Little news as NZ/Aus earnings season wraps and the US goes into what feels like a game of “who can out-hawk the Fed?” Notably Channel Infrastructure (CHI, buy-rated) is being added by S&P into the NZX 50 index (replacing Restaurant Brands). Should give a small boost to the infrastructure stock as passive funds seek to replicate the index. We took our time with CHI because the transition story was unclear – now the story is i) it’s a key infrastructure asset, not a refiner, ii) fuel demand – especially jet fuel – is going to be in demand for a long time regardless of electric vehicles and iii) on a EV/EBITDA basis CHI trades very reasonably compared to other competitors. Recommend adding in smalls.
Macro
The US ISM services survey for February showed strong data, sitting at 55.1 (flat on Jan’s data). In a recessionary market we’d expect the index to be significantly less strong — this feeds the narrative that we’ve been talking about for a while that entrenched employment means the Fed is going to have to maintain higher rates for longer. The Fed is talking a narrative of 25 bps rate hikes whereas former Treasury Chief Larry Summers said he’d prefer to see a 50 bps hike. A 50 bps hike would no doubt create some pain. As we have written, at the moment there is a sustained belief that the Fed may still yet pivot – as evidenced by elevated equities prices. We’re into March now, and we’re seeing sticky inflation data and sustained consumer spending – we don’t see that happening.
Hospitality is hot again
From today’s WSJ – hospitality employment grew +7% in January. This should be of no surprise to anyone who’s dined out recently: even in NZ there are seemingly constant “help wanted” signs in most restaurants and cafes. It supports this narrative that employment is entrenched and growing. It’s also worth thinking about what drives hospitality hiring – consumer demand. Recession? What recession?
Bubble watch – AI
We noted this with some interest in a recent FT article: “Marc Andreessen’s venture capital firm Andreessen Horowitz has led an investment of more than $200mn into generative artificial intelligence firm Character.ai”.
It’s hard not to draw parallels to recent crypto and blockchain and NFT bubbles, where VC firms rushed to give money to money-burning firms at eye watering valuations. We think AI is the next bubble – note the $10B commitment Microsoft recently gave to OpenAI (ChatGPT). As always, we prefer to be the ones selling the picks and the shovels than actually mining the gold — investments in data centre providers like NextDC (buy-rated) have an asymmetric upside because all the extra data needs somewhere to live; but even if the AI boom is short lived data still needs somewhere to live. ChatGPT is a remarkable piece of technology, but as with all booms, there’s going to be a lot of charlatans.
What Markets will be Watching this Week
Monday
Tuesday
Reserve Bank of Australia (RBA) interest rate decision
Wednesday
Thursday
Bank of Canada (BoC) interest rate decision
Friday
US Non-Farm Payrolls
Bank of Japan (BoJ) interest rate decision