Your regular editor Callum Newman is away this week.
So I (Greg Canavan) am stepping in for the day.
As Editorial Director of Fat Tail Investment Research, I’m usually busy behind the scenes (and the paywall).
But today, I’ll give you a sneak peek of some of the investment ideas I’ve been talking to our paid members about.
You’ve no doubt heard of my ‘Decade of Decimation’ report, currently doing the rounds. It sounds dramatic, I know. But there is good reason for that.
There is a lot to be concerned about. This country seems to think that as long as house prices rise, all is good with the world.
But under the surface, trouble is brewing.
Inflation isn’t going away. With Federal and State governments trying to bribe their way to another term, spending is out of control. And it’s largely unproductive spending, meaning it creates more demand than supply.
And you know what that means from high school economics.
Throw in an energy system driven by ideology rather than rationality and energy security, and you have the ingredients for persistent 1970s-like inflationary pressures, which could have dire consequences for the Aussie market this year.
Let me explain…
In one of my ‘behind the paywall’ Decade of Decimation reports, I explain how inflation impacts the stock market:
‘There is one characteristic of the 1970s that many investors tend to forget…
‘That is, with inflation and interest rates higher than they were in the 1960s, the market traded on a below-average price-to-earnings multiple for much of the decade and for most of the 1980s too.
‘As a Reserve Bank of Australia paper states:
“The trough in valuations in the 1970s and 1980s followed the OPEC oil crises, high inflation and several property company failures, and PE ratios remained low (outside the resources sector) until the late 1980s.”
‘When interest rates fall, they provide a valuation tailwind for the stock market. When rates rise, it acts as a headwind.
‘At the time of writing (early June 2024), the ASX 200 trades at a P/E ratio of around 18 times trailing 12-month earnings. This is well above the long-term average of around 15.7 times.
‘The rising rate environment since 2022 hasn’t yet provided the valuation headwind you would expect.
‘My conclusion is that the market thinks a more benign interest rate environment is likely. Hence the higher than average P/E ratio.
‘However, if inflationary pressures and higher-than-expected interest rates persist, this will act as a long-term headwind for the Aussie market.
‘This is good news for the active investor, but not so good for the passive investor relying on ‘the market’ moving steadily higher each year.
‘With this in mind, I have six stocks or areas of the market that I strongly suggest you avoid in the years to come.’
To get access to the report, click here.
I wrote the above in early June. That was when the market was anticipating rate cuts from the RBA. Now, thanks to persistent inflation, there is talk of another potential rate rise.
Meanwhile, ‘investors’ have completely ignored energy stocks. The sector was one of the worst performers in FY24, down around 7% in an overall market up 12% (including dividends).
This is why I insisted on including a special energy report as part of the Decade of Decimation survival package.
Since we released the report, the stocks mentioned are up 11% and 7% with one flat.
And members just received two new recommendations last week, with one up 6.3% already and the other flat.
Such short-term returns are meaningless. But I tell you this because the sector is hugely undervalued, and these moves suggest the market is starting to see that. After underperforming during FY24, energy stocks have certainly made a strong start to FY25.
If you’re interested in getting in while these stocks remain cheap, go here.
Here’s the intro to my energy report:
‘THE best time to invest in traditional energy stocks was in 2021. That was when the world went green and lost any rational perspective of how the global energy system really works.
‘No one thought ‘old energy’ had a future. And the companies traded at very cheap prices.
‘If 2021 was the best time to buy, the next best time is now. As I write this (June 2024), the valuation of many energy stocks hasn’t been this attractive in years.
‘Once again, the prevailing view is that ‘old energy’ is dead. That higher energy prices are unlikely as new forms of renewable energy emerge.
‘There is no historical precedent for this view. Demand for coal is as high as it has ever been despite being displaced by gas in many use cases. History shows that we simply use more energy over time.
‘And with the highly energy intensive AI juggernaut, we will need all forms of energy — including oil, gas and coal — for decades to come.
‘Despite this reality, the sector is cheap, and the long-term investor should do very well by buying a select group of companies at current prices.’
Personally, I’m very overweight energy, having added considerable exposure during last year’s correction.
As the reality of the world’s energy needs dawns on investors (again) I expect traditional energy stocks to come back into favour, after being ignored for most of FY24.
Do you have adequate energy exposure?
For ideas and ongoing analysis, please join me in what should be a cracking year.
Cheers,
 |
Greg Canavan,
Editor, Fat Tail Alliance, The Insider and Fat Tail Investment Advisory
Comments