At the start of year, the Oracle investment team looked to the year ahead and they decided to have a go at predicting the future. The predictions are not supposed to represent our base case scenarios for the year, but instead encourage thoughtful conversations on a range of topics that we faced in 2022.
We have revisited the predictions from January 2022 and to see how we performed; our results were very interesting.
International Travel Will Return to Pre-COVID Levels (Almost)
Our prediction was spot-on thanks to Xi Jinping and his zero COVID policy. The travel companies that we own in the Emerging Companies portfolio Webjet and Auckland Airport are reporting strong demand for travel with the forecast of a return to pre-COVID levels in FY24.
The reason we are still below these levels is due to the hard closure of China’s border. China’s hard stance has created a $280bn black hole for global tourism and there is no way in getting this back until they open their borders.
Electric Vehicle Bubble Burst
Our prediction was spot-on. The Electric Vehicle (EV) Bubble did burst with a 70% plus decline in stock prices of EV names such as Tesla, Nio, Xpeng and Nikola since the start of 2022. Contrary to the Electric Vehicle Bubble that burst, a long-standing automotive company such as BMW with a tradition in internal combustion engine (ICE) technology and slowly moving towards replacing drivetrains of motor vehicles with Electric Vehicle technology, is only down 6% over the same period, against the benchmark Index down 10%.
This stock market performances of Electric Vehicle names are not reflective of the broader electric vehicle industry and growth trends. The market for electric vehicles is booming, suggesting sales and profits at the sector’s most important constituents should be benefiting from this tailwind. Clearly, the Electric Vehicle stock bubble has burst even as the industry itself is kicking into high gear. In the past couple of years, legacy internal combustion engine companies (such as BMW and Volkswagen) have gone from being behind the curve to having some of the best-selling electric vehicles in the world. Although, the disruptors in this Electric Vehicle industry didn’t have as much of a moat as many investors originally thought.
The Australian Small Ord’s will outperform the ASX 100
Given this forecast came from the Emerging Companies portfolio manager, we were hoping to be correct on this one. Unfortunately, in down markets it’s the small cap companies that get hit hardest first.
At the end of November, the ASX Small Ord’s was down -14.3% compared to the ASX100 up 4.1% including dividends. This is owing to the make-up of the index with the ASX 100 dominated by the banks and miners who have performed reasonably well in this volatile market. The good news is that small caps historically rally harder coming out of a bear market. Therefore, if one were to invest now, they will likely receive strong returns over the next five years.
Australian Property Market to Finish Year Lower than it Started
2021 was characterised by soaring asset prices, fuelled by ultra-low interest rates, cheap liquidity, and speculative behaviour. This trend sharply reversed as the calendar year turned. Out of control inflation saw central banks globally tighten interest rates almost as fast as they had lowered them during 2020.
As at mid-November 2022, house prices in Sydney have fallen 10% and the 5-capital city aggregate has fallen 5%. This decline in house prices can be attributed in our prediction outlined at the end of 2021:
The easy monetary conditions that helped fuel the rally in house prices, however, could in fact become the surge’s undoing. Given the unprecedented amount of money flowing through the economy, it is likely that the Australian economy is going to endure a period of higher-than-average inflation. To combat this, the Reserve Bank of Australia will likely raise interest rates to help keep price rises to modest, sustainable levels. This will in turn result in higher interest rates on Australian mortgages, which would likely simultaneously decrease the demand for properties due to higher borrowing costs. Also, as well as increase the supply of properties as mortgage repayments rise for homeowners with variable rate mortgages and more properties are put on the market to realise capital gains and to avoid being left paying higher repayment costs. These tighter monetary conditions, coupled with history showing us that previous episodes of very strong price growth have been followed by price falls, leads us to predict that the Australian property market will finish 2022 at a lower level than it started.
Gold to Outperform Bitcoin
Although gold has fallen 2% year to date (as at the middle of November), this pales in comparison to Bitcoin’s 64% fall over the same period. Most of this decline has come as the appetite for risk assets has been well and truly eradicated, although has been exacerbated by the latest crypto fallout as the second largest cryptocurrency exchange in the US went bust.
We could never have predicted such chaos; however, it is a product of the lack of regulation around the sector and points to one of the clear shortfalls surrounding the industry.
Federal Election Result is a Hung Parliament
We were very wrong in this prediction with the Australian Labour Party (ALP) achieving a majority government for the first time since 2007. With the Federal Election in May 2022, winning 77 seats (out of a total of 151 seats) in the House of Representatives. The Liberal / National Coalition (LNP) was soundly defeated.
Unprofitable small cap tech to have a tough year
Anyone invested in small tech this year will likely agree that we called this one right. With bond yields on the rise, it looked likely that anything without a shred of cash flow was at risk of being sold down. As it happened, bond yields rose the most aggressively in history. Discount rates rose, valuations fell, and while few sectors were spared, loss making tech (large and small) were the worst impacted.
While the selling was widespread, we even called out a few names with only one ending the year positive. Two others received takeover offers with private equity investors sniffing around the sector for depressed valuations. See below chart that depicts the performance of the names we called out. It is quite varied, and we’ve included the ASX All Technology Index as well for comparison (down 35%).
RBA to stay the course
Remember the word “transitory”? That was all the talking heads on TV talked about at the end of last year: “will inflation be transitory or is it here to stay?” they asked.
While no one really provided a definition of transitory (inflation is coming down now, does that mean it was transitory?), it was clear it was here in some form and the bond market was reacting. Bond yields were creeping up, and investors, economists, and the media, all seemed to be expecting the Reserve Bank of Australia (RBA) to raise rates soon. Despite this, Phil Lowe, governor of the RBA remained staunch in his stance that rates would not rise until 2024. Yet nobody believed him, not least the bond market, which had already started to bid up the 2-year government bond yield in anticipation.
When we made this prediction, it was a contrarian call, one we got wildly wrong. In saying that, it is a good thing we did since the economy would surely be in a much worse position had the RBA not given in to the data and begun raising when they did.
There we were some interesting results from our predictions, but overall, we were pleasantly pleased looking back at our predictions.
Next month, we will be making our predictions for 2023, so watch this space!
Written by Oracle Investment Management team