The US Federal Reserve hiked interest rates by 0.25% in its March policy meeting as market expected. What do you think from here?

So, what happened was as markets have wildly expected, the US Federal Reserve increased the policy interest rates by a quarter of a percent and spoke of more interest rates hikes in the meetings going forward. And then, they also said that they will begin balance sheet reduction in the coming meeting. It doesn’t say when, but likely the next meeting, if data continues to hold up: inflation and employment and economic data continues to hold up strongly. So, the markets reacted very happily, I would say some markets were up within 2-3%, depending on the index that we’re looking at and more than three percent in fact for NASDAQ. And we also received their projections, the economic projections and the projected interest rate pathway forward. So, they project another 6 hikes of a quarter percent each for the rest of the year and he (Powell) did speak of the possibility of going to hiking 50 bps or half a percent instead of a quarter percent increment but is not more hawkish than what market has feared. It is basically delivering what the market expects. But prior to the meeting, the market was pricing for a total of seven rate hikes this year. And now, if we have one delivered, so if all things being equal, the market expects six hikes for the rest of the year. But instead now, it’s I think slightly more than six, at one point after the meeting, it was even closer to 7 again. So, including the one we had in the meeting, we would have been closer to eight for the whole year including the need latest hike. So the first instance was that interest rate markets took it as a very hawkish statement, very hawkish comment. But that interpretation has been taken back a little bit. My interpretation from what I hear from the press conference, the way they answered questions, was that it’s very data dependent. Every meeting is life, meaning they are considering everything, it’s not automatic hike and he did talk about the lagged effects of monetary policy. Meaning that even if you hike now, in fact, you will only be seen much later on. So you shouldn’t really be very aggressive unless you truly know what’s going to happen in the future. And because there’s so much uncertainty given the war, given the covid shutdowns in China, also high energy prices, supply chain destructions. Continuing still, that’s a lot of uncertainty. And more importantly, I believe more importantly, the data’s producer price index (a measure of inflation because it measures the prices that producers pay to get good that they need to manufacture goods) is lower than expected. It’s the first inflation metric to undershoot in the US for some time now. So I think it makes sense for the Fed to be gradual and be careful in the removal of accommodation. He stressed that these are emergency conditions that were put in place, which is correct, to address the Covid crisis. But now, the economy is very strong, the labour market is strong, inflation is above Target and they will bring it back down to within expected long-run inflation target, keeping inflation expectations anchored. So, I think it’s good news that we have taken the uncertainty our of the market. The decision had one dissent from Governor Bullard who essentially has been talking about wanting a half a percent hike for the longest time, but I think it’s good. It’s consistently one guy, so that’s again reaffirming what we really known so far so that’s good. And historically, rate hike cycles have started with strong Equity markets because usually when the Fed is ready to hike, economy is very, very strong. They always tend to err on the side of the economy and jobs situation for the last 20 plus years. So I think it’s good for risk assets unless there’s more bad news coming from the war front or more shutdowns in China, we are likely to see that the buy on dips mentality in the stock market will return. Many investors are under invested now, there’s a lot of cash on the sidelines and think it’s good. We shall be seeing more positive price action going forward.

China stock markets rallied strongly off the lows since Wednesday, what’s going on here?

China’s stock market is very interesting. So what happened was it had a big selloff on Tuesday. It’s been selling off for the longest time because of Chinese government cracking down on education, technology companies, construction as well as various other sectors in the name of the common prosperity target – basically wanting to have a more equitable society. So they are trying to reduce dominance in any particular industry by big companies. Then we had the problem of the US wanting to delist Chinese stocks because of security concerns citing that there’s many connections to the government, maybe they’re taking data and it’s not protected from the government. So a lot of reasons for that and also then we had renewed fear of more lockdowns in China. So, that’s from the weekend, the last few days, there was a lot of panic selling on Tuesday. But on Wednesday morning, the Chinese government officials came out with a very strong statement about ensuring that policies going forward is to stabilize market, not to scare markets. I think they are announcing the end of cracking down on any particular Industries and more importantly, they say that long-term investors should buy stocks now, right? So basically, they’re saying the national team – the Pension funds, the government controlled funds, all the connected people should be buying now because this is it, right? They are going to e d the policy of cracking down on different sectors. And also they are going to promote policies that will stabilize the economy and help the economy grow, ensure that liquidity is sufficient for the economy to stay stable. And stable means up  for stock markets so that’s great. So, a big rally off the lows happened, Hong Kong was almost 20% off the lows. And I think also the positive risk sentiment from the Fed’s decision fed into the Asian markets as well. So we’re seeing a double boost and we see how Hang Seng index up 37% today, so I believe many people have capitulated. So a lot of those getting out are underinvested. I think again, this is going to be the low of the Chinese and the Hong Kong stock markets. And unless there’s worse news in store, for them on the covid front. But I think each time there’s bad news is going to be supported or met with more response from the government to help stabilize the market.

