Posts tagged: KNG International Advisors

Monday 25th of September 2023

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Uranium commodity and financial markets...

Most commodities have seen major declines in price this year, following a spike in prices in 2022. Oil prices are down 6% year-to-date in 2023, while natural gas prices in Europe are down more than 80%. Aluminium, zinc, palladium, in fact virtually every commodity is trading on prices today well below peaks form last year.

One which stands out is uranium. The commodity used to power nuclear power stations is trading on spot prices close to the highest in more than a decade. Over the past twelve months the price of uranium has risen 18%, while since 2017 the price has climbed by more than 130%. 

What has been driving this, is a global undersupply of uranium feeding the world’s growing fleet of nuclear reactors. Total demand exceeds supply, and has done for several years, with the difference made up by inventories held by large utilities. As demand rises and supply remains stable, this deficit in supply is growing and putting upward pressure on the price of the commodity.

Demand for uranium, unlike most other commodities, has very little to do with the macro economy. While demand for copper or crude oil will often fall during an economic slowdown, this is not the case for uranium. The large nuclear power stations which use uranium as fuel typically provide baseload electricity for grids, which means they run at high rates of capacity 24 hours a day, seven days a week. Other sources of electricity, like gas fired power, are used to flex up and down to meet fluctuating electricity demand on a typical grid. 

So, while during a recession electricity demand may fall, as overall economic activity cools, use of nuclear power will often remain stable.

Meanwhile, there has been a steady shift in attitude toward nuclear power, which has accelerated in 2022 and this year. Russia’s invasion of Ukraine and the subsequent spike in coal and natural gas prices has forced a major re-think about energy security in many countries, with more pro-nuclear policies having already been, or in the process of being, introduced. 

In addition, the needs to de-carbonise energy systems and the slow build-out of renewables has further shifted opinion on nuclear power as an option for energy systems in many countries. 

In many cases we have seen countries produce updated long-term plans with radical increases in nuclear power predicted for the 2030s and beyond.

In the more immediate term, there is a growing list of nuclear power stations which were scheduled for decommissioning where the closure has been delayed or cancelled. This is adding unexpected demand to uranium markets in the near-term. 

Uranium multiplication...

In the 2005-2008 period, uranium saw a 10x increase in price. As with the market today, the global market for uranium was in supply deficit and prices had steadily risen, the market became increasingly tight. Then an unexpected interruption to supplies from one large mine in Canada triggered a wave of buying from utilities running nuclear power stations. The cost of uranium fuel to power a nuclear plant is very low relative to the power output and as such, many of these buyers were much more concerned with securing supplies than how much they paid for the fuel. 

Today’s market for uranium has many similar characteristics and we have recently seen several unexpected supply disruptions. A military coup in Niger, home to 5% of global uranium output, has interrupted exports from the country. A large Canadian uranium miner has also announced lower than expected production from one of its largest mines following unexpected issues with that location. 

History may not repeat but sometimes it rhymes.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 14th of August 2023

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How does the butterfly effect link to the markets?

It is rare in any sector of the economy for talks between a trade union and employers to have global ramifications. But that is exactly what happened last week.

Proposed industrial action by trade unions and their members at liquified natural gas (LNG) sites in Western Australia, representing 10% of global LNG exports, sent natural gas prices in Europe up +40% in just one day. Much of Western Europe relies on natural gas for a high proportion of electricity production, as well as many industrial production processes and (during winter) for heating. A spike up in price of this magnitude has major implications if sustained.

Outside of Europe prices rose too. In Asia, LNG futures rose +7% last Thursday, while broader energy prices have moved up too.

While much of Australia’s LNG supplies go direct to Asia, the prospect of tighter supplies there means many Asian LNG buyers will be looking to compete with European buyers for supplies out of North America and the Middle East.

The Butterfly Effect is an idea in which very small changes in the state of initial conditions in a system can have large nonlinear effects in a later state on the entire system. Mathematician and meteorologist Edward Norton Lorenz used the example of a butterfly flapping its wings resulting in a tornado some weeks later.

In the global commodity complex, an effect much like the butterfly effect can have global implications, especially when those markets are tight, i.e., where the spare capacity of the supply side to respond to high prices is limited.

