Mellon on the Markets: Autumn Outlook

6 mins. to read
Mellon on the Markets: Autumn Outlook

I’m writing this mid-year review (with the start of the investing year defined as the Master Investor Show event in March!) , partly as a way of thinking through my own strategy, and partly to update our loyal readers.

I’ve just been on a rapid-fire trip to Australia, rattling the tin for alternative proteins, and while it was so good to be back Down Under, it reminded me that 46 hours in a tin can isn’t too good for the old body.

I’m not fluent in any of them but I read German, French and Spanish newspapers, or at least glance at them every day . For those that like to read the reams of despondency coming out of the UK press, let me assure you that the somber drumbeats portending a sort of Game of Thrones winter are even more evidence in the likes of Bild, Le Monde and El Pais.

Since I’ve been doing this investing lark for a long, long time (but not as long as Evil!) , I can see that the gloom is overdone. The pressing forecasts of IMF straightjackets for the UK and multiple emerging markets , the certainty of an implosion in Italy, and the predictions of multiple corporate bankruptcies across Europe, particularly in Germany, are just plain wrong or at least, premature.

I’ve been forecasting inflation for years as well as the eventual demise of the Eurozone, and the Tech Wreck in the US, but even I would never believe that the commentariat could be so incredibly gloomy right now, when, lets face it, a lot of the damage is done.

We’ve seen some supposedly serious people talking about parity for sterling against the dollar, a recession in Germany of up to negative 7% GDP next year, an Italian bond meltdown and so forth.

No wonder investors everywhere are mightily confused and shaken .

Well, let me tell you what I think , the good , the bad and the “not-so-ugly as you might think “.

I think we are very near peak dollar, and that the currencies you should buy are precisely some of those that have done worst.

That is to say, the pound sterling, and the Japanese yen. The US dollar is wildly overvalued, and the lesson of the tech wreck is that if something appears to be expensive, it probably is.

I think that we are also close to, if not already at , peak inflation, and that we can now see that in wholesale markets . Oil prices have fallen a lot, food prices are now back to pre-invasion levels, and gas prices are beginning to come down.

Why are these things happening? One, there is what is called demand destruction, which is when consumers and industry just use less, for instance ,gas, because it becomes too expensive.

Second, the European Union and Asian countries have been buying gas at whatever price they can get it at, all the way through the summer, and some of their more extravagant purchases they will live to regret. But for now, it means tanks are almost full and that despite the shutting of the Nord Stream 1 by Gazprom, gas prices have probably peaked.

Third, labour market tightness has also peaked and that will alleviate wage led inflation in coming months . The Great Resignation will soon become the Great Scramble for jobs. Mark my words!

And lastly, substitution is occurring at a rapid rate; the Russians will be increasingly marginalized as oil and gas producers, and prices of their output will continue to fall. The growth of nuclear around the world will be astonishing, the growth of renewables, especially wind , continues apace, and the (hopefully temporary) revival of coal production will see continuing falls in energy prices to levels that are consistent with stabilizing economies.

Currently 14% of world GNP is devoted to energy, up seven times in three years. It will go into sharp reverse if it already hasn’t begun to do so.

Yes, we are in an era of higher inflation , and this will last for some time, which is why generally I don’t like bonds , but the PEAK level is very close to being reached, with a time lag due to the wholesale prices of food and energy working their way through the various consumer indices.

Does this mean good times ahead for the stock markets? Probably not, at least in the short term .

And absolutely not for the still overpriced US market. I believe the tech sector still has considerable pain ahead of it, and it may be up to another 25% down in a year or so’s time.

As an example, I don’t understand why Apple sells at 20x when every new iteration of its technology is only modestly better than its predecessor. Sure ,it’s got its services business, but in the same way that Blackberry was supplanted by Apple, don’t believe it can’t happen again, with a new technology supplanting Apples gently rotting core.

But of course, there are buys out there.

Firstly, as a devotee for some time of the oil majors, I would stick with them . Sure, the price of energy will come down, but these companies are cash machines, and the threat of windfall profits taxes will at most just clip their wings slightly. I continue to hold BP and Shell.

Despite sterling’s fall and the acres of lachrymose coverage on the UK, there is a reason why it is the best performing major market in the world so far in 2022. Its cheap (about 9x earnings), has significant overseas earnings exposure (a positive with weak sterling) and old economy companies are probably best for the next six months or so.

I still like Lloyds Bank and Tesco in this regard, so keep holding.

In the US , my “like” of GM has held up very well, and I think it , along with BMW and Mercedes in , will give Tesla (still ludicrously overvalued) a real run for its money.

Some emerging markets look really cheap, and Vietnam stands out as a major benefit of manufacturers moving out of a troubled China , and in Asian markets Japan remains a standout, and I am nibbling at Hong Kong which is terribly oversold.

So, those are some shorter-term ideas for you. And yes, there will be recessions around the world , but I doubt they will be long lived or very deep.

And yes, the euro is probably even more doomed as a result of all the terrible things hppeming there, including Italy’s slide backwards and the fractious challenges from Poland and Hungary to the Euro project.

The US is going to have some interesting pollical fireworks over the next couple of years, and yes, there are always and always will be, international flashpoints.

But overall, we live in an era of really dramatic and exciting technological change : novel forms of energy , quantum computing, new food systems, longevity science, climate change mitigation industries, and AI generated advances.

All and any of these could literally transform the world we know, transforming the old order, rendering Russia even more toothless and friendless, elevating democracies once again to being the preferred model for societies, and generating extreme wealth for the far sighted.

Bottom line, worry, but not too much . It will all be fine, and though we fish in different waters, the catch can be as bountiful as you want to make it.

Happy Hunting!

Jim Mellon

Sept 6th 2022

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