Why are we so afraid of normal? Yarra Capital Management 25 July 2022 Dion Hershan, Head of Australian Equities, details why he believes the panic in markets today appears excessive. There has been an extreme bout of panic this year (ASX -11%, S&P 500 -19%) regarding the return of what appears to be a traditional business cycle (yes it still exists!) and key settings normalising. With the glory years of low and falling interest rates (supplemented by a bit of QE) now over, financial markets are in a state of flux. This is notwithstanding the obvious inevitability that at some point interest rates would have to move upwards from zero! Commentators, many of whom just finished becoming experts on epidemiology, are now opining on the chance of a recession and discussing it as if it's a fatalistic event. It is worth noting the US had 12 recessions in the 20th century and still fared OK. Unfortunately there appears to be no sensible discussion about the duration or severity of a recession, instead just alarmist rhetoric. While we won't attempt to call the business cycle, we do believe it's worth sharing a few simple facts with reference to the Australian market where we focus:
Financial markets always look forward and often overreact. This sell off has put forward earnings multiples at 12.5-times, the lowest level since the GFC (one standard deviation below the long-term average). Clearly, broad based earnings downgrades are expected in August; a 20% downgrade would put the market at 'fair value', which may very well happen. For what it's worth, we believe this feels like a forced slowdown in the economy and the panic that has ensued seems excessive. We are capitalising on the opportunity and stepping up at the epicentre of the panic to buy a number of quality cyclical and high growth business. We have established a position in Xero (XRO) which has halved and has enormous runway for growth (new markets, lifting average spend) and also increased positions in Carsales.com (CAR), Reliance Worldwide (RWC), and Nine Entertainment (NEC). |
Funds operated by this manager: Yarra Australian Equities Fund, Yarra Emerging Leaders Fund, Yarra Enhanced Income Fund, Yarra Income Plus Fund |