So, in conclusion, I think we are now at the tail end of the selloff in risk assets since the end of last year. I believe barring any drastic bad news from the war front from Ukraine-Russia situation. We are likely to see in the lobes and the Buy on Dips mentality will be returning soon if it’s not already returned. Okay. I think it’s very interesting markets. Volatility will remain high because many people will interpret the same news very differently given previously held views but I will stick with the side of history where early on in the rate hike Cycles, we have risk assets continuing to do well. Even though the Fed has hiked by one time of a quarter percentage point, risk conditions are still very easy. And they also stated that reduction of balance sheet can be considered a rate hike as well if it should happen. So, I don’t think they’re going to go over aggressive with reducing the balance sheet. All right, as always stay true to the process and eventually you’ll be profitable.

Hey guys, welcome back to a special edition of risk call. Today, we have with us Vee, the CIO and founder of TrackRecord. Hey, let’s talk about the Fed. We have the US Federal Reserve meeting later today. It’s the meeting that many anticipate that they will start their hiking cycle. Market is pricing for a 28 basis points hike, so slightly more than 25 basis points. A 25 bps is baked with a 10% probability of maybe a 50. But it’s low because it’s very unlikely that it’s going to be that way. Powell has already said that he will recommend a 25 basis points hike and I think that’s the way they’re going to go. That should not have an market impact. What’s going to impact the markets would be their statement on how they’re going to proceed with the hikes in the future. So, what’s important is also the dot plots, which is the projection of interest rate hikes for the future from each member of the committee. Then, they take poll and publish the range of their projections. So far, the market, is pricing the Fed to hike seven times of 25 basis points this year, which is I believe a lot. The dot plot previously showed only three, so they were talking about 3-4, but we’ll see how that has changed since last December projections (they only do projections every quarter so this is the first one since December). And another thing that market will be sensitive to will be the likelihood of 50 basis points hike at any some point in time, right? So we’ll see what Powell will say in his press conference. Likely that the journalist will grill him on how he intends to go about hiking. Would he consider 50 basis points hike, what does he think about the economic uncertainties from the Ukraine-Russian War, inflation from the supply disruptions of the war, especially in the Commodities, such as oil, gas, wheat and other food supplies as well. And also, what he thinks about the resurgent covid in China, which has led to the shutdown of Shenzhen and partial shutdown of Shanghai/partial restrictions in Shanghai. So that’s going to be all very closely watched. And that’s the excitement for today. Yeah, so I think we have a benign message from the Fed, they stressed on gradual hikes and seeing what happens and then adjusting, when data calls for adjustments, happy to take the time to slowly proceed with removing policy accommodation. Also, not just rate hikes but also balance sheet reduction. If it’s a gradual and benign policy statement, I think that stock markets and risk assets will rally further because today, we saw in Asia, a strong rally across the board because of the Chinese authorities – Chinese record State Council – saying that they will keep the stock market stable and they have encouraged the long-term investors to buy stocks. That’s basically also an encouragement for private investors and everyday investors to buy, basically saying the government will do everything in their power to keep the stock market stable. So that’s the first, I guess, it’s a very strong sign of support from the government. In this case, the risk sentiment is on the mend. If the Federal Reserve does not go extremely hawkish, does not express hawkishness beyond what the market is fearing, then risk assets will do well. Alright, on that note, as always stay true to the process, and eventually you’ll be profitable. Take care.

