GARY Top 10: Yield investing has changed

The global economy is currently facing the challenge of low growth for an extended period, with a growing risk of stagflation or recession. As anticipated, Germany has entered a technical recession, leading Europe in this downward trend. Moreover, substantial portions of emerging markets, excluding China, are also facing the prospect of prolonged stagflation or recession cycles. The collapse of industrial production in major manufacturing countries is contributing to this situation, as elevated inflation and rising interest rates weigh on consumer demand. Investors find themselves navigating an unprecedented economic cycle, pinning their hopes on central bank stimulus to provide a rescue. Meanwhile, consumer debt levels continue to rise to bridge the gap between the increasing cost of living and weak wage growth.

Contrary to the media narrative, the primary driver of inflation remains the rising profits, as supply chain disruptions gradually ease. Central banks had cautioned last year that inflation would become concerning once wages started catching up. We are now at a stage in the cycle where rising wages, coupled with artificially inflated growth in property rentals, are likely to sustain higher inflation levels for an extended period. If this cycle persists, it may lead to a scenario where rising wages and rents further fuel inflation, prompting central banks to raise interest rates. The Reserve Bank of Australia (RBA) has attempted to delay rate hikes to support the property sector, but recent economic data is forcing their hand. The prevailing consensus suggests that the RBA will implement multiple rate hikes, keeping rates elevated for a longer duration than initially anticipated.

Despite the robustness of the employment market, it is crucial to recognize that the unemployment rate is a lagging indicator. It tends to move after the economy has already begun to decline, while hours worked serves as a leading indicator of the economic cycle. Notably, the data shows that hours worked in the United States has been declining over the past few years, even as unemployment figures continued to improve. Drawing lessons from history, this suggests that the unemployment rate is poised for a significant increase in the coming period. It remains our expectation that the United States will experience a cycle akin to a recession in late 2023.

In a scenario where there is low growth, yield investing runs the risk of falling into value traps, especially during an elevated inflation cycle with concerns of a recession. To navigate such volatile markets, the GARY (Growth At Reasonable Yield) model presents an approach that provides exposure to the top 10 stock ideas. These ideas are carefully selected to manage factors such as growth, value, yield, and risk, considering the current market conditions.

As we enter a new decade, it is anticipated that inflation and interest rates will be higher compared to the previous decade. However, economic growth is expected to be weaker in the coming years due to high levels of debt and inflationary pressures. This combination poses challenges for investors as asset prices are likely to face ongoing pressure, with interest rates remaining elevated for a longer duration than originally anticipated.

In such an environment, investment strategies must adapt to the evolving cycle or risk being left behind. The dynamics of the market demand a proactive approach that takes into account the changing conditions and incorporates strategies that align with the prevailing economic landscape. By considering growth, value, yield, and risk factors, investors can position themselves to navigate the challenges and opportunities presented by the market in the coming years.

The GARY Top 10 at the end of May 2023

• ASX (ASX: ASX)
• Codan (ASX: CDA)
• Elders (ASX: ELD)
• Evolution Mining (ASX: EVN)
• Nine Entertainment (ASX: NEC)
• Regis Resources (ASX: RRL)
• Telstra (ASX: TLS)
• Wesfarmers (ASX: WES)
• Woolworths (ASX: WOW)

Note: DDA may or may not have made changes to the model holdings since the end of May. We continue to see the cycles changing and the model portfolios evolving with that.

GARY keeps delivering through the market cycles. The performance chart excludes dividends and transaction costs.