There's a famous saying that predictions are hard to make, especially about the future. For the closing session of Livewire Live 2019, we asked seven presenting fund managers to step out of their comfort zone and deliver a shocking prediction for 2020 and beyond.
The exercise was designed to stimulate debate and to get investors thinking about where the consensus view could be challenged. Our speakers delivered opinions on topics ranging from geopolitics and interest rate settings through warnings on liquidity, contrarian stock calls and a searing short thesis.
Short, sharp, entertaining and provocative is a great way to describe these seven shocking predictions for 2020 and beyond. Here's a summary article with the full video at the bottom of this wire.
#1 Global trade splits into two camps – China or the United States
Timeframe: 5 years
Speaker: Jay Sivapalan, Janus Henderson
Jay picked up on the current topic of trade wars. While many are hopeful that there will be a calming of tensions between China and the US, Jay's shocking prediction is that the rift will escalate in the years ahead. Jay painted a scenario where the world will split into two distinct trading blocs – those that trade with China and those that trade with the United States. Australia will choose to trade with the US and Jay argues that this could spark a flare up in inflation.
"China's rise in the global economy will remain an uncomfortable threat for the US."
#2 Negative Rates: A new normal in an expanding policy toolkit
Timeframe: 2020 and beyond
Speaker: Charlie Jamieson, Jamieson Coote Bonds
The term ‘unconventional' is widely used to describe monetary policy settings across the globe. There is a consensus view that negative interest rates can't be sustained, however, Charlie Jamieson predicts that this will become an increasingly common tool.
Jamieson highlights that Japan and Europe are already entrenched in negative rate environments. He adds that subtle changes in the policy statements of the US Federal Reserve indicate that zero is no longer the lower limited for rates in the world's largest economy.
"Once we get into these black hole moments, it can become very, very difficult to extract yourself."
#3 China experiences a deep economic downturn
Timeframe: 3 years
We all know Aesop's fable, The Boy Who Cried Wolf. It contains timeless lessons about telling the truth, credibility and complacency. Philipp argues that like the town folk in this fable, Australians have become complacent and offered his prediction of a significant downturn in the Chinese economy.
He expects this will be caused by a sharp decline in CAPEX - a narrative that has been present but to date has failed to materialise. After years of false alarms, Hofflin says the risks today are more elevated than ever before. The Chinese government has used stimulus on multiple occasions to ‘bailout' the economy, but their ability to keep doing so is now significantly diminished.
"The risks today are higher than they have been in the past. Even the Chinese communist party cannot amend the laws of economics."
#4 There will be a spike in funds and ETFs that can't provide liquidity for investors
Timeframe: 12 - 18 months
Speaker: Anthony Aboud, Perpetual Investments
There has been a rise in the number of funds and ETFs that are promising to offer investors daily liquidity. Anthony Aboud highlights two funds that have had to freeze investor funds due to lack of liquidity, and he reckons they are just the tip of the iceberg.
To make his point, Aboud runs a case study on the Alternative Harvest ETF – a product he says is cashing in on the latest thematic high. It is a chilling case study and shows a clear mismatch between the optically liquid ETF and the highly illiquid underlying assets. Aboud concludes with two key messages.
"Be careful of funds and ETFs that liquify illiquid assets. Secondly, liquidity dries up in a bear market."
#5 Three aged care stocks ready to stage a comeback
Timeframe: 2 years
At Livewire Live 2016 Ben Griffiths issued a warning about an impending crunch headed for Estia, Japara and Regis Australia's three listed age care stocks. The call was somewhat prophetic as the share prices of all three cratered the very next day as the government pulled funding from the sector. The share prices of these three stocks are wallowing in the doldrums and trail the small ordinaries index by 70% since 2014.
"It has been painful. Essentially the sector has lurched into crisis."
Griffiths argues that the current malaise engulfing the sector is unsustainable predicting that the royal commission into the industry will mark a turning point. He expects consolidation in the sector and believes there are strategic buyers already sniffing around the sector.
"Each of the three listed vehicles is trading at below replacement cost. These vehicles are absolutely trading at scorched earth valuations."
#6 Tesla's share price to collapse – target price $0
Timeframe: 15 months
In August 2018 Ben McGarry wrote an article on Livewire that outlined why he believed it was time to short shares in Tesla. It followed the now famous ‘funding secured' tweet from Tesla founder, Elon Musk. Shares in Tesla have since fallen by 38%, and McGarry says it is now the firms most profitable short.
At Livewire Live McGarry reinforced his thesis, predicting that Tesla shares will ultimately be worth zero, an outcome he believes is possible by the end of 2020. In his presentation, he showed how the stock fits into a bucket that he calls "Fads, Frauds and Failures." Poor governance was just one of the many ethical red flags highlighted in a searing short thesis.
"In 2018, Tesla's board of directors was the second highest-paid board in the USA. Elon's brother Kimball, a chef, was paid $6.8million to sit on the board last year."
#7 Australian equity market multiple to set a record high
Speaker: Philip King, Regal Funds Management
The list of reasons to be bearish is seemingly endless. For Phil King, this is the perfect backdrop for his three-pronged bull thesis on equities. King says that the scars of the GFC still run deep and he expects they will take many years to heal.
"Equity markets are at crisis valuations. Relative to bond yields the only time equities have been this cheap in the last 15 years have been in the financial crisis and the Greek crisis. Both those times proved to be great times to buy equities."
King says the current make-up of the ASX is less reliant on economic growth than ever before. He says the rise of quality technology companies is a win for the local index.
He concludes his pitch with a tale about a reliable sentiment indicator and compelled the audience to ‘stay long' as he expects the market to march higher.
Watch the full session by clicking on the video below
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On number 3, China is showing virtually all of the signs of an emerging market market debt bubble. The shocking thing would be if it didn't have a recession at some point.