Hey guys, welcome back to risk call.

[VEE] I think it’s interesting to note a few developments, the market has been very focused obviously, on the Russia-Ukraine situation. I want to talk about what are the inevitable trends that this war has triggered, how it’s going to impact our investment thesis going forward and the trends that Nic and I think are inevitable in the months ahead. So, Nick, tell us what you think, you’ve been away for some time so what’s on your mind?

[NIC] I think a lot of things have changed to say the least. I think for the energy portion of our portfolio. We have been talking about it for the longest time, right? When the world was at peace and even before covid, right? And none of us expected the situation to be exacerbated, to the point where we are right now where we’re seeing oil above $100 and Russia, which is a major OPEC+ producer being taken off the global supply of balance for energy when the situation is really so acute. I think that what we’re going to see is an unprecedented spike in energy prices across the world and developed world economies, especially the Western countries, are going to be scrambling to figure out how they are going to solve this energy issues because their ESG policies that they have been touting for the longest time is apparently making this a lot worse. To restart energy, like the oil wells and gas fields is not like a switch where you can just turn it on. It’s going to take many months of lead time to restart the capacity. And I think in the interim we are going to see some crazy things in the energy market.

[VEE] Yes, I believe that’s exactly what’s going to happen. We are already seeing crazy things happening in the energy markets, but I think this is just the beginning of the next phase. I see a lot of investment Banks scrambling to predict higher oil prices, revising their targets up to 120-125 dollars and I believe as always, you know, I’m quite cynical about financial entertainment – what I call it, but the rest of the world calls it financial press or financial research strategies. I believe that $125 is just a day’s move away on any given day and given the news flow that we have right now. And I don’t think it’s going to stop at $125. And as you pointed out, we’ve been very bullish energy for less than two years. After oil went into the negative territory then we started becoming bullish. But never in our wildest dreams, neither you nor I expected the world to develop in such a way geopolitically. Our thesis was predicated on demand and supply, mainly demand continuing to grow both from reopening of the economy’s after covid and also from the growing wealth in developing countries: India, China, Indonesia and much of the Emerging Market countries and more importantly on the curtailing of supply due to ESG concerns that you said, green initiatives, carbon restrictions, carbon emission limits and all the green energy. But none of them really have thought of how it would have caused severe underinvestment in traditional sources of energy. For example, coal and oil, many of the investors do not want to be funding what they think are the bad guys, right? Which is the pollutants and the companies that are adding carbon into the atmosphere. Of course, that has led to severe underinvestment in this energy sector, led to supply being curtailed. So, we have a situation where supply is very hard to be turned back on. As you say, it takes years and there’s not enough investment dollars for developing these sectors. While demand is on the trajectory up, and it’s growing at a very fast speed given the reopening as well as ongoing growth in emerging market countries. So that was our long-term view that was pointing to higher prices regardless of what happens in the world geopolitically, but the geopolitical situation has exacerbated this demand and supply situation. Where now not only production of Russia may not be available to the rest of the world, but also energy security becomes a huge concern for the western governments now like because they not only take their supply from Middle East but they are now also concerned about Russia. So, it’s a big problem, if push comes to shove Russia can and is able to use energy as a weapon against many of the western governments, right? And this is how we structure our thesis: we find anecdotal evidence that confirms our thesis of the world. And if usually when we’re right, we see that for various reasons, many anecdotes, many occurrences in the real world, many news, articles or developments policies that have been implemented somehow fall into place. And one of the very interesting developments in the last week was because after the war in between Russia and Ukraine, Germany, surprisingly and shockingly to many observers, announced that they will increase their defense spending to 2% of GDP in the years ahead, which is a big deal because Germany has been pacifist since the second world war and now, they are building up their military building and weapons. And more importantly, they are rethinking their plan to shut down their nuclear power plants. France has been very open to get their energy sources from nuclear. But Germany was turning their backs on nuclear, and now they’re reconsidering and I think they will come to the inevitable conclusion that if they want energy security, they have to find alternative sources to natural gas and oil, and with ESG concerns, you will need to have nuclear as a core part of the strategy. Yeah, and I think you also have certain views on this Nick, right?

