Market commentary: Jun 2024

Investment performance

To anyone watching the share market over the last year, it would seem the letters “AI” are akin to a magic wand that will pump up the share price of any company involved in it. Our international equity strategy has certainly reaped the reward with returns over 17% for the year. Exciting stuff, and AI is certainly transformational, but we’re not getting carried away and continue to invest in a wide range of companies globally.

Interest topic for June 2024: Investing in a world of high debt

In this article, we look at how high debt is impacting economic growth and what this means for investment returns. Pengana Capital Group are one of the fund managers we use in your portfolio. When thinking about what drives long term equity returns, they look at global trends. One of these is rising government and corporate debt.

Why have debt levels soared?

Over the last few years Covid, high energy prices, and elevated interest rates have slowed economic activity. Governments have responded by borrowing huge sums of money to keep their economies going. High debt levels will keep interest rates higher and limit the scope of government spending to boost growth. This impacts global equity investors.

What does this mean for governments and economies?

It’s predicted that government debt levels will continue rising to fund increasing costs of an ageing population, climate transition and increased geo-political threats. Funding from current taxes is inadequate and there is unwillingness to pay higher taxes.

What does this mean for investors?

Companies (and countries for that matter) with low debt levels will have an advantage. Companies offering innovative products and services that also have pricing power should outperform. Examples are Nvidia and Meta which have no debt. Over the last year they delivered earnings growth of 461% and 114% respectively.

Eli Lilly and Novo Nordisk also have low debt levels and unique products, which gives these companies pricing power that sustains margins during periods of elevated inflation.

While the growth of debt can present a gloomy outlook, opportunities remain for investors with the right processes to identify and carefully analyse them.

Debt is one of the four big themes that frame Pengana’s thinking about long term investing. The others are deglobalisation, disruptive innovation, and demographics.

Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFP^CM), Director and Financial Adviser