Market Musings 010423: Q1’s Frequently Asked Questions

1st Apr '23 by Edmund Shing

24 comments 1894 reads

Market Musings 010423:
Q1’s Frequently Asked Questions

Six of the questions I have been asked the most of late…

Summary:

Is the banking crisis over yet?
Is a US recession nailed on to this year?
Can inflation really return to 3% or under by the end of this year in Europe and in the US?
Are you still positive on Stocks today despite all the concerns?
Is it time to return to investing in property?
What benefits from stress in the banking sector?

Podcast this week:

The silver linings to the banks’ stress cloud

March : all about the Banks
How stock markets are surprisingly resilient despite banking stress
What are the silver linings to the banking stress cloud?
A Fed pause can be good for stocks over 6-12 months
Look again at equities

Frequently asked questions

I present below 6 questions that I have been asked several times of late, together with my answers...

1. Is the banking crisis over yet?

No, this is rather unlikely. The stresses in the US regional banking sector remain evident.

There is still deposit flight as deposits leave low yielding deposit accounts at smaller banks and either go to larger banks for safety reasons or go to money market funds. These funds yield up to 4.7%, which is over 4% higher than the average bank deposit rate today. So, there clearly remains stress in the US banking system as a result of this deposit flight.

Accelerating deposit outflows from US banks

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Source: St Louis Fed

The second area of concern is commercial real estate i.e. offices, warehouses, shopping centres and so on. The US regional banking sector has been a very large lender, in particular to this commercial real estate segment.

Vacancy rates post COVID remain relatively high in particular for offices in many US cities.

C. 25% office vacancy rates in Atlanta, Dallas, San Francisco and Washington DC

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Source: JLL

So there is a risk of a wave of defaults on debt that has been lent to these commercial real estate funds. Office vacancy rates remain elevated in big cities where the return to work trend has not been that strong,…

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Edmund Shing

3rd Apr '23

Quite possibly!

But to be fair, I am not always positive.
For instance, in my "day job" we were actually Neutral on Equities from February to November last year...

But I think the point is that there is usually some opportunity somewhere, whether in stocks, bonds, commodities or elsewhere...

Ed

Yes I am a big fan of royalty companies,
for exposure to precious metals prices without the risk of rising expenses hurting profits...

ridavies

I also like Capital (LON:CAPD) but their Investments element is like a yo-yo in terms of valuations of these largely non quoted companies. If you look closely at the annual presentation - which I think is first class by the way - you will see the management's justification and the long term value of these to the business. Unfortunately, too many people are short termist right now, and this last year's valuation was a big negative versus the previous year's big positive. That has a significant impact on the SP unfortunately.

Thank you Edmund. I don't know where you feel the rental market is coming down. That certainly is not the case in the UK residential, and especially not in the SE where shortage of availability is driving prices up and up and potential renters to distraction., This doesn't seem likely to end soon.

Alphaflight

Franco-Nevada (TSE:FNV) and Wheaton Precious Metals (TSE:WPM) are the highest quality precious metal royalty companies.

For base metals, potash and other key resources, Altius Minerals (TSE:ALS) is leader. Altius is the only company that I know of that still gets a Rick Rule ranking of 3 (Franco and Wheaten both ranked at 4).

For the Oil & Gas royalty companies there are quite a few to chose from. I recently (via Resource Insider) invested in a private Oil & Gas Royalty company. I'd highly recommend Resource Insider to anyone serious about the resource space, it is $5,000 per year to join (*and you have to be an accredited investor to partake in any private offerings).

marigold

Stupid question, but do we have money market funds in the UK yielding 4.7%?

tic_tac_toe

on ' money market funds. These funds yield up to 4.7%, which is over 4% higher than the average bank deposit rate today'

I hear a lot lately about 'money market funds' - can anyone suggest a couple of examples of what these might be?

I hope you don't own any old buildings in the EU:

Harry Hindsight

Thanks for Resource Insider. Investopedia has good information on accredited investors and private placements, I just need to become a High Net Worth Induvidual :)

You are very welcome.

BnB

I hope you don't own any old buildings in the EU

No. But I own Kingspan, Volution, Daikin, Eneraqua, Trane Technologies and a selection of industrials, like Schneider Electric and Addtech, whose ranges include energy efficient construction products.

Money market funds are an investment product that focuses on short-term
securities. These securities are deemed very low-risk – and typically
include a blend of government-issued bonds like US Treasuries and UK
Gilts, alongside high-grade corporate bonds. The purpose of investing in
a money market fund is not to generate long-term investment or growth.

Have a look at this in the UK for an example of a low risk cash-like money market fund:

https://www.vanguardinvestor.c...

They benchmark to the SONIA interest rate, which is very close to the Bank of England base rate - 4.25% presently.

More like 4.2% I think, close to the BoE Base rate

The UK residential market, especially in London and the South East, is experiencing strange dynamics in large part due to the change of treatment of buy-to-let investment properties for tax purposes... This, plus the huge hike in borrowing costs of late has led to a lot of shrinkage in available-to-let properties, similar to the case in Dublin for instance.

But this is not true to the same degree elsewhere in the world...

4th Apr '23

Our goverduhment is ahead of the virtue race with the Minimum Energy Efficiency Standards (MEES). Still we can always work from home and the hulks become temporary hotels.

Haha don't get me started on MEES / Carbon Reduction Targets.

Our government is essentially betting on technologies that don't work well or haven't been invented yet. See here for example.

Meanwhile our largest oil and gas producer is cutting UK investment due to the new windfall taxes. Shell and Total are making similar noises relating to the UK. So that means less energy independence for the UK over time.

There are tectonic changes occurring right now but we aren't seeing them get a mention on the BBC "news". For example, Kenya has agreed to buy their oil from Saudi directly in their domestic currency (Kenyan shilling), thus bypassing the USD completely. Brazil just announced the same thing, they are ditching the USD for trade. Then you've got Mexico, Saudi, Iran and so on lining up to join BRICS.

“There are decades where nothing happens; and there are weeks where decades happen” – V. Lenin.

Snowbum

Don't forget the Chinese deal with TotalEnergies SE (LON:TTE) for LNG!

Guybrush

Epitychia

5th Apr '23

Gold and silver should always be part of a diversified portfolio. But today they also offer a lot of upside potential as well, fill your boots!

The small gold/silver miners have yet to catch up with spot gold. For example I see that Hummingbird Resources (LON:HUM) is starting to move, up 22% today. Serabi Gold (LON:SRB) starting to move too, Centamin (LON:CEY) is still cheap paying a solid dividend....

Market Musings 010423: Q1’s Frequently Asked Questions