Safe haven?
We’ve been thinking about what equities are likely to do well regardless of continued margin pressure. The age old “if you’re forced to be a buyer, what are you buying?”
In NZ we still think Infratil (IFT) looks like a solid buy (2.2% fwd cash div yield) – infrastructure still needs to be used during any stage of the economic cycle, and we are long-time fans of Infratil’s management who are the best in the industry, in our opinion. Spark is another utility-like company which offers some shelter from the storm (5.5% cash div, 19x fwd earnings). Over the ditch we think QBE looks like a nice place to park some cash – best-in-class insurance company with good potential to re-rated from 9x fwd earnings to around 12x. We still like CSL (the definition of “an oldie but a goodie”) – their healthcare products are going to have demand regardless of the economic state of the world. Finally, we’ve started to wonder whether Lynas looks interesting sitting at 2 year lows of ~$6.06 per share – feel the stock looks oversold and could be a nice high risk buy.
Overseas we still have preference toward the payment providers: Visa and Mastercard, which have incredibly healthy margins and take a percentage of payment agnostic of where inflation is – they’re just getting their “piece of the pie”. We think Diageo in the UK (makers of Guinness, Johnny Walker, etc) is a “no brainer” trading at 20x earnings. Continue to be buy-rated on the entertainment companies: Disney and WarnerBrothersDiscovery – entertainment is an “essential” and right now you can buy Disney for a discounted price due to pessimism in the sector.
US CPI continues to be an issue
We’re back in CPI week and our first thought was “the headlines are misleading”. The headlines say “US inflation slows for the seventh consecutive month”. The truth is a little more complicated, which we will examine below:
Note that while goods and durable goods have experienced deflation (albeit from very elevated levels of +10%), services inflation still stubbornly continues to trend upwards. It’s this yellow line that we’re worried about – services inflation is obvious to anyone who has been to a restaurant lately, or taken an Uber, or ordered a beer in a bar. Services – the “experience” economy – still remains starkly elevated and needs to fall.
It’s not hard to see the culprit in services’ stubborn inflation – wage growth, which continues to be on the ascent and has in fact moved a tick upwards in the last month or so. It’s not good news for the Fed, which will likely need to keep hiking until they start to see proper services disinflation.
Meanwhile, over in the bond market
Treasury 2 yrs dropped to their lowest since 1982 – if you go through the chart there’s a pretty good correlation between a steep 2 yr drop and a recession. We keep harping on that history doesn’t’ repeat but it rhymes and it is pretty hard to not look at the recent plunges portend a coming recession. But is the bond market wrong? All year the has been a diverging narrative between bonds and equities – bonds say that pain is coming, while equities continue to gain. Hard to take any view right now, but the data suggests inflation continues to bite, which will continue to be painful for longer.
Misc
Note the major brokers have upgraded Scales as of this week – we upgraded the stock to a high-risk buy on March 3 as we anticipated a less-than-feared outlook on their crops – we continue to be high risk buy rated on the stock. Key assumptions are a 25% cut to export volumes going forward and a NPAT of $14-19M.