Growth at reasonable yield (GARY) keeps delivering through high-risk macro

Macro Cycles

Debt-fueled spending by most Western governments has reached a point of no return amid declining political capital. Global economic issues are so complex that the average person now favors simple, one-dimensional solutions—despite low success rate—over a long-term, reform-driven fix. Economic data manipulation for election cycles has become a primary policy focus. The lack of reform, high living costs, and endless debt growth mean Western economies are mirroring Japan’s past policy mistakes, hoping for a different outcome.

Policy Outlook

The Fed's emergency rate cut has pressured others to follow, though the rationale feels weak. Post-election policy is likely to temper rate cut expectations as inflation concerns grow and growth slows. China’s economic data shows relative stability, supported by targeted stimulus, while a trade war with the West has begun in the EV sector. Markets remain uncertain, as the cost of maintaining high asset prices has become the very force dragging economic growth down for longer. The US election outcome has the potential to ramp up bond yields and shake multiple asset bubbles in most western economies.

Data Analytics and AI takeaway

In recent weeks, global funds had to defend their overweight equity positions in weak markets, leaning on tech stocks in the US and banks/miners in Australia. Momentum remains the top-performing factor, with size and scale trailing behind. Profitability, value, and dividends are largely overlooked in the momentum-driven trades, though economic realities are likely to bring these factors back into focus.

Investment Strategy

Yield investing, particularly in a high-risk macroeconomic environment, demands a nuanced approach, especially as the U.S. presidential election outcome contributes to inflation and interest rate uncertainties. The potential for increased government spending, fluctuating policy shifts, and heightened geopolitical concerns has amplified economic volatility. With these dynamics at play, the Federal Reserve's stance on interest rate adjustments remains a key factor, impacting fixed-income investments and yield-bearing assets.

In this landscape, yield investors are grappling with a complex equation: how to balance income generation with capital preservation. While traditional high-yield bonds and dividend-paying stocks offer attractive returns, they also come with greater exposure to market fluctuations and default risks. On the other hand, more conservative options, such as Treasury bonds, provide stability but may deliver yields that struggle to outpace inflation, especially if inflation accelerates further.

Growth at reasonable yield (GARY) remains a viable strategy in the current environment due to the investor demand for a more cautious and adaptive approach. Balancing the pursuit of income with the need for risk management and flexibility will be key to navigating the challenges posed by elevated interest rates, slowing growth, and an uncertain geopolitical future. Deep Data Analytics’ Growth at reasonable yield (GARY) strategy offers that with consistent premium outperformance over the long term.

Model Portfolio

Growth at Reasonable Yield (GARY) Top 10 continues to exclude big banks, big miners and big property trusts. The stretched asset valuation, weakening local economic outlook, US election outlook, rising geopolitical risks, weak China outlook, reflation worries and fading consumer spending cycle suggest that these major sectors of the local market are being mainly held up by global passive funds while the earnings are facing cyclical decline. We continue to see the overall market multiple as unsustainable while some segments of the market offer substantial outperformance. Hence the data driven targeted sector/stock selection strategy continues to outperform despite volatile macro-outlook. The market moves in the days after the election are not always the real trend. The real macro cycles usually start to take over as the market starts to look through the policy details and the implications.

The best performers over the last three months in the Growth at Reasonable Yield (GARY) Top 10 are: Regis Resources (ASX: RRL), Evolution (ASX: EVN), Austal (ASX:ASB) and Codan (ASX:CDA).

Note: DDA may or may not have made changes to the model holdings since last update. The data driven model portfolios will continue to evolve with the economic and market cycles.