Since the Russian invasion of Ukraine, global energy markets have become tighter. And these markets were already becoming tighter in the lead up to the war, the conflict has only exacerbated the problem. Years of low investment in new production capacity by fossil fuel producers has meant that the ability of the supply side to respond with higher production has become reduced steadily over time.

We have warned previously that tight markets in an unstable geopolitical climate and with high inflation could result in lurches back into rapid rises in commodity prices which surprise markets.

This is exactly what happened last week. Unions representing just 700 workers in Australia resulted in European and Asian energy prices rising substantially. This is a strong indicator of tight markets and that we could see further spikes up in prices for commodities, as we saw in 2022.

Inflation picks up...

This raises the prospect of inflation levels picking back up due to commodity prices pushing up broader price levels. Last week’s price spike is not enough, on its own, to cause this, but is indicative of the state of energy and commodity markets today, namely one of tight supplies across many major commodities, a world where the risk of interruptions to supplies is high, and where demand for some commodities is rising structurally (driven by emerging market demand and the needs of climate change mitigation policies).

This sets us up for continued lurches up in prices to very high levels in the short-term. The timing of these lurches up in prices is hard (arguably impossible) to predict, but we can say with more certainty that the probability of these lurches up in price occurring is higher.

When we look at some of the stocks (energy suppliers) with positive exposure to these price rises, they often trade on very low valuation multiples. This is why we maintain long investment positions in some of these names. With limited downside to share prices given the already low valuations, we have exposure to the positive side of higher energy prices… higher short-term profits and dividends!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 7th of August 2023

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Markets never go up in a straight line...

A classic staple of past bull market cycles has been the proclivity of markets and market participants to have short spells of worrying unnecessarily about certain risks. Markets never go up in a straight line and often, if we look back at past bull market cycles, the short spells of market weaknesses you observe were driven by these bouts of worrying.

When we look back at them, we realise that there was little justification for these market jitters, it was simply a short-term blip of fear, followed by the resumption of positive sentiment and positive market moves. These blips were opportune times for patient investors to increase exposure to risk assets.

At the time, it is easy for investors to become wrapped up in the fear and sometimes the panic induced by these periods in markets. In the five years of strong positive equity markets leading up to 2019 we can recall at least two separate scares related to North Korea firing missiles into the sea.

The lead up to the election of Donald Trump in 2016 led to market jitters about the implications of a Trump victory. There were similar gyrations and fears in global markets following the surprise decision of the UK to leave the EU that same year.

In fact, the more we think about the past in financial markets, the more examples we can recall of now long forgotten issues which, at the time, dominated news headlines and led to investor fears of an imminent market decline, requiring ‘action to be taken’. History and hindsight tell us that, more often than not, major investor concerns about most issues are overblown.

This is not always the case, there are rare instances like the 2020 pandemic where the risk of major market declines was real, similarly the financial crisis of 2008. But major issues like this requiring investors to take defensive actions are few and far between. They do not happen very often and, when they do happen, they are usually very unusual events.

Recently we have seen a credit downgrade form Fitch of US government debt hit the headlines as something investors should be concerned about. A short bout of market selling followed. This and ongoing wrangling in the US Congress on budgetary decisions has moved up the headlines and become an issue many investors are asking questions about. This smells to us like a news story investors should be looking through and largely ignoring.

The news cycle will always look for scary news stories, news establishments are incentivised to do this. In the absence of real issues to worry about for investors (financial crises, global pandemics, being two examples), the news media will show us issues they suggest we should be worried about, but which actually pose very little if any risk to our portfolios (North Korean sabre rattling, US political problems, another war in the middle east, and many more examples). The truth is these issues are just news stories and have no effect on a well-diversified global portfolio of assets.

What is more, it is normal during a bull market to have short pauses where markets worry about X or Y, only for everyone to forget about X and Y very quickly as the news cycle moves on.

Save the worrying for the big ones, when they do come around from time to time. For now, we don’t see much to worry about. We remain fully invested and see opportunities in many areas to invest at attractive valuations.

This can always change. Evidence of recession and major slowdown in the economy is a good reason to be worried about short-term asset price performance. But we’re not seeing evidence of that yet and so remain tactically bullish. We’ll save the worrying for when we need it.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 31st of July 2023

Analysing the financial market...

