Trump's TikTok Intervention

Magellan Asset Management

January 2025

TikTok, one of the largest social media platform in the US along with Meta's Facebook and Instagram, has faced ongoing uncertainty regarding its existence in the US due to national security concerns under Chinese ownership. President Trump intervened in the Supreme Court's decision to ban TikTok in the US. Investment Director, Elisa Di Marco chats with Investment Analyst, Claire Britton reflecting on the implications of this intervention, the potential sale of TikTok, and its impact on the social media landscape, particularly for Meta. They discuss how Meta stands to benefit from the increased likelihood of a sale and the potential shifts potential shifts in user engagement and market dynamics.

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Core Infrastructure Fund, Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged)

Important Information: 

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

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Hedge Clippings | 31 January 2025

This week's December quarter CPI number put a smile on the face of Jim Chalmers as he hit the airwaves to spruik his track record of dropping inflation, while keeping the economy afloat (just) and maintaining strong employment. Of course he was careful to mention that he wasn't trying to influence the independence of the RBA, although that's exactly what he was trying to do, as well as convince voters that he was a safe pair of hands for the next 3 years.

To give him his due, Chalmers is a much more convincing advocate of the government's record than the Prime Minister, even if he is only responsible for Treasury and the economy. Albo continues to huff, puff and fluff, and if things don't go his way at the upcoming election, he might be retiring to his new $4 million beachside pad on the NSW central coast sooner than planned. You never know, that could have been part of his "Plan B" when buying it.

Back to the December annual inflation figures: The figure of 2.4% annually certainly puts it well within the RBA's central band of 2-3%, even though their preferred measure of inflation, trimmed mean, still sat outside that at 3.2%, albeit down from 3.6% in September. Looking through the RBA's board minutes from their December meeting, their considerations for monetary policy would certainly seem to give them room to move on the 18th of February, with the only caveat that the government electricity rebates, which dropped electricity prices by 9.9% in the December quarter, and 25.2% over the past 12 months, are temporary. Be that as it may, the expectations are now well entrenched for a rate cut prior to the election - even if that's just the message Albo and his Treasurer, are desperate to convey.

2024 Fund Performance Tables:

With over 900 managed funds in the fundmonitors.com database, across multiple asset classes, strategies, and peer groups, producing the list of "Top Ten" is always fraught with danger. Assuming funds' performance or returns are the preferred method, then allocation to asset class or peer group is essential to provide an "apples with apples" comparison.

The next issue lies in the time period and track record of the particular fund universe. FundMonitors is as guilty as anyone for providing short term data - either by the month, YTD or over the past year - in spite of clear indications that managed funds should be considered for investing over at least 5 to 7 years. In spite of this at the start of each year, we publish the "Top Ten" list for each category, over the past 12 months.

At the same time every fund, encouraged or as required by ASIC, will issue the warning that past performance is no guarantee of future performance. In spite of this, there isn't an analyst, advisor or investor, who doesn't (or shouldn't) consider each fund's track record before investing.

The tables below, and our analysis, clearly show this when it comes to analysis of each fund's track record, the most recent 12 months performance is not the best predictor of longer term performance - say over 5 or 7 years: Taking Australian equity funds as an example, the top ten funds over one year performed exceptionally well against the ASX200's cumulative return of 11.44%.

Table 1: Top 10 Australian Equity Funds over 1 Year, shown by RETURN over 1, 3, 5 and 7 years if applicable (plus 3 year Sharpe).

However, if we "rank" those 261 funds over multiple periods to dovetail with suggested investment timeframes, 1, and particularly 3 year periods, don't necessarily correlate over all time frames:

Table 2: Top 10 Australian Equity Funds over 1 Year, shown by RANK over 1, 3, 5 and 7 years (plus 3 year Sharpe rank).

It is rare for any fund (but not impossible) to perform consistently in the Top 10 over all time periods and across differing market conditions, but taking the Top 10 over 7 years (in spite of ASIC's warning) shows a much higher correlation over all time periods:

Table 3: Top 10 Australian Equity Funds over 7 Years, shown by RETURN over 1, 3, 5 and 7 years (plus 3 year Sharpe value).

