Henry Jennings on the ASX, the Budget, AI IPOs and "weird" billionaires

One of the silver linings of the tumultuous current market is that you're never short of things to talk about. Between AI, war, prospective IPOs, the Budget and the general state of equities, being a market commentator has arguably never been a more engaging pursuit. 

I recently spoke to Henry Jennings, Senior Market Analyst at Marcus Today, to get his unique takes on all the big goings-on in markets and why the SpaceX IPO reminds him of Jennifer Hawkins. 

The ASX and market mayhem

The bane of many investors' existence right now is the prolonged dislocation seen across the ASX. It's certainly been the major topic of conversation in many recent talks I've had with Australian equities fund managers (see here, here and here).

One of the major impacts has been the growth of ETFs and passive investing and it's something the market will continue to reckon with, says Jennings. 

"Passive investing is only going to get bigger and bigger," he said. "ETFs are a great way to play the market, but it doesn't improve necessarily the underlying market."

"We saw it last year when CBA got to $192, and it's 11-12% of the index," he said. "Every $11-12 out of $100 that goes into an index fund goes into CBA. That distorts things and I suspect we're seeing a little bit of that at the moment with BHP."

But passive investing isn't the only distorting influence says Jennings. "A lot of what we're seeing at the moment is very much momentum driven, and that comes from passive, but it also comes from active as well."

Share prices can run much further and harder than the fundamentals can justify and that isn't always the fault of passive flows. 

"Charting packages are easy to buy - and I've long railed against this and written about this before is that - chartists will look at the technical indicators, they'll look at all this stuff and they think oh it's fantastic, it's going up forever."

Temple & Webster (ASX: TPW) is a notable recent example, says Jennings, which surged from $5 to $25 despite earnings trailing established peers on similar valuations. 

"I looked at it some time ago, it was a multi-billion dollar company – I compared it to JB Hi-Fi, which was four times the market cap but made a truck load of money. TPW made very little and it made no sense that the market was valuing it in the billions. It has fallen a long, long way since I wrote about it."

All in all, the ASX is now subject to the vacillations and whims of multiple, often contradictory, forces. "It's distorted by that momentum, by computers and by algos," says Jennings. "The volatility in some sectors is just stupid, especially when you have massive short positions."

The standout example there is the uranium sector, says Jennings, where prices have moved in double-digits one day to the next, and companies like Lotus Resources (ASX: LOT) have attracted extreme short interest in recent months. 

"20% of the company's shorted, that's an extreme bet," he says. 

"Brokers love the volatility. I'm not sure investors do."

IPOs, index funds and the Baker's Dirty Dozen

Outside Australia, the burning question right now is how the upcoming IPOs of AI leaders like OpenAI, Anthropic and SpaceX will impact markets when they list at dollar valuations. 

Once SpaceX, OpenAI and Anthropic go public, as should soon happen, 13 companies will represent 48% of the S&P 500. Those same 13 companies will also represent 36% of the entire global stock market. And Jennings has already coined a neologism for them. 

Move aside Mag 7, it's now the Baker's Dirty Dozen. 

And it's indicative of a market that is becoming increasingly divorced from fundamentals.

"I looked through the SpaceX prospectus and I ran it through AI because I thought, 'well, let's fight fire with fire'," said Jennings. 

"So I ask it to run through the 277 pages and show me some red flags. It came up with an awful lot of red flags."

"What was interesting was the first 12 pages were pictures of rockets and planets. I haven't seen this since Myer floated and Jennifer Hawkins was all over their prospectus."

What's also worrying is how the index fund providers have been so willing to bend their own rules around including these mega-IPOs in their indices as soon as possible. It's simply a further way to distort an already top-heavy, passive-driven market.

"You'd think they'd at least give it six months to settle down, given the free float's not huge, given there's a massive amount of stock that is escrowed and will come out," says Jennings. "It does seem bizarre and we're all going to be affected by it. A lot of people will have exposure to the US market and SpaceX, Anthropic and OpenAI are going to be a huge part of the US market."

"It is a bit of a black hole and it will suck a lot of funds in and suck funds out of other stocks."

The tendency for influential companies to stay private longer also has obvious risk for retail investors, he says. 

"When you're buying something from private equity, these guys aren't known for their philanthropic generous natures. They tend to try and squeeze every last drop out of the lemon, and then when they've got as much as they can, then they'll sell it to the retail investor, to to get that extra dollop."

On "weird" billionaires 

The AI boom has been the latest chapter in the rise of the new class of Robber Baron, and each understands the power of branding, says Jennings. 

"All the front men have got a shtick," he says. "You've got Jensen [Huang] with his leather jackets, you've got Elon with his weird tweets and his outfits, you've got Mark Zuckerberg with his t-shirts and you've got the new Jeff Bezos: Jeff Bezos 2.0, weddings in Venice, new wife and that sort of stuff."

