'Perspectives' by Escala

In this episode of Perspectives, Escala Chief Investment Officer, Tracey McNaughton joins Ed to explore sudden lane changes in markets, what rising bond yields mean for investors, and why cash flow is coming into sharper focus - from Meta to Procter & Gamble. With lessons from a weekend motorbike ride, they discuss how to keep portfolios moving when conditions change.   (1:25) Now, Tracey, before we get into markets, How was your weekend? (2:14) Sense an investment analogy coming along? (2:34) Quite a comment for someone whose business is right in the middle of it. (2:58) Tracey, we've seen a pretty substantial lane change between the 2nd and 3rd quarters. (3:45) Tracey, what does that tell us? Were people too quick to write off the 7? (4:25) So, what looked like everyone suddenly switching lanes had something more fundamental behind it? (4:43) So, Tracey, let's talk about those road conditions. Why did rising bond yields make such a difference? (5:18) That's happening to everyone. Everyone now is facing a higher cost of capital. So why does it change which companies lead the market? (6:03) So, you can get squeezed from both directions. Your costs go up and your customers have less to spend. (6:24) Brings us to the puzzle. Technology companies are usually considered sensitive to higher yields. So why did the Magnificent 7 come back in Q3? (7:48) So, the advertising business can be doing well, but there's no cash left over after building the infrastructure. (8:10) Fairly abrupt lane change for a company that investors had been backing. (8:55) So we've had changing market leadership. Higher borrowing costs and now investors questioning the spending of companies like Meta. What are you watching to work out where we go next? (9:33) A steady flat road is easier to navigate than one that keeps getting steeper. (9:57) And the second thing, Tracey, earnings. (10:27) Rather than simply announcing a bigger investment budget and expecting applause? (11:05) From artificial intelligence to washing detergent? (12:20) So Tracey, is that investors becoming defensive or evidence that the opportunities are broadening? Those were pretty big moves. (13:03) What did the wider market tell us? (13:31) The technology lane slowed down, but other lanes were moving. (13:48) How does that influence the way you build portfolios? (14:22) We're back to your weekend ride. Watch the conditions, leave yourself some room. (14:37) What does that look like in practice? (15:14) Tracey, how does that translate into a portfolio? Because the temptation is to keep switching into whichever lane has just moved ahead. (16:03) So, leave yourself some room? (16:18) So the lesson from the weekend ride?

Perspectives: Episode 136 – Between Trump and a bond place   In this episode of Perspectives, Escala Chief Investment Officer, Tracey McNaughton, explores the collision between US fiscal stimulus and tighter monetary policy, why rising bond yields aren't necessarily bad news for equities, and how investors can find opportunities in a world where capital costs more.   (0:55) We are in an interesting environment right now. The US is running two economic policies that are working against each other. (2:55) And all of this spending is making its way into the economy. The US is growing in nominal terms, that is, accounting for inflation, by over 6%. That is well over the average for the past 30 years. (4:48) We normally associate strong economic growth with strong financial markets. Yet recently we've seen bond yields rise and equities come under pressure. Has good economic news become bad news for investors? (7:11) So let's start with what happened in the Treasury market this week. (9:27) And this brings us to equities. Higher yields means that earnings generated way out in the future need to be discounted back to the present at a much higher interest rate (11:48) So Tracey how do you translate all of this into portfolio construction? (13:27) If we're looking for protection against a recession, long-duration government bonds may still have a role. In a conventional growth shock, inflation tends to fall, central banks cut interest rates and bond prices rise. But we don't see a recession anytime soon. (15:53) What about infrastructure – will that protect you in an inflationary environment? (18:20) What about the currency. We had a question at our morning meeting today – should US equity investors hedge the US dollar? (18:46) So you're not suggesting investors should become more defensive. You actually telling them to be more deliberate – be conscious of the risk you are taking and why?