Table 4: Top 10 Australian Equity Funds over 7 Years, shown by RANK over 1, 3, 5 and 7 years (plus 3 year Sharpe rank).

It is important to note that the funds in the 7 year Top 10 list, even if they dropped out of the Top 10 over 1, 3 or 5 years, significantly outperformed their ASX200 Benchmark's return of 11.44%, averaging 29.3% over 1 year.

Fund Monitors' 2024 Annual Top 10 Fund returns and rankings analysis across all asset classes and peer groups will be available next week. To request a copy directly to your email inbox, please email contact@fundmonitors.com.

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Future Quality Insights: Pandemic Memories

Yarra Capital Management

December 2024

Funds operated by this manager:

From Resilience to Risk: Australian Market Outlook for 2025

Sage Capital

January 2025

As we reflect on the key developments of 2024 and look ahead to 2025, this article provides an in-depth analysis of the trends shaping both global and Australian equity markets.

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Key Takeaways

• ‍2024 Market Performance: A strong year for global equities, driven by the US Federal Reserve's easing monetary policy and a rally in US markets following the presidential election.
• ‍Australian Market Trends: Despite global strength, the Australian market showed mixed results, with banks outperforming while resources struggled due to sluggish Chinese growth and limited stimulus.
• ‍US Monetary Policy Impact: The US Fed's three rate cuts (100 basis points) boosted sentiment, asset prices, and investor confidence, helping mitigate downside economic risks.
• ‍Rise of Passive Indexation: The dominance of passive indexation and superannuation funds has contributed to inefficiencies in the Australian equity market, notably in the banking sector.
• ‍Key Risks for 2025: Emerging risks include the potential impact of new US trade tariffs, rising bond yields, and inflationary pressures, which could disrupt short-term growth and market stability.
• ‍Sector Outlook: Growth stocks in healthcare and technology remain attractive due to consistent earnings but face valuation risks tied to bond market dynamics. Resources continue to face headwinds from weaker Chinese demand, with base metals preferred over bulk commodities.
• ‍Two-Speed Economy in Australia: Higher interest rates have widened the gap between wealthier older generations benefiting from income flows and younger, debt-burdened households under financial strain.
• ‍Sector Preferences: Sage Capital favours insurers, diversified financials, and travel stocks while maintaining caution toward banks and certain discretionary retailers with stretched valuations.
• ‍Portfolio Strategy: A focus on diversification, stock selection, and limiting macro risks ensures resilience amid evolving market dynamics. Sage Capital remains neutral on growth stocks and selective within commodities and energy sectors.

2024 in Review: Global Strength, Local Surprises, and Shifting Market Dynamics

Looking back, 2024 was a strong year for the Australian equity market as it trended higher with a strong performance by US equities being a key driver. The subsidence of inflationary pressures allowed the US Federal Reserve (US Fed) to shift to an easing monetary policy bias, cutting the official cash rate three times by a total of 100 basis points. This helped boost sentiment and asset prices in general as the market took comfort that downside economic risk was controlled. The US presidential election and the eventual Trump victory saw a strong finish to the year for markets. Equities, the US dollar, gold and cryptocurrencies were all aggressively bid as investor sentiment shifted into euphoric territory.

The Australian market was a little more subdued as resources were generally under pressure across the year with sluggish Chinese growth and a lack of material stimulus. The most notable feature of the local market was the strong performance by the banks with CBA rerating to around a 25x Price Earnings ratio and forming over 10% of the index, leaving even seasoned investors, including us, puzzled.  This breakdown in market efficiency appears linked to the increasing dominance of passive indexation and the growth of superannuation funds, that have divergent goals to maximising returns.

Navigating 2025: Balancing Optimism with Emerging Challenges

As we look forward to 2025, Sage Capital sees a generally positive outlook for Australian equities, though several risks are emerging. The primary risk is the potential impact of new US trade tariffs, which may drive domestic investment higher in the medium term but could disrupt short term growth and intensify inflationary pressures.

