Saturday, October 30, 2021

What I'm Positioning For

Inflation.  And more of the unhappy kind (stagflation), rather than the happy kind (growth).

Long term I see inflation spikes this decade.  Not hyperinflation, just spikes of 5-10% some years with a 'normal' rate 2-4% for others.  Like the 40's or the 70s.  If you haven't already done so, you really have to read Lyn Alden's two pieces on why:

Investing in this kind of environment is really tough.  In real terms, expect a sideways market that treads water for ten years.  Its not like the last decade, where ever-falling rates boosted asset prices.  Its the opposite, when ever-rising wages reduce profit margins.  Asking whats a good investment during this is an oxymoron.  For the last decade investors had the wind in their sails.  This decade we'll be pushing boulders uphill.

To make it worse you can't hold cash.  Your cash is melting at 3-10% a year.  Learn to love the boulder.

Market Outlook

In 2-3 years, I think energy prices will rise enough to cause a recession.  Brent around $110 to 120-ish for 6 months should do it.  When that happens, the Fed can't fix it, and spraying all the liquidity they can will only make it worse.  It'll be our first real recession that can't be fixed by the Fed, it will feel more like 2008 than 2020.  Gold would be my hedge for this, but thats not here-and-now.

Before this, I think:
  • Energy is a getting overbought now.  I think after Winter it sinks to a more reasonable (though still elevated) level.
  • The Inflation trade is now becoming consensus.  ZeroHedge is running an inflation article every few days.
  • Can't see any sign of a correction now, maybe in 2Q 2022.  Especially if the Fed tightens then.  Think it'll be a short, sharp one like Dec 2018, as the Fed reverses course and starts spraying with a fire hose.

How am I positioned?

To prepare for higher inflation, I'm moving more into commodity producers.  Anything that cant be printed:

The trouble with commodity producers is that they are really tough to invest in:
  • Mines collapse and flood all the time, even in first world countries.  
  • Developed countries have extracted all their easy-to-reach resources, so companies at the lower end of the cost curve are in developing countries.
  • Who commonly change the rules and raise taxes.  Here, here, and here.
  • Meanwhile companies in first world countries face ESG pressures.
So its a lot of small 2% positions, spreading out the operational & political risk.  Out of the 17%: 5% is Malaysian palm oil (United Plantations),  6% is in Russia (oil, gas and fertilisers at 2% each), 4% Kazatomprom, and 2% copper.

My REITS should be fine.  Hard, scarce assets plus debt.  Only half their properties are in Singapore.

Energy pipelines should be ok.  Costly assets with low maintenance costs, and high debts paid off in tomorrow's dollars.

I want to get rid of Netlink Trust, but for now its a cash/bond proxy, paying 4% while I wait for the correction/recession.

What do I want more of?  Copper, aluminium and battery metal producers.  Oil producers.  Its tough to find companies to buy, especially with sustainable dividends.  Maybe stock exchanges in commodity producing countries.

No banks or bonds.  US debt is so high, interest rates need to be held down.  Negative real rates deflate the debt.

I'm slightly over leveraged, at 104% invested.  Will stop buying and get my leverage back down.  Waiting for the next correction.


henner said...

very interesting article. I kind of agree to what you say and I like the portfolio mix. Maybe it's a bit too concentrated in the inflation camp. What if central banks are right and it's all transitory. I think you will have a problem then.

just out of interest: Which REITs do you hold? any recommendations?

BlackCat said...

Yep, its a dividend/value portfolio. Only the "commodity producers" are inflation plays, and they are not expensive. The reits and pipelines (and Kazatomprom) are value plays, I would have bought them anyway.

I've got big positions in SGX-listed Reits:
- Frasers Centerpoint Trust. Singapore retail properties, shopping malls at public transport hubs.
- Frasers Logistics Industrial Trust: Industrial properties in Australia/Europe.

SGX REITS are income vehicles, they pay out 100% their distributable income as dividends.

And a medium position in Fibra Macquarie. Mexican industrial properties. Don't know much abt their properties, but their numbers and valuation are nice.

I can't make recommendations. For dividend stocks, you gotta watch out for witholding tax on dividends, depends on where you live and how your stockbroker handles it.

Unknown said...

Thank you for another great article. I've been trying to adjust my portfolio for the possibility of stagflation as well. I ruled out of stocks like KMI due to associated withholding taxes. Is it not a concern of yours? Also, can you elaborate on your reason for wanting to get out of Netlink Trust?

BlackCat said...

Yes, I'm paying 30% witholding tax on KMI/WMB dividends. So getting just under 5% on my buy price. I live with it because its hard to find high dividends with growth.

Canadian listed Enbridge *may* have a lower witholding tax. Slightly more oil (than gas) based.

Netlink Trust is stable, but has an opportunity cost. There's no upside - if they make higher than expected profits, these will be regulated away in the next 5-year review. Phone bills always go down over time - theoretically it won't do well under inflation. Still, I think its OK to hold if you like dividends and have no better ideas.

Unknown said...

Thanks for your answer about Netlink. It did seem to perform poorly in the last round of interest rate rise. However, inflation was low in the last round of rise. I wonder if they would do better if the rate rise is accompanied by inflation and cost increases as well. I agree that its hard to find high dividends with growth. Many of them that I could find in my spare time are located in the US. However, they put me off not only due to the WHT, but also the possibility of extremely high estate taxes. I am not that old, but you never know.