In this episode of Perspectives, Escala Chief Investment Officer, Tracey McNaughton, talks about why we are not trying to build the portfolio that performs best if we're right. Rather, we're trying to build one that can still achieve its purpose when we're wrong. (1:03) Do you think there's another shortage emerging that investors probably aren't thinking enough about? (3:09) Japan still owns roughly US$2.4 trillion of overseas debt. So nobody is suggesting Japanese institutions are suddenly going to dump that portfolio and bring the money home, are they? (3:49) But presumably Japan isn't the only reason yields are rising? (5:16) Since the risk-free rate sits underneath almost every asset valuation, this rise in bond yields, the rise in bond yields is becoming an equity market story as well. (6:23) We've talked about the price of capital. But you had an interesting question from a client last week which takes this discussion in a slightly different direction. That's the location of capital. (8:09) But gold is gold, so why does it matter whether it's sitting underneath New York, London, or Amsterdam? (9:01) So this is not just a gold story, is it? I remember during the GFC, it was important to know which bank kept your savings because some of those banks were ring-fenced by the government, but others weren't. (10:24) This is almost precisely the philosophical change we've been making in our new asset allocation methodology. (12:13) One of your strong criticisms of the traditional way we label assets in a portfolio is the label itself. What do you mean by that? (13:22) How does your methodology deal with that? (14:34) And what would today's discussion change? (16:53) That sounds less like optimization and more like engineering, doesn't it? (17:38) But presumably there's a cost to doing that

Perspectives 134 – Ride to the Conditions   In this episode of Perspectives, Escala Chief Investment Officer, Tracey McNaughton, looks at the changing conditions facing investors, from persistent inflation and a stronger Australian dollar to rising government debt and the return of fiscal discipline.   (0:44) Tracey, we spend a lot of time talking to clients and advisers about what is happening in markets, but I thought today we might turn that around a little and talk about what they are asking us. (3:13) You think there are good riders and bad riders in markets as well? (4:36) So how do you tell the difference between a good investor taking risk and a reckless investor who just got lucky? (5:08) And presumably that means there will be times when the more reckless investor actually looks like the better investor? (6:39) So what are the conditions around us today? (8:04) Which makes inflation harder to get rid of because the constraints on supply negatively impact growth. (9:34) Let's move onto the Australian dollar. We've seen quite a move recently. In the last month and a half we have seen almost a 3 cent move higher. What's going on? (10:21) US government debt has just passed US$40 trillion for the first time. It has doubled in roughly a decade and about US$3 trillion has been added in the past year alone. (11:43) And we're seeing the bond market respond to that now. The US 30-year Treasury yield has recently been above 5.3 per cent, the highest level since 2007 (13;49) Are we seeing that happen? (15;46) And presumably there's a feedback loop here as well. Higher yields make the debt problem worse. (17:11) Meanwhile, back home, the Australian Commonwealth government debt hit its own milestone last week topping A$1 trillion for the first time.

In this episode of Perspectives, Escala Chief Investment Officer, Tracey McNaughton, discusses just how large the AI capital expenditure budgets have become, where the money is coming from, and which parts of the AI supply chain are most at risk of overinvestment. (0:51) It feels as though every major technology company is announcing another massive increase in AI investment. Just how big has this AI spending boom become? (2:00) What's interesting, though, is that the spending doesn't seem to be slowing. If anything, every earnings season the budgets seem to get bigger. (4:10) Microsoft seems to have convinced the market that the investment is paying off. Was that true for everyone? (5:58) For Alphabet and Meta, investors are still asking, "Show me how this next wave of spending turns into future earnings." (6:57) If the hyperscalers are collectively spending more than US$400 billion this year, where is all that money actually coming from? (8:38) Where does that capital come from? (10:47) AI has become one of the world's largest consumers of investment capital. The unfortunate thing is this is happening at the same time as bond yields are hitting multi-decade highs. (12:12) So, Tracey, whenever we see an investment boom of this magnitude, history tells us that eventually somebody builds too much. Is AI heading down the same path? (12:49) Let's work through the supply chain. Where do you think the risks are highest? (13:54) What about data centres – surely that's where everyone's worried about a bubble? (14:41) What about the companies actually making the equipment? (16:01) So, not all parts of the AI supply chain should be treated the same – particularly when we are talking about capex?