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A FinSec View – Unicorns, the world in 2030, perspectives of an ex CIA director and more…

Issue: 6th August 2021

It’s a good time to be in the Australian share market! Despite all the lockdowns, the end of July saw the ASX notch up its 10th consecutive month of gains (a little over 1% in July), equalling its record, and is tipped to deliver a buoyant August earnings season. The most recent time investors enjoyed a run of this length was in 2006 to 2007.

However, it was a different story in other parts of the world, with markets falling over the last couple of weeks not helped by concerns about Chinese regulatory tightening, a likely slowing in tech sector earnings growth, and ongoing worries about a resurgence in coronavirus cases.

Debate and uncertainty around inflation continues. The big question is whether these pressures will prove to be transitory that is to say, disappear once supply chains normalise or lead to something more permanent. Most central bankers say they think inflationary pressures will subside next year, and they feel comfortable with their loose monetary policies. While we agree that this is the more likely outcome, this is not a time to be complacent. There is a risk that we may enter a period of inflation that troubles markets.

A special shout-out to all those across Australia that are continuing to endure lockdowns. Whilst the Olympics has helped to put a smile on the face of many (congratulations to all the athletes. We couldn’t be more proud of the way you competed), we acknowledge just how tough these times are. Look after one another, accept that it is tough and if you are suffering please don’t do it alone.

Make Every Day a Unicorn Day…

The world is going to need a bigger unicorn stable soon!

The market seems to be throwing up many records in 2021, with one of the best examples being the growing number of companies achieving unicorn status, or in other words, privately owned (that is, unlisted) startup companies valued at over US$1 billion.

As their namesake suggests, unicorn companies aren’t meant to be a commonality. The truth is, most startups don’t succeed. But, according to CB Insights, there are now 771 unicorns, with 1.18 new unicorns now minted every day (by June 2021, there were already 69% more new unicorns than in the whole of 2020).

Behind the phenomenon is Venture Capitalists, who, despite multi-billion operating losses (not always but in many cases), are willing to put their risk capital to use in these growth dreams. It is, of course, all about the future cash flows these companies will be able to generate and not so much about the profits or losses they make today.

While we may leave it to our fund managers to decide which companies have the strategy and balance sheets worth investing in, we are not blind to these unicorns’ critical role.

  • Innovation – Profitable or not, disruptive business models and technologies often challenge traditional corporations, ultimately forcing them to innovate in order to stay relevant.
  • Lifestyle – Unicorns are often responsible for providing consumers with access to cheaper services. Think cheap streaming, food delivered to our door and marketplaces such as Airbnb. The lifestyles we lead today could not have been afforded by previous generations (which begs the question… if we are paying too little for services, who is funding the difference?).
  • Early investors – Some investors that get in early may be able to sell their stakes at a positive return. By the same token, when the mass market comes to the realisation that many of these unicorns won’t ever become profitable, existing investors will bear the losses. Rule of thumb, if you’re hearing noise about an exciting new startup, chances are you’re already too late…

A Guide to the World in 2030 – Part 1

The world in 2030 may seem a long way off (hard to believe it was nine years ago that Sally Pearson won gold for Australia in the 100m hurdles), but one investment firm has spent a lot of time thinking about it. Capital Group have produced a report that looks ahead a decade to highlight 10 of the most exciting, and in some cases, life-changing developments they believe will shape the world to come. In this View, we take a look at prediction number one.

Semiconductors ‘will be everywhere and in everything.’

It’s said that only 10% of everything that can be measured is being measured today. But it wouldn’t be surprising to find out that this number is actually closer to 1%. One thing that’s going to be vastly different a decade from now is the penetration of semiconductors to monitor many more aspects of our daily lives.

Most of this will be through products we already have phones and tablets, automobiles, entertainment systems and appliances. Wearables are becoming more sophisticated and will help us track our workouts, sleep and overall health. These devices will feel familiar, but we’ll be able to use them in ways we never could before.

