporting. That could have consequences there too. Yeah. Just thinking too about other trade partners besides the US. I think they're our second biggest trade partner, but China obviously is the big powerhouse, and there's obviously been a lot said about the slow down there, but it'd be quite good to get an idea of where that is actually at. To get anything out of the Chinese government
is quite tricky. I've seen a number of reports about economists and like being muzzled when it comes to gross domestic product, which is, you know, a typical measure of an economy good or bad. Where do you see that going, particularly for New Zealand but also for Australia too.
The one thing we can be sure about with the Chinese economic statistics is that they're basically lying. You know that the Communist Party wants us to believe that they're growing at about five percent. They'll be lucky if they're doing two two and a half. So the Chinese domestic economy is weak. If there are tariffs imposed at the sixty
percent level, will be that much weaker. But at the same time, I can't see circumstances under which the Chinese Communist Party government doesn't hold hands in such a way that it continues to keep basic consumer demand in the Chinese economy ticking over and to the extent that New Zealand anyway perhaps less so Australia where they're into hard minerals and so forth. But New Zealand we're selling protein,
and we're selling commodity protein mainly. Unless that unless the Chinese decide that I want to stay healthy, or that they are earning so little that they can't afford protein anymore, I think we're probably okay. And I suspect that if the flow of Chinese goods to the United States is cut off to some degree, we'll probably see cheaper stuff here.
Chris, have you any thoughts on that.
Structurally, China's still in such a hard spot. I think we're so used to out of China waiting for these big Berzuka stimulus announcements, and essentially since COVID, they've just disappointed and disappointed and disappointed. And that's because there's some
really big structural issues there. The mechanism of which they provided stimulus to their people was through property, but unfortunately that can only go on for so long, and it went on to a point at China where they inflated quite a large bubble and they don't have the population growth anymore to paper over the cracks. So I think it's not a one year, two year kind of cycle that you have to think about. In China now, I think it's the next decade. I think they're really struggling
to starve off deflation. It's starting to look a little bit like Japan did in the late eighties, and they're economic case study of just how tough it can be to get your economy going after you've had quite a substantial asset price bubble. There's we can kind of fear in New Zealand, there's probably some parallels with property. As I talk, I think, oh goodness me, my house price hasn't done actually hasn't done anything. It's gone backwards over the past three years, and like most keys, I look
at it and go, well, I feel less wealthy. People definitely aren't going to the insurance broker like they did in the twenty twenty twenty twenty one and going hey, I'd love to put a sparple, a new car, boat, insert fancy shiny thing here on my mortgage. So you know, us as key as we understand the positive stimulus that
a rising property market can give us. And that's where they're really struggling in China, and some of the multiples of house price to income rental yield in some of the Tierwan cities looking just as acute as Japan in the late eighties. So I don't think it's an easy fix in China. I really like it when I hear governments talking about diversifying our trade partners and looking at what we can what we can do to decrease our alliance there, because I think it's going to be pretty
tough going in China for quite a while. I completely respect what you've said Patrick about I'd much rather be exporting what we do to China than what Australia is exporting, which is far more aliant on the construction cycle. Maybe it's the thing we can't expect is for Chinese tourism to recover. Domestic budgets and Chinese households are stretch. They're not going to be going let's go to New Zealand for a couple of weeks.
So again, alternative markets, that's what we need to focus on, Chris, what about Australia.
I mean, with.
Lots of investors think in the US is the best thing. There's not a lot happening in the z X for a lot of people on shares is anyway, ACEX has always been known for its miners, but is that changing and is there value in some of the other types of sectors and stocks.
Do you think yes, I'd break apart Ralia into three parts. So they've got these two really big sectors. So you've got you've got banks, and the yield curve is steepened over the past six months. That's great for banks. It's great for their business model of that they tend to lend long, borrow short. A steep yield curve is exactly what they want. That hasn't been lost on the market. Australian banks at the moment are more expensive than they've
ever been relative to history miners. Again, it's that it's that China link. We're a little bit apprehensive there on the reliance. And then there's kind of everything else that's a third bucket. It's quite a few healthcare names we like in Australia. Healthcare is a bit of a beaten up sector globally, mostly because of RFK Junior getting into power and in the US in that key healthcare role
that's kind of sent shockwaves through the healthcare sector. The other one is the impact of the g LP one weight loss drugs that was tipped to impact a lot of healthcare companies. So any company involved in the likes of kidney dialysis for example, completely sold off because GLP one was seen to be quite a promising healthcare development
in that particular area. But yeah, there's a number of companies we like in Australia in that healthcare space that have been I suppose caught up by that negative global health care narrative.
