Notable news on the day the panel met was the Labour party announcing that they are backing a £50bn defined contribution incubator “growth fund”. This is financial repression front and centre – if it goes through, it is an example of the government mandating investment according to their whims and wishes, distinctly overriding investment managers. Considering the implications for stock markets, a few themes emerged. First, financial repression is typically good for gold (and stubborn inflation not matched by interest rates redoubles this conclusion), and second, it will be bad for the asset classes that pension funds will have to sell to finance these investments into the growth fund. As it is imperative for government that they maintain their own sources of funding, it is highly unlikely that pension plans will be allowed to sell any of their government bonds, certainly not “en masse”. The selling pressure then is likely to fall on the most consensus trades. This has been growth equities and tech in particular. Note that the S&P500 is as concentrated as it has been at any point since the 1970s, with Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta making up 28% of the index and essentially all the returns in 20231.
Beyond this slightly concerning but not surprising news, the panel spent most of the time discussing opportunities afforded to investors willing to look elsewhere, where asset prices are less inflated. Some of the more cyclical stocks have had a tougher time and could well be interesting if you are willing to take a risk on timing. Japan, South Africa, South Korea and China (where we focussed on HK) all look cheap, but not without their respective issues so discretion was advised. There are also some very interesting looking discounts in holding companies. Think Exor, Remgro, Jardine Matheson, Itochu, LG Corp. Aligned as we are with the philosophy behind both themes, Kennox had added LG Corp from South Korea to the portfolio back in April.
The macroeconomic backdrop does not look to be without its pitfalls, but for the judicious stock picker, there is no shortage of opportunities.
Craig Collins, Glen Finegan, Peter Hollis, Ally McKinnon, Russell Napier and the Kennox investment team