We are a couple of weeks into earnings season for the second quarter of 2023, with most of the world’s major listed businesses reporting financial statements and management commentary. With most companies still yet to report it is early in the season but, nonetheless, we have seen and heard enough so far to make some conclusions.

China’s discretionary consumer has arrived, albeit a little late. We are seeing a solid recovery in the Chinese consumer, led by higher income consumers in traditional luxuries earlier in the year, we are seeing evidence now of a broader improvement in spending across other product and service areas like mid-tier apparel and sportswear, and travel and leisure.

US ‘aspirational consumer’ is weakening in traditional luxury. We have heard now from multiple global luxury goods companies that in the US, consumers in the ‘aspirational’ category, those on incomes who can afford the lower pricing tiers of products, are slowing down their spending on this product category. Meanwhile, however, the US high income consumer is doing fine.

A major global catering business we follow is not seeing slowing in the US economy. In Sports and Leisure spending remains strong: “strength is continuing… We’re not seeing any signs of weakness thus far” according to management. This supports the view that where there is weakness in the US consumer, it remains restricted to physical products like traditional luxury goods and is yet to impact experiential or services spending, which remains strong.

Advertising spending is not dropping off a cliff, as you would expect to happen in a recession. Google Search growth accelerated, driven by retail advertising spend, while Meta (digital advertising business) reported very strong results. Despite the slowdown late last year in digital advertising, we have not seen the apocalypse predicted by many in advertising spend driven by weaker macro. Spending remains solid in the industry, especially in digital advertising with the large online platforms who offer the highest return on investment for advertisers.

Cloud spend growth is still strong across geographies and sectors. The two major cloud service providers to have reported results so far this season (Microsoft, Google) have shown continued strong growth in demand for cloud services across the economy and across regions. There is little evidence of a major slowdown in enterprise spending on cloud computing, far from it. We may see some moderation in growth rates, but nothing like the cliff edge drop expected earlier in this market cycle.

Conclusion: there is no evidence yet of a recessionary slowing in the economy. If there were we would expect to start seeing consistent patterns across sectors of the economy of slowing demand. We are seeing pockets of this, but it is limited and not consistent. The evidence continues to point to a ‘soft landing’ or ‘no landing’ scenario for the economy.

This is good for equities!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 24th of July 2023

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But valuations and strategy still matter...

Equity markets are undoubtedly in a bullish mood, with positive market sentiment and a broadening out of the rally in stock prices in recent weeks.

What was a narrow rally in stocks during the first half of 2023, with a small number of large technology names dragging stock indexes up, has widened to include many other index constituents across different sectors of the economy.

Better than expected economic data releases and lower than expected inflation prints have supported this broadening out of the stock rally. Measures of positive / negative surprises on economic data are at their highest level in two years, indicating consistent beats on expectations. This has historically been a positive lead indicator for short-term stock returns.

The stock rally coincides with investor sentiment hitting the highest levels since 2021. This is an increasingly popular rally with wider participation from retail and institutional investors alike.

Higher asset prices have two important short-term effects on the economy that we should consider.

First, it makes those consumers who own stocks feel more confident. The asset side of their balance sheets is going up and so they feel more confident to spend a greater portion of their disposable income and save less. This extra spending hits the economy quickly. We are already seeing this effect in consumer sentiment data from the US, with some measures hitting two-year highs.

Second, it acts as an effective loosening of financial conditions. Much like a central bank cutting interest rates has a lagged effect on boosting the economy via a lower cost of debt, a rising equity market has a similar effect of acting to make equity financing easier and cheaper for companies. Easier access to capital, whether sourced via debt or equity issuance, is stimulative to the economy.

In both cases, the above factors are inflationary. This is something investors and market participants should be mindful of in the coming months.

In the meantime, however, disinflation and bullish market sentiment are clearly the order of the day, and investors should consider tactical participation in this rally while it lasts.

At time of writing Netflix and Tesla had both announced their financial results and both stocks were trading down in the pre-market. In both cases, the results were actually pretty good, but relatively slight misses to expectations in revenues for Netflix and profit margins for Tesla, pushed share prices of both companies down in after-hours trading.

