Stock markets

Price inflation data for May 2022 was released yesterday in the US. Over the full year to end May, the consumer price index increased by 8.6%. The AFR reports that this is the highest 1 year increase in 40 years. The stock markets reacted badly. The Dow Jones industrial average lost 2.7% and the NASDAQ lost 3.5% in value.

That stocks have been broadly overvalued is well accepted. Part of the reason supporting high valuations was low discount rates. A year ago, the average P/E ratio on stocks in the S&P500 was over 37. Today, it is 21.5. That reduction will have been largely driven by recent market sell offs and revaluations with higher discount rates as yields on debt markets increase. But 21 still looks expensive. I’m not sure I want to pay $21 to buy a future earnings stream of $1pa. With the high likelihood of further increases in discount rates plus risks to underlying earnings owing to economic malaise, the P/E ratios are under pressure both on the top line and bottom line.

I’d expect there is more red ink to come.

Give the customers what they want

The best way to succeed in business is to give the customers what they want. This announcement from Rio Tinto clearly pleases one campaigner from the Conservation Foundation, but I’d be surprised if she is a Rio customer.

Source: Australian Financial Review

Rio customers looking for a supply of aluminium that is high quality, reliable and low cost are unlikely to be pleased with the outcome of this decision.

Investment in an inflationary environment

Investing in an inflationary environment is new to me in practical, but not theoretical, terms. It has been obvious for over a year now that this current inflation was emerging. But it hasn’t made the practical decisions of how to invest any easier. The last time the world’s major economies experienced significant inflation was at the end of the 1980s. I didn’t have any money to invest back then, so my understanding was theoretical, not practical. I read about it. Fast forward 30 years, I’m now living on the success or otherwise of my investment decisions in what is turning out to be an inflationary environment. At the beginning of 2021, I made my views clear in public professional circles that inflation was emerging as a looming threat. Many didn’t believe me. But we all have to deal with it now.

So, how to invest?

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Budget ‘winners and losers’ according to the Australian Financial Review

It’s Budget night in Australia. The press used to report “beer up, cigs up” as excises were raised on those products. But the Financial Review was meant to be more adult, more thoughtful, more nuanced, more educated and less tabloid in its reporting. Until now.

The Government has announced a cut in the petrol excise duty. What has the Fin described this as? “Electric vehicle buyers are losers in tonight’s budget because they won’t benefit from the cut in the petrol excise. “

FFS, as they say in the classics.

Cognitive dissonance triggers in the business news

I know that cognitive dissonance can stress some people so apologies in advance if these stories from today’s business news in Australia give you the jitters. But many people, like me, will find them funny and get a good old-fashioned guffaw out of them. Or at least a smirk.

First, to corporate finance. A senior executive from the RBA, Australia’s central bank, gave a speech yesterday. That in itself is enough to prime most people for a laugh, given that many utterings from RBA senior executives are laughable. He said that Australia risked climate conscious global investors divesting from Australian business for greener opportunities. This is being referred to as a potential capital strike. I understand that he made these comments as a warning to Australian business for not being sufficiently green. But on the same page of the newspaper, a different report quoted the CEO of a major coal mining company saying the company is enjoying massive demand for its coal. That high demand, particularly in conjunction with rising prices, is creating booming revenue. Further, he said that with little increase in production of coal (globally) in recent years, this boom could last many years. In a previous post I mentioned that corporate finance options would evolve as traditional sources of finance were becoming, as the RBA man said, “climate conscious”. Sure enough, the coal executive explained how new sources of overseas capital are opening up, with particular emphasis on the likely long term funding from Asian debt capital markets to invest in and expand production capacity. I think the RBA chap should get out and about more.

Secondly, we turn to the current thorny issue of mandatory COVID vaccines for employees. Two of Australia’s four big banks were reported to have disclosed their policies. Westpac has introduced a compulsory jab policy. This was after it had surveyed its staff and found 91% were already fully or on their way to full vaccination status. According to the bank, the survey proved that the staff were supportive of this new policy which would keep everyone safe. Meanwhile, the ANZ bank also reported that it had surveyed its staff and it too found 91% on their way to full vaccination status. According to the bank, this showed a compulsory jab policy was not needed and it had no intentions of introducing one. So there you have it – how to interpret a survey result of 91% in two totally different ways.