Are we living in a 5.00% World?

2 October 2023

NZ/Aus

Pacific Edge > noting the FDA released its intention to regulate lab developed tests. Link. Hard to read whether this decision is good or bad — market is reading it as bad for Pacific Edge, for now, with the stock trading down 13% as of writing. Our view is the thesis on Pacific Edge is “goneburgers” — the likelihood of the company actually gaining back Medicare approval seems less and less likely.

Housing (home and away) > Kāinga Ora has announced that a scheme aimed at getting first home buyers on the property ladder in NZ has been put on hold due to “recent unprecedented demand”. Hard to know how this helps the current housing situation…

Meanwhile, in Aus, Home buyers from China have racked up $3.4bn of approved residential real estate purchases in Australia over the 2022-23 year, up more than 40% on the previous year. Possibility of a National govt > more real estate demand from foreign buyers? We still think there is too much optimism priced into the housing market — interest rates are going to squeeze, foreign money or not.

The Australian market (ASX200 Index, +0.3%) was up on Friday, snapping up 3-day decline with mining leading gains on improving commodity prices. The index is still down 3% for the month, with markets around the globe suffering its worst month of 2023.

The New Zealand market (NZX50 Index, +1.1%) was also up on Friday, as end-of-quarter buying took place. The NZ market is less prone to momentum trading, with the index down -2% for the year so far, given it struggled to take off in the first half due to the lack of tech stocks we see downside risk being minimal compared to tech-dominated S&P500 – which is seeing large pullbacks the last two-months.

Both the Reserve Bank of NZ (RBNZ) and Reserve bank of Australia (RBA) have their interest rate decisions this week. Both are tipped to keep their cash rates on hold, and general consensus is that rates are likely to remain higher for longer than previously anticipated. Given inflation has remained stubborn in recent months (largely oil price driven) we see the door as being open for one more rate hike from the RBNZ in its final meeting of the year at the end of November.


US

Turning more bearish and questioning the thesis on Dollar General following a damning report on their health and safety and employment practices in Bloomberg. Link. We like the idea of the middle class trading down to “Dollar Stores” (the same thing happened in the 2008 recession) but we think there is some regulatory risk here. Sometimes there is a reason things are “cheap” (10x earnings). As Keynes always says — “When facts change, I change my mind – what do you do, sir?” A turnaround is needed here — mgmt needs to “pull up their socks” and get on top of what is a growing issue as well as turn around company culture. Hard to be a buyer here…

We continue to like European equities and consider them more attractively priced than their US counterparts. For instance, UK companies are now paying an average earnings yield of 10.00% vs. domestic bonds paying ~4.40%. Top picks > CDI, MC, UMG, DGE.

US 10 yrs > we see US ten yr treasury notes hitting 5.00%. Oil hitting $100 a barrel makes inflation a hard beast to tackle; plus we see intervention by the BOJ as likely as USDJPY edges near 150.00 and the only course the BOJ can take being selling UST to buy yen. US Housing > seeing 30 yr fixed mortgage rates creep up to ~7.50% — net result (so far!) is pending home sales YoY are down 13%. Hardly bullish.

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