30 Sep 30th September 2024
Weekly Index Movement
| S&P500 | +0.6% |
| Nasdaq | +1.1% |
| Aussie All Ords | +0.5% |
What happened last week.
No big news from the US but in Australia the RBA kept rates on hold whilst giving a direct dig at what the Treasurer said prior. Then Aussie inflation came in at 2.7% which is inside the desired band of 2-3%.
However, this is monthly inflation (which has only been around for a year or so) and really the RBA looks at the traditional quarterly inflation, and more really it is the trimmed mean quarterly inflation.
The trimmed mean monthly inflation came in at +3.4% so there will not be any rate cuts in Australia any time soon.
China was the other big news, releasing a swath of stimulus measures to halt their economic slowdown. Their stock market promptly jumped 10%. Iron ore increased 5% and Coal jumped a bit too.
This is good time to remember that investing is about doing the opposite of what you read in the media.
For several months we have heard how China is slowing and how it is going to significantly hurt Australia. That sent the prices of stocks like BHP down to $38. But, of course the Chinese government would do some kind of stimulus. We got it last week and BHP quickly popped to $45 and coal companies added almost 20% too.
Central Banks and governments always do something when economies slow and that’s when you buy commodity companies. Not after the commodity goes on a run.
The Tale of 2024
We are now at the end of the third quarter of 2024 and the S&P500 is up 20% for the year. I think there is more to go too.
I was looking this week at the biggest up days of the year so far. If you take the top 14 they account for all of the 20% gain. Think about it. We have had 184 days. Yet the entire gain can be accounted for by just 14 days. This is why you stay invested. Jumping in and out never works because you miss the big days.
But I digress.
The real point here is once the days are identified you can look at the headlines for the day and this year it really tells you a story of what has happened.
In the first half of the year the big days all came from AI announcements. For example:
- Jan 8th. +1.4%. Nvidia unveils new AI chips
- Feb 22nd. +2.1%. Nvidia crushes earnings and drags other AI plays with it.
- June 5th. +1.2%. Nvidia joins the $3trillion market cap club adding more fuel to the momentum driven move in Tech stocks
But since July, the narrative for big days has changed to focus on interest rate cuts.
- July 31st. +1.6%. Powell suggests a September cut was on the table
- September 19th. +1.7%. Fed cuts by 50bps
The year began with Tech driving market returns, but since the start of Q3 it has been expectations of rate cuts that have been the most important. This has allowed other sectors to outperform and large cap Tech (+16.2%) is now underperforming the market (+20.0%)
US large caps have been tested 3 times this year (April, August and September) and came back strongly each time with some of the best days of the year slamming the door shut in the faces of the bears. A still decent economy combined with interest rate cuts has led to the outsized performance this year.
We remain positive on US large caps and expect further gains in Q4, typically one of the strongest periods of the year. But the best sectors are now broadening and you can look outside Tech for gains once more. This is a sign of a healthy and long lasting bull market.
One for the Gold Bugs
For some reason some people like to buy Gold. They think it is a great investment. I don’t. It doesn’t pay me a dividend and comes with an opportunity cost of holding. (If I don’t buy it, the cash can stay in the bank and earn 5%, so holding gold costs me 5% per year).
I’d much rather buy tech stocks and to prove why I did a comparison using GLD as gold and QQQ as tech stocks.
Gold is a static asset with a long history as a store of value. It uses have not changed in thousands of years.
QQQ represents the economic value of human innovation. Most holdings are Tech stocks and the rest high quality growth names. The value comes not just from the current, usually highly profitable, business models, but how these companies can evolve their offerings to create even more profits over time.
Over the last 20 years, QQQ has compounded annually at 13.4% (not including dividends)
Over the same period Gold has compounded at 8.9%.
That Gold performance really surprised me. I was not expecting it to be so high. I thought it would be around 5%. As inflation has been about 2.7% over this time, Gold has more than fulfilled its mission to preserve value.
Yet human innovation has the edge when it comes to investment performance – 4.5% better per year than gold over the long term.
But the annual return differential varies considerably over time.
When the blue line is above zero it means Gold is outperforming the Nasdaq. Below zero then the Nasdaq outperforms gold. As you can see most of the time the blue line is below zero and the Nasdaq is outperforming Gold. Gold tends to outperform in times of economic contraction.
Right now Gold is outperforming the Nasdaq but this is not due to economic contraction. Rather it is due to buying by central banks, particularly China as they view it as a better investment than sovereign debt as it cannot be confiscated or sanctioned.
Doing this analysis has changed my mind about Gold. I didn’t realise the long term 8.9% returns it offers nor the hedge against economic contraction.
I still believe portfolios should be mainly Nasdaq, but can see a value in putting 10-20% into Gold.
You could do this directly through GLD or you could buy gold miners. The funny thing about Gold is it is often found alongside Copper………
Copper
With the push for electric vehicles and new renewable energy, the demand for copper should be rising.
An electric vehicle uses around 3 times as much copper as an internal combustion vehicle.
Renewable energy locations are a long way from fossil powered plants and so need connecting to the network. It’s all well and good to float wind turbines in the Bass Straight, but how do you get the electricity from there to the houses where it is needed?
By Copper wire. And if we do all go onto electric vehicles then the demand for transporting that electricity will increase which will mean we need thicker wires in the existing grid.
Whichever way you look at it, the demand for Copper will rise. That means the Copper price will rise.
Whilst the price is volatile, there has been a definite upward bias since 2020 and we are just at the start of the decades long transition to renewable energy and electric cars. A rising copper price is a long term play.
How best to play it? There are plenty of listed copper miners. Freeport McMoRan (FCX) is listed in the US and is one of the biggest in the world.
But closer to home we have several also.
I particularly like SandFire Resources (SFR) and FireFly Materials (FFM).
And remember, they often find gold alongside copper, so adding miners puts a foot in each camp and both camps have positive biases right now.
New Hope Coal (NHC.AX)
At the other end of the renewable energy scale we have New Hope Coal. My favourite coal miner.
They put out earnings recently that demonstrated just how well they run their mines. Output at Bengalla has increased from 8mtpa to over 9mpta with very little cash thrown at expansion. Production costs at $65 a tonne make it one of the lowest cost coal mines in the country too.
The New Acland mine produced 1 million tonnes and is expected to ramp production to 5mtpa over the next three years. Costs are likely to be similar to Bengalla.
Production this year was an all time high for the company.
But the average sale price of $195 per year was less than half that achieved in the prior year (when prices were abnormally high) and led to a profit around half of the previous year. Still enough to pay a 39c full year dividend, add the franking back and it goes to 55 cents which is a yield of 10.8% on the current share price of $5.06.
Compared to it’s peers, New Hope stock is expensive. But you are paying for the best run coal mining company with a board that makes sensible capital allocation decisions.
I still like it and will hold for what is likely to be increasing future dividends. Coal is presently selling for around $205 which is higher than the average sale price of last year and should mean higher profits for New Hope this year.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.