Linked to this is the significant disconnect building between the bond market and the equity market. Bond yields have been pushing higher throughout the year as stronger US growth and more persistent core inflation have seen interest rate cut expectations pared back. There is also a supply-demand dynamic at play, with large budget deficits requiring funding, while the US Fed's quantitative tightening―by not repurchasing its considerable holdings of government bonds as they mature, adds further pressure. This process of quantitative tightening and interest rate cuts has seen the yield curve steepen but may act to constrain growth given that US mortgage interest rates are priced off the long end. Further increases in US bond yields may challenge markets, particularly across growth stocks which were largely immune from valuation impacts last year.

We've seen similar dynamics at work in Australia where higher interest rates have largely been ignored by long duration growth stocks, across both healthcare and technology. Whilst this is the area of the market that is delivering the most consistent earnings growth with a combination of pricing power, low fixed costs and high margins, it's also the area of the market which has become the most crowded and valuations have been pushed beyond historical extremes in many cases. It's hard to ignore growth stocks when looking for high quality earnings compounders, but the risk of a sharp valuation correction is rising if these bond market dynamics continue. Our approach is to remain broadly neutral while identifying areas of relative valuation and earnings outperformance.

Commodity prices have been generally soft, hampered recently by the strength in the US dollar, but broadly reflecting softer growth in China. It is difficult to be positive going forward on bulk commodities as China's population declines and an apparent lack of policy desire to stimulate the property and infrastructure sectors given the overbuilding that has already occurred. Our preference remains for base metals such as aluminium and copper where electrification demand is a key support for prices. Lithium remains oversupplied in the short term and western tariffs against Chinese EVs are unlikely to boost demand. However, the downside is also limited by cost curve support, so Sage Capital are relatively neutral and focused on stock selection. Energy has been unpopular as macro growth concerns and softening demand growth in China amongst a strong EV transition, although supply discipline by Organisation of the Petroleum Exporting Countries (OPEC) has helped provide price support. Energy stocks look cheap, and the space is heavily shorted so a contrarian move wouldn't surprise, particularly if the incoming US government drives stricter adherence to Russian and Iranian sanctions on oil exports.

The Australian economy has remained reasonably strong, though higher interest rates have put pressure on heavily leveraged households. This has created a two-speed economy, split along demographic and generational lines, with older generations that have accumulated wealth benefiting from higher income flows, while younger generations, burdened by mortgage debt and higher rents, have faced greater financial strain. We expect this dynamic to persist in the short term, with a tight labour market and persistent services inflation likely keeping the RBA on hold until mid-2025. Even then, policy isn't that tight, and absent a growth shock, interest rates are unlikely to be significantly reduced.

Sector Insights: Opportunities in Travel, Financials, and Diversified Strategies

Sage Capital maintains a preference for travel stocks where older cohorts with wealth have an increasing preference to travel. While we don't foresee a material downturn in spending, weaker terms of trade with softer commodity prices, higher interest rates eroding savings buffers, and uncertainty surrounding the federal election are likely to keep consumer spending constrained. While performing well, some discretionary retailers, much like the banks, have re-rated to valuation levels that can't be justified by their growth outlooks.

A solid, if unspectacular, growth outlook for the Australian economy and a strong labour market suggest that a bad debt cycle isn't imminent for the Australian banks. By the same token, banks have limited earnings growth potential as mortgage competition keeps net interest margins under pressure, book growth is limited given high household indebtedness, and rising costs are difficult to control amidst ongoing technology, security and regulatory demands. The valuation expansion doesn't appear justified by fundamentals, presenting more opportunities for shorting positions.

Sage Capital's preference within the Yield group has for some time remained with insurers and diversified financials, and this is unchanged. These stocks all have ongoing earnings growth, even as the insurance premium cycle nears maturity. Valuations are closer to fair than cheap given the broad re-rating across the last year, but they are still clearly preferable than those in the banking sector.

The portfolios are constructed using Sage Groups to minimise macro volatility with a focus on individual companies within these groups. Sage Capital maintains low net exposure to each Sage Group to limit the impact of unpredictable macro risks, and as always, the portfolios are well diversified and liquid.

Funds operated by this manager:

CC Sage Capital Equity Plus Fund, CC Sage Capital Absolute Return Fund