| Here’s what you need to know today |
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|  | Amid economic crosscurrents and political uncertainty, US markets are retreating. |
| | The impact of ex-Cyclone Alfred continues to be felt. Around 240,000 homes and businesses remained without power yesterday, while some local councils in South-East Queensland issued ‘too dangerous to leave’ emergency alerts. One person has died in floodwaters in Northern NSW. (ABC News)
The US stock market has had its worst week in 2 years. The S&P 500 is down 3.3% in the past 5 days as investors have tried to get their head around tariffs, weak job numbers and a general sense of chaos in American politics and international relations. The S&P 500 has still more-than-doubled in the past 5 years (+113%). (Quartz)
Former Australian Prime Minister Malcolm Turnbull likely has Anthony Albanese and Peter Dutton cringing, as he went on Bloomberg and called Trump “weak”, "ineffective" and surrounded by “yes men”. Australia is currently trying to negotiate an exemption to Trump’s steel and aluminium tariffs which are scheduled to take effect on Wednesday, and this won’t help. (AFR)
Online furniture retailer Koala is reportedly considering an ASX-listing. The company was founded in 2015 and became known for delivering mattresses in a box. From there, the company expanded to a huge range of furniture delivered to your door. The company reportedly made $194m in revenue and $558k in profit in the last financial year. (AFR)
China’s economy continues to struggle. Inflation came in at -0.7% suggesting weaker demand from the Chinese consumer. It’s not all bad though, warmer weather saw a bumper harvest and a huge supply of fresh vegetables that saw fresh produce prices fall by 12.6%. That’s something Australian shoppers would love to see! (Bloomberg)
Yesterday, we wrote that Poland is investing $46 billion into its armed forces and providing training to every military-aged man as it questions the NATO security guarantee. Now the President of Latvia, Edgars Rinkevics, has suggested that some European nations should follow its lead and introduce conscription to counter Russian aggression. Latvia introduced conscription in 2023 citing Russia’s ongoing invasion of Ukraine. (CNN)
Another European leader that appears to be questioning the NATO alliance is Germany’s incoming chancellor Friedrich Merz, who said he would welcome talks with Britain and France to share their nuclear weapons. Since WW2, Germany has sheltered under America’s nuclear umbrella. (The Guardian)
If you’re wondering why European countries like Poland, Latvia and Germany are questioning the NATO alliance, it could be because Elon Musk is tweeting things like: [it] doesn’t make sense for America to pay for the defense of Europe and retweeting Senator Mike Lee’s comment Exit NATO now with the comment We really should. Under US law, a President cannot unilaterally withdraw from NATO without Senate approval. (Bloomberg)
And finally, some news here at Equity Mates Media: today we’re excited to launch our latest show, Basis Points! To listen to the first 6 episodes dropped across all platforms, head to the links at the bottom of the email.
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| | | | | What the…? | If you’re having trouble figuring out what is happening with the economy, rest assured you’re not alone. Chair of the US Federal Reserve Jerome Powell recently told a panel the US was seeing “elevated levels of uncertainty” and the Fed is “focused on separating the signal from the noise as the outlook evolves.” | That is Central Banker speak for ‘we don’t know where the economy is going next and don’t know what data points to pay attention to’. Our two cents: in volatile markets like this, remain focused on the long-term. (Quartz) |
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| | Investing is a lifelong journey | Here’s what you can learn today. |
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| The case for investing beyond the US | This is an extract from an interview with Eric Marais, Investment Specialist at Orbis for our new show Basis Points. You can listen in full on Apple, Spotify or YouTube. | So I looked up the numbers this morning. You've doubled your money over the last five years [in the S&P 500], but if you look at the last 15 years, the S&P's returned 14% a year in US dollars. So a little bit better even in Australian dollars. So that means you've doubled your money, then doubled it again, and then doubled it again. | That’s pretty phenomenal. I think that’s been the reality of US-invested investors. The S&P 500 is cap weight, and so you’re getting the full benefit of the Magnificent Seven coming through there. That’s just, I think, a phenomenal outcome. I don’t think anyone can realistically argue against that. | Intuitively, I get this interest bordering on obsession with the US companies, and in particular the US tech companies, because it seems so intuitive that businesses that grow, businesses that are innovative, are going to deliver returns in the future—the returns we’re all looking for. | There are some other opportunities out there, but the first question maybe to ask is just why is it even worth looking? Why bother looking elsewhere if the returns have been so good? | And there’s kind of three elements of bad news I suppose: | The first piece of bad news is that there’s no real relationship between how fast a company grows and what its stock returns are. Which seems ridiculous. It sounds really counterintuitive, but across a large sample of stocks, there’s no relationship there. In fact, the relationship is the opposite. Meaning companies that grow their revenues and profits faster tend to have lower stock returns.
So that’s value having outperformed growth. And there’s a 200-year history of that. Now that kind of ended in 2018. So we can all have a debate around whether you think that’s permanently changed or whether that’s just a cycle—because there’s always been a cycle within that 200-year history.
Sounds really counterintuitive, but at the end of the day, the stock market’s a discounting machine. So today, people are incredibly excited about some of the potential for these big tech companies. And so that potential, that excitement gets priced in and it has an impact on what the stocks can return in the future.
I think the second piece is a large chunk of the 14% a year that the S&P has returned over the last 15 years has come from two sources of returns that we can argue about whether they're sustainable, where they are today, but they're not going to be sustainable sources of return going forward. The first is margin expansion. So the S&P 500 already has record high operating margins. It is possible that that just continues to go up. I consider myself a capitalist.
Capitalism is a very powerful force. Big profit pools tend to attract competition over time. And so I wouldn't bank on profit margins just continuing to expand the way that they have necessarily.
The other source of return that I think is probably not sustainable is just multiple expansion. You've seen quite a bit of multiple expansions. So today the S&P is around 25 times earnings, it's been higher. So it's not yet at a record, unlike margins, but it's pretty close to the most expensive it's ever been. So again, it's possible that things get further stretched, things get more expensive, but would I want to bank on that if I was planning for my long-term financial health for my retirement? I'm not so sure.
| So I think those two added together account for in the ballpark of 6% or 7% out of the 14%. So if you take those two off the table, you assume things still go pretty well, otherwise you're looking at a significantly lower return going forward. |
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| | We’re excited to launch our latest show, Basis Points. Check it out on Apple, Spotify or YouTube. To give you a sense of what to expect, we’ve dropped one episode on Equity Mates Investing podcast this morning. To listen to all 6 launch episodes, head over to the Basis Points feed.
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