Professional followers of fund management house 36One will most likely be familiar with Evan Walker’s somewhat folksy and decidedly blunt speaking style. I certainly wasn’t surprised when they cracked the nod for a couple of Raging Bull awards earlier this year.
Like many other fund managers at the conference, they were concerned about global inflation and the prospects for both rate hikes and quantitative tapering. They did feel that there is quite a lot of liquidity to support markets, but felt markets were perhaps still a little high and the estimates for next year’s earnings on the S&P too optimistic. Walker drilled quite extensively into the nature of the inflation out there, with some distinctions between goods inflation and services inflation and discussion about inventory levels in the US.
The US built huge inventories after the initial jolt from Covid, leading to a position of being vastly overstocked. (Author’s note: I have previously noted the interaction of company economic order quantities and interest rates, and how it causes a gearing effect in the sensitivities of inventory to interest rates. Hint — it’s much higher than linear.) This is obviously quite tricky given that we are at the tail end of a housing cycle (and the associated purchasing of appropriate relevant durables).
They touched on the point that resources generally do well in all inflationary periods
This (plus collapsing ISM manufacturing new orders data) led them to the conclusion that the goods inflation cycle is likely to roll over relatively swiftly. However, a very important insight was that this prior goods inflation would ricochet through into the services inflation line and that that could persist for another three quarters at least.
Further evidence was supplied by Amazon’s seemingly relentless double-digit sales growth recently stalling to below 2% like for like.
Since services make up between 25% and 45% of OECD economies’ typical GDP, related knock-on inflation could stay sticky (along with food inflation, which is being aggravated by drought conditions in the US) for quite some time. US consumers remain quite strong, with credit card delinquencies and household debt servicing ratios at relatively conservative levels.
Along with other presenters, they touched on the benefit of the global supply chain rectification efforts to the SA economy. In addition, they touched on the point that resources generally do well in all inflationary periods.
This led them to a synopsis of their local big five overweights: Absa, Glencore, British American Tobacco, Mediclinic and Sasol. This they describe as a kind of barbell strategy, which is essentially building a portfolio of extremes with a mix of cyclicality and defensiveness.
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