Cars are being equipped with more electronics every year. The recent global shortage in automotive chips underscores the dependence the industry now has on chipmakers. As vehicles become autonomous, they will require even more advanced components to make them safe and efficient. Over the next decade, we expect chipmakers to be working overtime to satisfy the robust demand for semiconductors across industries.
(Source: Steve Watson equity portfolio manager, Capital Group)

The bottom line

According to research firm EMR, the global semiconductor market is expected to grow at a compound annual growth rate of around 10% between 2021 and 2026. The stable demand suggests that those fund managers fond of tech stocks will probably hold a chip stock or two. This said, the group is volatile, and we’re in the midst of a tech-stock pullback. But for investors who can commit long-term, the stage appears set for good performance.

Aside from the chip makers themselves, those companies that are working on transformative ideas to change daily life, also deserve some attention.

Chart of the Week

Morningstar has updated its annual gameboard. It emphasises the poor returns from cash and bonds and the extraordinary returns from Australian property and equities.

Most notable is that the bottom place from FY20 is the top place for FY21. It illustrates the risk of selling your losers.

In Conversation

Michael Morell, a former deputy director of the Central Intelligence Agency (CIA) of the US, recently spoke with Hamish Douglass, Magellan’s founder and Chief Investment Officer, about the lack of US policy on China, the threat of war over Taiwan, the US inquiry into the origins of the covid-19 virus, President Joe Biden’s misstep over the growing cybersecurity threat from Russia, and what he views as the world’s biggest risk.

With the Whitehouse as a fitting backdrop, this interview offers a candid insight into some of the ‘big’ questions and his responses may just surprise you. View the video here.

From the Desk of Brenton Moyle

A quick reminder from our debt and financing specialist, Brenton Moyle with regard to assistance programs (housing) that came into effect on 1 July. While the information may not apply directly to your own situation, it may serve to benefit family and friends.

From July 1, the federal government released a total of 30,000 openings in three different assistance programs aimed at first home buyers and single parents.

At the same time, the government will increase the price caps that apply to two of the programs, making them easier to access.

The three schemes allow eligible buyers to purchase a property with a deposit of anywhere from 2% to 5% (depending on the scheme). The government guarantees the ‘gap’ between that 2-5% deposit and a standard 20% deposit, so the buyer doesn’t get charged lender’s mortgage insurance (which generally applies when buyers have a deposit under 20%).

  • Under the First Home Loan Deposit Scheme, 10,000 first home buyers can purchase existing homes with a 5% deposit.
  • Under the New Home Guarantee, 10,000 first home buyers can buy or build new homes with a 5% deposit.
  • Under the Family Home Guarantee, single parents (who may or may not be first home buyers) can purchase a property with a 2% deposit.

The schemes have price caps, which vary from region to region. From July 1, the caps increased for the First Home Loan Deposit Scheme and Family Home Guarantee.

Retail – Our Economic Barometer

In this article Economist, Shane Oliver explains the importance of retail sales in forecasting economic growth from both an employment and consumption perspective.

While the news hasn’t been all positive for 2021, according to Oliver, there are reasons to be optimistic, not just for the retail sector, but also the broader economy.

Read article here.

Barrie Moyle Retires

With the recent retirement of Barrie Moyle, we take this opportunity to celebrate his career, acknowledge his contribution and say thank you.

A stalwart of the insurance industry, Barrie commenced his financial services career over 30 years ago, seven of these spent with FinSec. He has witnessed several complete market cycles, seen many colleagues come and go and experienced (and survived) enormous changes to the industry.

His clients (some of whom have been with him for much of the journey) will miss Barrie’s genteel approach; however, with Barrie being Barrie we know paths will cross as he continues his highly active role within the Naracoorte community.

For Barrie, retirement promises to be anything but slow, and we look forward to hearing more of his planned adventures; writing his autobiography, travel and golf. Retirement will indeed offer many new opportunities, and we know Barrie will embrace them all wholeheartedly.

Forever a friend, we wish Barrie and his wife Roma a wonderful onward journey in the next chapter of their lives.

Stay safe and look after one another. As always, if you have any concerns or questions at any time, please reach out to your FinSec adviser.


Original Article – FinSec Partners

Published On: August 6th, 2021Categories: A Finsec View