So you're saying they're cheap at the moment, Yeah.
They are cheap relative to history, but we're kind of our style is to not kind of you go up to purely cheap companies. The growth has to be there too.
Thinking about our own market then, z X, it's no secret that it has been having a tough time. We did an index just recently, the Chezies Index, which is a quarterly sort of litmus test of what investors are thinking where they're putting their money in terms of confidence.
And nine out of ten of.
The stocks that people were investing in they are no longer because it is inz X and the US and to a lesser extent, Australia is taking their money. Just wondering what you think about where things could head for the inset X. There's been a lot of people talking about, you know, we need to put fire under it, we need to do something else or alternatives.
What's your perspective, So this is not just an INSIDEX problem. Lots of exchanges around the world, publicly traded equities generally have been out of favor of me in so much private equity activity. Now inst x is a very small market. I mean, I've been reporting the enertisecs since nineteen ninety three, so I've now carbondated myself and the daily turnover it's not that much more today than it was then from my recollection anyway, my personal view is that we've it's
got to get closer to the AASEX. You know, if it's got to be called the NZX, fine, but we need to be part of a much bigger, more liquid market. And you can see New Zealand companies voting with their feet on that. We've got a number of the more
interesting New Zealand companies. I think of Aroa Biosurgery for example, good example of a company which should have a lot of growth potential in the health sector, based in Auckland, listed in Australia and those companies which make it into the big indicies for passive fund and indexes and so for passive fund managers and so forth, are almost all dual listed on the AX. So I think we've just got to get over ourselves a wee bit. And so it's a small market, how to get a multiplier effect
out of it? While also saying, yeah, it's important that we have a capital market that works in New Zealand.
What about our currency? We know the key we've been tanking if you like the Aussie hasn't me doing that well either? Watch and investors think about there.
I mean, good for our.
Exporters, but we're just looking at levels now. The way to think of the US dollar is it kind of operates like a smile. So what I mean by that is when the world is fearful, things are going really really badly, the US dollar is really really strong. So that was like twenty twenty, right, And when kind of the global economy is kind of trucking away, okay, the US dollar will tend to weaken. But then there's another scenario when the US economy is really really strong and
other global economies are really really weak. People want to hold the US dollar. That is where we are today, the theme of US exceptionalism. At the end of last year, We've got a stack of outlooks from all the global and banks. I couldn't find one of them that thought the US wasn't going to be the best performing economy in the world, and that's really showing in their currency. At the moment. You've got economies like here in New Zealand that have priced in a fairly aggressive rate cutting
cycle to around three percent. We've got inflation relatively under control the US. It's not quite there yet, you know, they're still printing high two s, low threes, depending on the measure of inflation that you're looking at. Our view at the moment is that actually is a lot of good news priced in to the US dollar, a really high consensus view that the US is going to go very well, and that means that at current levels we
actually see it as relatively attractive. I think for investors, the key thing they've got to consider is that your share aren't the only thing that generated you returns last year. It was the currency that your shares were held in. So a lot of people who are holding these US shares directly, they've got a great return, they've got twenty odd percent, but then they've got another you know, call
it twelve from the currency on top of that. So while we focus so much on the picking a good stock, actually the currency that you're picking it in is really key as well. So I think for investors that is the key thing they have to take into account. You know, how much of my money is wrapped up in a currency that is quite expensive relative to historical levels.
Thinking about coming back to New Zealand and we can't have a conversation really to think about the year without talking about infrast rates. Here it's easing and it's looking like we're going to get another rate cut in February.
Pat, Just what's your perception.
On whether or not that has provided the relief that businesses who have been torink quite hard here and needed mortgage holders, you know, they're the next ones on the list.