This tells us that the market rally may become more discriminatory as it goes on. Popular stocks trading on very high valuations (like Netflix and Tesla) may be prone to corrections in price on news-flow, even if that news is only slightly worse than expected.

Valuation remains king, in our view, and should remain the focus of investors navigating this market.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 17th of July 2023

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The end of last year saw sentiment towards risk assets and in particular equities become very pessimistic. The bear market of 2022, which hit growth stocks hardest but also hit bond prices dramatically too, understandably led to broadly negative and pessimistic sentiment for market participants as we entered 2023.

The rises in interest rates by central banks around the world and continued high levels of inflation further led to economic forecasts predicting major slowdowns in the world’s largest economies.

Looking back, it is remarkable how strong equity prices have been through this period. The S&P 500 Index is up close to +17% so far in 2023, the MSCI World Index +15%. These would be strong moves for a 12-month period, so it is even more impressive to deliver this in just the first 6 months of the year.

For much of the first 6 months of 2023, the rally in equities has been led by a small number of stocks. Large cap technology stocks in the US have driven much of the performance for stock indices this year, with the news-flow around artificial intelligence (AI) and a starting point of below average valuations supporting a strong move up in share prices of these companies.

More recently, we have seen two things that make us think the rally in equities could continue through the remainder of the year.

First, we have seen a broadening in stock index performance. What does this mean?

The fact that much of the move up in stock indexes in the first half of 2023 was driven by a small number of stocks (Apple, Microsoft, Amazon, Nvidia, etc.) made that a ‘narrow’ market. When a rally broadens, we mean that more stocks in the stock market index are contributing to the overall index performance. This is typically a healthy sign for a market rally, as confidence from market participants spreads to other sectors and stocks in the index.

In the past two weeks, we have clearly seen a broadening in positive market index performance.

Second, the latest data from the United States show a major reduction in rates of inflation and evidence of disinflation coming into the system. Remember, higher interest rates and their associated negative impact on the economy are what have held back market sentiment and economic expectations. If inflation really is coming down quickly and surprises to the downside, this could be a major tailwind to the economy via: (i) lower prices which boosts demand, (ii) higher corporate profits which boosts share prices, (iii) the potential for interest rate rises to be paused and even (whisper it) reversed.

What is more, the hype around AI is no fairy tale. Large language models and generative AI are revolutionary and we see ChatGPT and other iterations of this technology as having the potential to transform entire industries and have a major positive impact on economic productivity.

Broadening in market performance, lower inflation, and a technological tailwind to the economy, could be the recipe for further upside surprises to equity prices this year.

Equity rallies of the past have been sustained by far less!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 10th of July 2023

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As investors taking actions day-to-day, month-to-month, year-to-year, it is easy to get lost in the data, the news flow, and the emotions that come with making decisions of where to allocate capital.

We think it is important for investment success over the long-term to ask ourselves important questions which can ground us and help guide the investment decision making process.

The core question for all investors is quite simple, in our view: what are we actually trying to do?

We see the answer to this question as lying somewhere between perception and reality.
Perceptions of how the world works, how it is ordered, can sometimes diverge wildly from reality. There may be a widely held believe which when examined via robust data collection and analysis turns out to be incorrect. It is in this gap between perceptions and reality where opportunities and risks lie for investors.

Sometimes this gap in perceptions can have major implications. Governments, financial markets, whole populations of people can respond to their distorted perceptions of reality which then have major real-world implications.
An excellent example of this is the public and media’s perception of terrorism. If we look at data of media coverage from mainstream sources like New York Times and The Guardian, and then take all of the published news articles covering issues related to human fatality and split these by topic, you find more than one-third (>33%) of articles published are on the topic of terrorism. More than 23% are focussed on homicide. That means that more than half of these media articles in the mainstream media are focused on terrorism and homicide alone as subjects.

This focus on subjects bleeds into public perceptions and, as a result, into government decision making. If the fear of terrorism is high, governments respond to this with changes to the law to ‘fight terrorism’. America even fought two major wars over the past two decades in the response to the perceived threat of terrorism.

