Australian and US GDP, commodities and builders
There was strong GDP data out today, exceeding already fairly strong expectations.
Private sector demand continues to take the reigns from public sector spending, driven by a strong household contribution.
Energy stocks and materials led the market higher, with growth defensives (healthcare and tech) declining, which is what you’d expect on a strong print.
Private sector capex has shown signs of life as well, supporting the building materials companies.
You can see a very clear downward sloping relationship between wages and unemployment, suggesting that tight labour markets do flow through to wages growth, and a barely-there, squint-to-see-it relationship between inflation and unemployment.
If the US is headed back to a late 2018 type world (pre COVID, pre inversion of curve) then the conversation is one of strong wages prints, which, if difficult to pass on (as the Philips curve below suggests) are a negative to corporate profit margins.
The Biden government is determined to have the former (i.e. wages up but no pass-throughs) and is seeking to partially fund that worker-led, wages-led recovery by reversing the Trump tax cuts (taking the tax rate back up to 28%).
It then becomes somewhat difficult to see why shares should sustain presently lofty levels.
As we continue to point out, the equity risk premia is getting ever tighter.
Rounding this out, it is also a world that’s not commensurate with negative real interest rates. Rates are not going back to the average of decades past (a variant of secular stagnation) but nor are they staying at pandemic levels when fully reopened.
And so we get quite a bearish tilt to the outlook for equities. Taxes, wages, rates. A strong economy does not always equal a strong stock market.
The fact that coal is at a 10yr high tells us that the whole commodity boom is only temporary.
We know thermal coal is dead, headed to zero somewhere in the near-ish term. But it is bouncing like all else in the same supply squeeze.
Ergo bullish extrapolations of demand driven by “fundamentals” used as narrative support for everything else (from copper to iron ore to soft commds) are just about as likely as it is for coal.
To restate, it is hard to make the point that a “commodity supercycle” is underway, due to ongoing/persistent demand, when a commodity that we know doesn’t have long term ongoing demand is behaving in the same way as all the others.
Rather, it is just the same underlying issue, a temporary supply shock meeting a powerful reopening demand shock, and will sort itself out as it has before.
And that means they should all drop at pretty much the same time, by a large amount, at a point somewhere in the near term.
There are some great home building / building materials companies out there. As noted earlier, there’s a significant rebound in desired private sector capex spend, going by capex intention surveys, and, as we already know, there is a significant resurgence in dwelling approvals.
But, we’d suggest, all that and more is already embedded in the multiple you are paying.
James Hardie (JHX) is a great business, but, we think, a loss making trade.
CSR is very much the same, a great narrative, but at peak multiples.
Boring old Amcor (packaging company) is sitting at 15x, with 10-15% eps growth, in a relatively defensive industry. Narratives are powerful, and right now the housing narrative is essentially FOMO (fear of missing out) but you are paying top dollar for that thematic.
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