[NIC] Yeah. So, I think it’s quite interesting because Germany has actually one of the strongest green party movements in the entire world. And to see them make a sharp U-turn where they said that they’re going to rethink their nuclear strategy and start stockpiling coal and oil, which you will never expect coming from Germany at any point in time, right? So, everything ESG just went out of the window. And also, what’s interesting is also that the EU is going to integrate their Energy Grid in the future. And I think that’s quite telling of where the EU energy story is going to go because France seems to be the leader in Europe in terms of being smart about the energy choices because they are the only country which has an existing nuclear Fleet and Macron is very insistent on building up more nuclear reactors in France. So, I think this is going to flow over the Germany soon as they start to consider integrating the energy grid across the entire Europe. We have never seen, the Western Alliance so United before in terms of energy and in terms of the policy stance now in the face of Russian threat, right? And I think that they will understand that the only way Europe can achieve carbon neutrality or if they are even going to consider sticking to their green targets, nuclear is the only answer for that. Because now they are taking strong actions against Gazprom and Russian energy, which Europe was entirely dependent on for survival. And that is why I think that’s why Putin was so bold in saying that: If you sanction Russia, then you have fun staying cold because they’re not going to send gas over. The only answer to that is nuclear. And I think what has happened post-Fukushima was that nuclear mining activities have become almost dead. And as countries around the world ramp up, we are stockpiling nuclear and understanding that it is the only way to achieve energy Independence, what we think is going to happen in the years or actually even months ahead is a mad Scramble for Uranium resources where the world in is such a huge deficit of these commodities. So, one of our major Investments and trades is also in Uranium because as I think as this oil supercycle winds down in the future, I think the next one that is going to explode is uranium. And it’s starting to break above the post-fukushima resistance of $50 per pound. I think that’s a very historic and key breakout and I think it’s something that we should watch and it’s an  asset that we should add to our own at this point in time.

[VEE] Yes, I agree with that and also very interesting is that there was a news headline, where US is going to start a strategic reserve for Uranium or nuclear energy sources, much like the SPR for oil. I think if that’s the case, it wouldn’t be the first or last country to do so. I believe that’s the trend going forward: energy security. This is just one of the themes that I believe is now set into motion as inevitable, the world order has changed. This is a paradigm shift, that in my mind, is as lasting as what happened after September 11. The strategic alliances has changed, policies will have to adjust. the world is much less safe than before and governments will have to change their policies and act in a way to secure the future security of resources. So, on this energy front I believe that uranium and also coal companies will be benefiting from this new world order. So, for the details of the stocks that we’ll be adding to the model portfolios, we will drop the details into our chat forum soon enough.

In summary, the world has changed and it’s obvious to all. But I think the debate of what’s going to happen next geopolitically within begin in the war is not really productive for our investment thesis because things can change, peace talks may succeed unexpectantly. But what is inevitable is that the government have end up realising that being too dependent on one source of energy is making themselves very vulnerable to disruption that is going to cause other problems economically and politically as well. So, is there anything else you want to add Nick?

[NIC] No, I think that’s all. I think the world is moving from an optimisation-based system to a redundancy-based system, right? Where a lot of reshoring is going to happen and the spread in between to get from an optimisation-based system to a redundancy-based system is going to have to require lots of fiscal spending. And I think commodities in general is going to do very well, right?

[VEE] Yes, in layman terms, what you’re saying is that when we are optimised, everything was just in time where we assume very efficient supply chains, which may just get our resources and our production inputs, in a timely fashion, just when we need it. We don’t stockpile We just get it whenever we want. From optimized to now redundancy. So you need to stockpile, you need to secure your suppliers, to you need to make sure that they are within your control, rather than dependent or vulnerable to supply chain disruptions because of our strategic enemies, right? I think the word should be enemies, it used to be rivals but for many nations now, they are very close to their enemies now. It’s a bleaker world that is more dangerous. But be that as it may, there are opportunities for Investments. And I think these are the inevitable trends going ahead. And in the days ahead, we will put out more of our thoughts and hopefully we can encourage more discussions around this. Thanks, as always. Stay true to your process and eventually you’ll be profitable.

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