But if we look at the data on causes of death in the United States, as a proxy for how worried people really should be about terrorism and homicide, we find something remarkable. Terrorism was responsible for less than 0.01% of deaths in the US, while homicide was 0.9% of deaths. So, in total, homicide and terrorism represent less than 1% of deaths in the US (and we can assume the Western developed world is close to being the same), while more than 50% of media coverage involving human fatalities was focussed on these subjects.

This is a dramatic divergence between perceptions (“terrorism and homicide are something we should worry about!”) and reality (“these issues are a tiny fraction of deaths and really not worth worrying about at all”). Gaps between perception and reality have real world consequences and are something everyone should be aware of.

These gaps of reality versus perception can occur in financial markets too. And the result is that prices of assets can sometimes reflect the distorted perceptions rather than reality. This creates risks and opportunities.

If perceptions are too optimistic and you own an asset, there is a high risk of prices falling if reality catches up and is priced in. On the flip side, if perceptions are overly negative, buying an asset can be a good investment idea as when (eventually) reality catches up with the price of the asset, the price should rise. Sometimes it can rise a lot!

We see this perception to reality gap in many of the sectors we focus our research on.

We have spoken in recent weeks about exactly this gap being a potential source of opportunity in the debate around artificial intelligence (AI). The market perceives that some businesses are going to suffer significant disruption from the introduction of AI, and the prices of those shares have fallen dramatically in some cases to reflect that perception. If that perception is wrong, if those companies end up doing just fine over the next several years, those share prices are likely to rise significantly as reality forces perceptions to shift again.

Big news stories and controversial subjects like AI can be rich picking grounds for investors! Tread carefully, but we think the dislocations thrown into markets by subjects like this, and many others, offer very interesting investment opportunities for the prudent investor.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 1st of July 2023

It’s easy to forget, but less than 18 months ago Russia surprised the world with the full-scale invasion of a neighbouring, independent, democratic country. Ukraine then surprised the world by halting the Russian attack in its tracks and inflicting heavy losses on the invading forces.

Russia and Ukraine are both important exporters of major commodities and as a result of the conflict, the supply of these commodities was interrupted, resulting in major spikes in the prices of these goods.

When the supply of any good or service is disrupted, you would expect a spike in prices in the short-term. How long this rise in prices lasts depends on how critical the good or service is, in economics we call this the ‘price elasticity of demand’.

A good with a high price elasticity of demand likely is something that people can easily substitute, so if the price rises considerably, you will see switching out into other products and a major concurrent fall in demand. Imagine, for example, an event causes the global price of bananas to rise +300%. Assuming the price of other fruits remains unchanged, most consumers of fruit would likely stop buying bananas and simply buy something else, like apples or oranges. Bananas as a good have a high price elasticity of demand, in other words, if prices go up a lot, demand goes down a lot.

This process of demand collapsing in response to higher prices for a good with high price elasticities also works to bring prices down quickly. If demand for any good drops quickly, prices will fall as the market for that good will come back into equilibrium (where demand = supply) more quickly.

But not all goods have high price elasticities of demand, some have lower price elasticities. These are goods where it is not easy to substitute with another good, and where forgoing consumption all together is not easy. Forgoing the consumption of bananas is not that big a deal for most consumers, but what about forgoing electricity?

Many commodities used to produce electricity, like natural gas, coal, oil, these goods typically have lower price elasticities because in the short-term, you need to keep the lights on for a country like Germany, or the United States. If coal or gas prices spike +200% in the short-term, because of a major supply interruption like a war, then the buyers of those commodities must keep on buying, they cannot easily substitute. This further exacerbates the magnitude of the spike in prices, as demand does not decline as quickly, making the short-term supply interruption worse.

We saw exactly this scenario play out last year. The global supply of commodities was interrupted by the war in Ukraine, prices increased but demand remained relatively unchanged, exacerbating the spike in prices.

This was made worse by the fact that many commodity markets were tight after years of low investment. What does this mean? A tight market is one where there is little spare or idle capacity available to respond to changes in prices. A loose market would be one where a rise in prices would unlock a whole bunch of new supply quickly, helping to alleviate the rise in prices. A tight market is the opposite, it is one where there is little prospect of new supplies in the short-term coming online to respond to higher prices. Many commodity markets have seen much lower investment in new supply capacity over the past 5+ years, in some cases some of the lowest levels of relative investment for decades. The tightness of many commodity markets last year combined with a major supply interruption (a big war) was the biggest contributory factor to the rapid spikes up in prices of some commodities.