"They've all got their thing and they're all the frontmen, and like any good band, you need a good frontman. You don't care about the drummer. No one cares about the drummer unless it's Charlie Watts."

But the real worry is that this handful of men collectively control so much capital, but also the fate of what could prove to be one of the most transformative technologies in human history.

"They're all singing from the same song sheet: 'trust us, it's all gonna be alright.' And clearly there's a lot of things that are going to change quite dramatically, far more so than the internet. At the end of the day the internet was all about flogging you stuff, it's still about flogging people stuff."

"Whereas the business model of AI is simply to replace humans. And if you replace humans, who's going to buy the stuff that they're flogging?" 

There's also the issue of extreme key man risk, especially in the case of Elon Musk, whose cult of personality drives much of the developments across a wide stable of companies and technologies. 

"Can you imagine the insurance premium somebody has to pay for Elon Musk if he gets hit by a bus?" asks Jennings. "We've seen this time and time again. Companies have key man risk and sometimes they implode, and when they do, the results can be pretty detrimental to shareholders."

"We saw it with Hamish Douglas with Magellan, we've seen it with Kerr Nielson with Platinum, Bitcoin with Sam Bankman-Fried - that was one guy leading the charge - key man risk, the guy turns into to be a crook or gets hit by a bus. It's a worry."

"The premiums must be huge. The guy's going to be a trillionaire. And you're betting a lot on one bloke whose lifespan - I know that we're advancing science - but his lifespan is limited."

Once SpaceX, OpenAI and Anthropic go public, many investors will either directly or indirectly be risking part of their wealth on a handful of companies and a handful of businessmen, many of whom have no clear contingency plan in place, says Jennings. 

"Even Warren Buffett had a sidekick. Even Warren Buffett had Charlie and there was a succession plan."

There's also the obvious downside risk that the glorious future promised by the billionaire class - of AI and galactic colonisation - on which so much of capital markets now depend could turn out to be a busted flush.

"I watched Jeff Bezos talking about data centres on the moon, and two days later his rocket blew up on the launch pad."

The Budget, housing and the next generation 

The other topic of conversation that has been hard to escape in recent weeks has been the Budget. Jennings is slightly more sanguine about its impacts than much of the commentariat, but still expects issues.

"The budget may have had good intentions, but it does seem to have gone a little bit too far, and it will create distortions and problems," he says. "Accountants I'm no doubt will do quite well out of it."

He expects the Budget to contribute to a fall in house prices, but the potential knock-on effects there are harder to control. 

"It's hard to have it both ways," says Jennings. "You can't try and solve housing affordability, but yet keep house prices the same as what they are, so everyone feels good about it.

"So inevitably as house prices do fall - and they they should fall because they're ridiculous - people will feel less wealthy. And if the RBA continues to push ahead with its anti-inflation policies and rate-setting and gets too aggressive we could end up in a in a nasty situation as far as the stock market goes."

"It's probably going to have more implications this time next year than this year, but it's still going to be interesting to see how people deal with some of the issues."

The well-publicised impact of CGT changes on Australian startups also slightly misses the woods for the trees, says Jennings, where tax incentives are only a small piece of the puzzle. 

"We don't have the startup culture that the US has unfortunately, and some of that I suspect is a tyranny of distance, and some is just the fact the beach is nice and maybe we don't have the same drive and ambition that Americans or Asians do."

"The other problem of course is that a lot of our startups end up going to where the money is, which is the US. 

We've had some massively successful companies over the years, CSL, Cochlear, Canva, Atlassian. BHP is the biggest mining company in the world, it was started in New South Wales. So we are pretty good at creating great businesses."

Ultimately, the Budget was on a hiding to nothing, an economic Catch-22 where the issues confronting Australia require radical change, but where radical change risks upsetting things further. 

"You can throw as many incentives as you want, but you can't really solve those problems," says Jennings. "These problems have built up over decades and just to solve them with one budget is never going to work. CGT, housing - it's all a work in progress and maybe you have to take baby steps unless you get this massive mandate to change things."

"Donald Trump clearly got that mandate to shake up the US, and he's embraced it with gusto. Maybe Pauline Hanson will get the same mandate and will similarly embrace it with gusto at our next election, in which case I suspect there'll be a lot more startups leaving to go to America."

And the generational divide that features front and centre in today's economic discourse misses that there are some things more important to Australia's future prosperity than tax rates and property prices. 

"Young people generally, they've probably got better things to do than watching share prices like a hawk - building lives, getting married, having kids, buying houses, saving for houses, having fun – just struggling to keep your head above water is a challenge these days with cost of living pressures." 

"Maybe our generation really did tilt things too much away from the next generation. But that won’t be an easy thing to solve."