The predictions are not supposed to represent our base case scenarios for the year but instead encourage thoughtful conversations on a range of topics we faced in 2023.
We have revisited the predictions from January 2023 to see how we performed; our results were interesting.
Our thinking here was that 2023 would see a period of continued central bank tightening, including a reduction in the assets held on central bank balance sheets. In an environment where this occurs, so-called “value stocks” (characterized as having low price/earnings multiples, low price/book multiples, and high dividend yields) would outperform so-called “growth stocks” (characterized as those with high expected growth in earnings and typically have higher multiples).
While rates did rise and central bank balance sheets did decline, 2023 was the year of the growth stock. The reasons for this have nothing to do with current monetary policy and reflect, in our opinion, two things:
- That interest rates are close to their peak, and with inflation now declining across much of the world, but particularly in the US, further rapid tightening is unlikely; and
- “Growth stocks” as a basket have been driven by the Magnificent 7, which are dominated by tech stocks that have high exposure to generative Artificial Intelligence (a topic for another day).
This underlines why we build portfolios based on fundamentals with only a small consideration for macroeconomic conditions, because even if you get the macro call correct, you still have to predict the impact of this correctly.
If we had to select one prediction of those in the 2023 article, this would have been the one we would have assigned the highest likelihood. Fortunately for the economies and stock markets, it has yet to transpire. This is despite many forward-looking macroeconomic indicators still pointing forward to a recession. The US National Bureau of Economic Research, an independent body that has determines and declares the US business cycle, has forecast a recession to occur in each of the last 4 quarters.
In our opinion, two main things have kept Australia and the US out of a recession: strong employment and immigration. The unemployment rate in Australia and the US remains below 4%, which is historically low and has meant that those looking for work have more or less been able to find it. Immigration has also boosted the economies because more people in the country means more people consuming goods and services, it increases the demand for housing and also fills job vacancies, keeping unemployment low.
The RBA may have kept rates on hold 5 months in a row, but with the next meeting now in 2024, we can safely say this prediction came to pass. 12 months ago there was an expectation that because the economy would experience weakness – likely a result of the sudden increase in rates – and rates would need to be cut, to undo the restrictions on demand the rapid increase had wrought. With inflation coming down and the economy remaining resilient, rate cuts have not been required.
It was a close call, but based on our calculations we believe there were only $92 billion in acquisitions year to date in 2023. The acquisitions doing the heavy lifting included the $29 billion acquisition of Newcrest Mining (NCM) by Newmont Corporation (NEM) and BHP’s $9.6 billion acquisition of OZ Minerals (OZL).
Not included in this number, however, were the takeover attempts. Brookfield Renewable (BEP-US) were unable to follow through on their $18.7 billion offer to buy Origin Energy (ORG), and Lithium producer Allkem (AKE) are still looking to merge with US-based Livent (LTHM-US). Had these gone through we would have easily cleared $100 billion.
Yes, the prediction came true, on 13 October 2023, to be exact. The cash payment was U$61.8bn. At the time Microsoft reported 1Q24 results (which was 24 October 2023), the company informed the market Activision Blizzard (ATVI) would be reported as part of its More Personal Computing segment, which segment houses the Xbox as well.
The acquisition adds significant depth to the content portfolio of Microsoft. The company now has a U$13bn plus franchise from Candy Crush, Diablo, and Halo, to Warcraft, Elder Scrolls, and Gears of War. Not to mention Call of Duty.
Approval from the Competition and Markets Authority (CMA) in the USK was the last hurdle left for Microsoft to clear, which saw off serious challenges to the transaction. At times, it seemed unlikely the deal would be concluded, given the fierce opposition from regulators in the US, UK, and Europe.
One of the primary competition concerns in this transaction arose from the (vertical) concern that Microsoft may, post-merger, restrict the distribution of Call of Duty to the Microsoft console, Xbox, or make Call of Duty available on terms that exclude or undermine the ability of other console manufacturers to compete.
If you wonder where X comes from, remember that Elon Musk had a company called X.com, a US online bank founded by Musk and three partners. In 2000, X.com merged with competitor Confinity and in 2001, the merged company changed its name to PayPal. Surely that name rings a bell – today a global, two-sided network in fintech at scale. Its portfolio of assets is found across the consumer & merchant segments in Wallet and Commerce, Network, and Payment Service Provision.
Elon Musk repurchased the URL “X.com” in 2017. Now the domain directs visitors to Twitter. And do not be surprised if X becomes an “everything platform”.
Elon Musk’s obsession with X does not stop with Twitter. Space Exploration Technologies Corporation is today known as SpaceX, and then what about the Model X Tesla? And don’t forget the letter X also features in the name of Elon Musk’s son – X AE A-XII. An AI startup launched recently has been named xAI.
As for the IPO of Starlink – well it did not happen and according to news articles in late November 2023, Elon Musk is not planning or discussing an IPO for Starlink, the satellite Internet Services Provider (ISP) of SpaceX. According to Elon Musk, Starlink has achieved cash-flow break-even.
Break out the champagne, we got this one right. That’s right the A-REIT 200 index has outperformed the ASX 200 by a whopping 80 basis points in 2023 (we note at the time of writing there are 16 trading days left in the year). With a total return of 4.8%, the property index has outpaced the equities index which had a total return of 4%.
The outperformance from the property sector comes from a whopping month in November, with the index up over 10%. Before this the index was down -5% for the calendar year as uncertainty around how high interest rates would go kept lingering. The market, however, decided in November that enough was enough and decided that we were at the top of the rate cycle. This saw listed property bounce back hard as this asset class has a high correlation to interest rates.
Look out for our 2024 predictions, where this Oracle Property Portfolio Manager may go all out and double down again on property beating equities for the year.
Well copper didn’t reach all-time highs, but it did fair much better than the lithium price in 2023. Copper prices are flat for the year compared to lithium which is down -80%. We remain bullish on copper as we believe the supply/demand profile of the metal will be severely tested as we race towards a green energy future.
However, I must have had my head in the clouds when I predicted lithium to lose its place as the number one discussed “transition” or “battery metal.” If you can’t slip both property and lithium into the discussion this festive season around the BBQ, are you truly Australian? Here’s a fun fact to regurgitate to your family and friends as you throw another shrimp on the barbie: lithium is behind copper, graphite, and nickel in terms of the weight of each metal required in an EV.
Next month, we will be making our predictions for 2024, so watch this space!
Written by the Oracle Investment Management team