Markets, the financial media, and market participants have short memories. Very few are currently talking about the prospect of more surprise commodity price spikes. But if we look at the causes of last year’s price rises, they are all still very much in play.

The war in Ukraine is intensifying with little prospect of easing up any time soon. Russia is also increasingly being incentivised to try and destabilise other regions where it has a presence (Africa, the Middle East) to put pressure on the West. The risk of further surprise interruptions to commodity supplies remains very high currently.

Meanwhile investment in new production capacity for most major commodities remains relatively low by historical standards, we are not seeing a rush from miners or energy producers to open new supplies, capital discipline remains conservative.

It is always difficult to predict the exact cause of an unexpected interruption to the supplies of any commodity. But what we do know is that the ingredients for further price spikes are very much there. Investors should be braced for these and even consider being positioned to benefit from them if they come.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Tuesday 27th of June 2023

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The recent and remarkable rise of generative artificial intelligence (AI) systems has captured the attention and imagination of the world. ChatGPT being the most discussed (although there are many other generative AI systems producing very impressive outcomes), there is already talk of a new technology revolution driven by AI systems.

Our investment team has trialled ChatGPT and it has become a useful tool in our work process. Many others we speak to across different industries are finding novel uses for generative AI to support workflows and improve productivity. We are believers in AI systems eventually heralding a new age of technological progress.

As with all new technologies with the potential to change the world, generative AI has also captured the attention of equity markets! Stocks deemed to be potential ‘winners’ from the AI revolution have seen dramatic increases in market valuations over just a few months.

The poster child of this recent short-term trend has been the chip designer Nvidia, which has seen its share price rise +192% in 2023, the company’s market value is now greater than $1 trillion. Other tech firms like Microsoft who are thought to have a lead in AI have seen significant share price rises too.

We think Nvidia, and Microsoft for that matter, are both fantastic businesses with great technology, and both are undoubtedly at the forefront of AI today. But both businesses also command high valuations too. This leaves little upside for investors who want to take a position in the evolving AI story.

Sometimes in markets as an active investor, when everyone is looking one way, it pays to look the other way. In fact, it’s always worth looking the other way, even if you don’t make any investments!
What do we mean by ‘looking the other way’? Well, the consensus in markets today on AI is that, as investors, we need to pick the ‘winners’, the companies who are going to see accelerated revenue growth and profits from the AI revolution.
But what about the perceived ‘losers’ from AI. Looking the other way in this context means, looking at the companies the market thinks are going to lose from AI. Maybe there are opportunities there?

It’s very early days with this new technology in generative AI. Past cycles of new technologies teach us that the expectations of how quickly a new technology will change the world are often overly optimistic early in the cycle. The internet really was going to change the world, the tech evangelists were right about that in the 1990s, but it still took decades for that to happen in practice. It’s also incredibly hard to predict how a new technology will be implemented, and who the winners or losers will be.

Meanwhile the market has already punished the share prices of many companies who are thought to be at risk from AI.

A good example of this is in outsourced customer care services, where large companies and governments outsource call centre and helpdesk services to companies who specialise in the provision of these services.

At a very basic level, it seems quite obvious that some call centre jobs are likely to be replaced with generative AI systems like ChatGPT. But it is also quite naïve in our view to assume that that it is necessarily bad for the companies in question.

Imagine, for example, a large government department who outsources visa application call centre and helpdesk services to a large expert company in the field. That same department is not going to go to OpenAI (creators of ChatGPT) and request the entire call centre service is moved over to ChatGPT. OpenAI wouldn’t want them to do that either.

The obvious outcome from this user case example is that the existing service provider integrates ChatGPT into their existing service offering, with humans and AI working together to provide a better and more effective service to the end client.

The end client is happy, since it gets a more efficient service that works. OpenAI is happy because its AI system is being used. And the service provider is happy because it is now offering a better product to existing clients.