I suppose my presumptions on that are pretty pretty bog standard. You drop interest rates far enough and it will have an impact on economic sentiment and you will see something of a recovery. I just worry a little bit that in New Zealand have got something a little bit more deep seated going on. You know, we had a round of tax cuts last year, which nobody seemed to notice. We've went through we's all reasonable electronic card spending over Christmas,
but wasn't anything write home about. But it's coming back a wee bit. But I sense more that I was trying to contrast the American inauguration. We've got a president, no matter what you think of him, who is telling a big story about what America is going to become. In New Zealand, we have a government that that is struggling to tell a story about what New Zealand is going to become. And a lot of New Zealanders are worried that New Zealand is becoming a place that people
will leave. You know, we go through these cycles. You know, this reminds me, has been reminding me for a long time about the sort of three or four year period around early nineteen nineties when it just felt as if New Zealand was going down the drain and it was never going to get better. And then sort of one day the sun came up and I thought, ah, actually
it's not that bad. But there's still not a narrative or a sense from this government as yet that they actually know what to do to make the place grow. Just rely on interest rates to get everybody back into the warehouse in mine attend isn't enough.
I think there are some green shirts though, I mean a measure that we look at a lot as the own activity measures within business confidence surveys. They've bounced off lows and typically that has had quite a strong forward looking relationship with GDP. I think how's is just so
key here. So if we get those interest rates coming down, if I look across the Reserve Bank, I look across the main bank economists, if we get the between five and say, you know, high single digit house price appreciation, that starts getting a back a bit of bit of wealth effects, a little bit of animal kind of spirits into the into the market and into the economy. So I just we can't underestimate just how strong our alliances on property in New Zealand and just how intimately our
wealth effect is tied to that. I think the good news for a lot of investors is within the interidets, a lot of that is priced in. So you look at our cyclical companies, they're trading at really low valuations, So you know, think of the likes of the likes of Fletchers. You know, they're a key one where you know, people don't have high expectations for our cyclical companies. Same with the retailers, you know, Warehouse, cat Man, do Briscos the other day. You know, it's all been relatively weak
that's now baked into share prices. So yeah, while the New Zealand economy doesn't look particularly good, I can remember being here on previous episodes and I wasn't confident enough to kind of pick a turning point for New Zealand. We kind of we have picked a turning point for New Zealand over the past few months and actually moved to relatively finding the New Zealand market more attractive than the global share market. So yeah, just a little warning
out there. You know, New Zealand economy may not look great, but actually if you look at our share market, it's not a great reflection of the New Zealand economy at all. And actually the individual companies within there are quite reasonably priced. And although it's hard to find a turning point for those cyclicals, you're not paying a high valuation to be in them at the moment.
If we are at the battle of the cycle. Then this ought to be the time to be thinking hard about whether a cheap stock is was buy it.
So what is the recommendations for investors?
Do you think this year?
Then with all of that, I think bonds actually still look good, so yields, and you've got to think about the risks that they're hedging you for. So if you look back to twenty twenty two, everyone says our bonds didn't work. My equities went down, my bonds went down. It was just horrible. There's no diversification. Bonds don't ensure you for an inflation shock. They ensure you for a
growth shock. And right now the consensus view is that everything goes along really, really well, and that's why bond yields are higher than they are us growth will be pretty robust, but the world mysterious place where things like COVID nineteen happen, and then you need your bonds to ensure your portfolio. You are getting paid to be there
at the moment. The one caveat I'd really give is that the additional return you're getting for buying a corporate bond or a corporate bond fund is really really low at the moment, So i'd favor. I do favor in portfolios having more of a sovereign bent than a corporate bent, because that's rarely going to help you with your downside protection.
So yeah, I think they look good. As I said, New Zealand a bit more relatively attractive compared to global shares, and that's largely because of just how wide the breadth of expensiveness goes, particularly in the US to a lesser extent Gladly as well.
You know, when you talk about downside protection, I think it's worth thinking hard about that because the one thing that I think has changed from in the last say, three or four years compared to almost the whole of the rest of my career is we've been through a period of globalization, trade liberalization, internationally accepted rules. We're now into where economy kind of trumped politics. We're into an
era now where politics trump's the economy and trade. So there is a lot of uncertainty and baked into that. You know, it can just be Trump saying something different every day, or it can be the Chinese economy tanking so badly that they need to create a distraction and decide to invade Taiwan. You know, all sorts of things can happen when politicians rather than markets are driving things
which you don't see coming. So I do think that while there's a lot of upside there in the US story, and I really take your point about new Ual, it may not look very exciting, but if it's cheap enough, it's always exciting. I would be taking a lot of cognizance of the potential for something to come created by our fellow man and women, but mainly man, which will up end the applecart, and which has nothing to do with actual economic conditions and has everything to do with geopolitics.
On that note, I think we'll leave it there. Thank you so much for coming in and giving us those insights, and thanks everyone for tuning in.
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