If anything, AI may be a tailwind to these call centre outsourcer companies. They might end up being AI ‘winners’, rather than ‘losers’. But their share prices have declined because the market (incorrectly, we would argue) is assuming AI must be bad for call centre services.
This kind of short-sighted, poorly researched thinking in markets creates opportunities for the thoughtful investor! And there may be many more opportunities where the market is assuming businesses will lose out from AI.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 19th of June 2023

Listen to this financial market update by playing this audio...

Equity markets have had a strong first-half of 2023, with strong moves up in many of the major stock indexes around the world. This has been led by very solid moves up in US stocks, with much of this increase in equity value driven by a relatively small number of US technology stocks.

The launch and widespread adoption of ChatGPT and other large language models has further added fuel to the fire of the market rally, with expectations of the implications of artificial intelligence feeding into the stock prices of the suppliers of related technologies. Chip designers like Nvidia, and business process implementation companies who use AI like Palantir, have seen very strong moves up in share price in recent months.

Meanwhile, however, the economic outlook for the global economy remains as confusing as ever. Despite one of the fastest moves up in central bank interest rates in history in the US and Europe, we continue to see relatively robust economic data, especially from the US. Housing markets have seen some slowing and dips in prices, but nothing dramatic just yet. Consumer spending growth rates have slowed but remain positive. And we continue to see labour market data surprise to the upside, most recently in the UK.

So, while equity markets have been buoyant in the first 6 months of 2023, with the latest hype around AI providing further support, we think that the economy will increasingly come back into focus for global financial markets and guide the direction in the second half of 2023.

A steep rise in interest rates will always have an impact on the macro economy. The question is, how much of an effect?

Going from close to zero interest rates up to closer to 5% is a big move, especially when it happens in the space of 12-18 months as we have seen in the US. This begs the question, how big an impact will we see on the US, and as such, the global economy from this rise in rates and subsequent decline in liquidity?

Whatever the case may be, there will be some slowing in growth rates in the economy from higher rates. The worst outcome would be what is widely being called a ‘hard landing’. This would be a dramatic decline in economic output and confidence. The last economic ‘hard landing’ was the 2008-2009 recession. The best outcome would be ‘no landing’ at all, where we see some slowing in the economy but we do not see anything that looks like a recession. The third option is somewhere in between, what is being called a ‘soft landing’. This would look like a mild recession, something along the lines of the recession seen in 2001.

Which do we think is most likely?

This is probably one of the hardest macro-economic environments to predict in our careers. And many other commentators and investors agree. The supply chain and demand pattern disruption caused by the pandemic has shifted business cycles in many industries in unpredictable ways. Inflation, caused by a war in Europe and over-stimulation of Western economies by governments and central banks has further complicated the situation, pushing central banks to raise rates dramatically to attempt to tame inflation. This leaves us in a position where the outlook is highly uncertain for the global economy.

It is helpful to think about what needs to happen for either of the extreme outcomes to occur. Starting with a ‘hard landing’, we think this is probably less likely than a soft landing because to get a hard landing in the economy, we typically need to see a major credit or financial crisis. If we look back at two of the biggest hard landings in history (1929-1933, 2007-2009), in both cases there were systemic risks to the global system caused by the failure of large banks and financial institutions. Although there have been some worrying recent parallels with the failure of several regional US banks and Credit Suisse this year, we do not see the risk of systemic bank failures as being particularly high. Banks are much better capitalised today vs. 2008 and it is rare (if ever) that a crisis repeats a second time. If there is going to be a major crisis that pushes us into a hard landing, it won’t be bank failures or a major credit crisis in our view.

We also think the ‘no landing’ scenario is somewhat unlikely, simply because of the very high levels of debt in the global financial system and the rapid rise in interest rates. We find it hard to believe that the global economy can completely get away with no significant slowing in growth rates given these factors.

Which leaves us with ‘soft landing’. We think this, therefore, is probably the most likely outcome. A recession at some point in 2023-2024, but in the absence of a major credit crisis, a shallow recession that looks more like 2001-2002. This also chimes with the equity market we have seen over the past two years, where tech stocks rallied to unsustainable valuations before seeing major declines last year.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

Have you watched our financial news reports?

You can see the videos of our weekly financial news report on our social media:

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