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Weekly insights from the Trail

Three things that got the team talking this week

June 16, 2023June 23rd, 2023
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1. Profit surge…

The Firetrail investment team were at AGL’s Strategy Day today. The key message – electricity prices are going up, and so are AGL’s earnings. AGL announced electricity price increases of up to 50% kicking in from 1 July 2023. This is well above increases to the Default Market Offer (a benchmark price set by the Australian Energy Regulator) this year, and market expectations. Given AGL is vertically integrated with access to cheap energy generation, higher electricity prices flow directly through to AGL’s earnings. We expect wholesale electricity prices to stay higher for longer, and this is why AGL is a key position in the Firetrail High Conviction Fund.

Source: AGL, Australian Energy Regulator, Firetrail, June 2023

Companies mentioned are illustrative only and not a recommendation to buy or sell any particular security.

2. Hikes starting to bite…

We’re seeing increasing signs that RBA interest rate hikes are starting to bite the Aussie consumer. The chart below is one of them. Data from non-bank lenders shows that the percentage of loans in arrears (i.e. the borrower is falling behind on repayments) have been ticking higher and higher through 2023.

We expect the squeeze to continue. According to the RBA, about $350bn worth of low, fixed rate mortgages are set to roll off this year. And they will have to be refinanced at a much higher rate…

Source: Bloomberg

3. US housing sentiment rebuilding brick by brick…

The NAHB/Wells Fargo Housing Market Index (HMI) is a key leading indicator tracking the sentiment of US homebuilders. Surprising most analysts, the HMI has experienced a sharp positive reversal this year despite higher interest rates and deteriorating economic conditions. While we remain cautious and aren’t banking on a strong housing market, we believe the market was baking in an overly bearish outlook for home repair and renovation spend. The gradual reversal of this negativity has led to significant outperformance of James Hardie Industries, a holding in the Firetrail Australian High Conviction Fund, in 2023 YTD.

Source: NAHB

Companies mentioned are illustrative only and not a recommendation to buy or sell any particular security.

Disclaimer

This article is prepared by Firetrail Investments Pty Limited (‘Firetrail’) (ABN 98 622 377 913, AFSL 516821) as the investment manager of the Firetrail Australian High Conviction Fund (ARSN 624 136 045), the Firetrail Absolute Return Fund (ARSN 624 135 879), the Firetrail Australian Small Companies Fund (ARSN 638 792 113) and the Firetrail S3 Global Opportunities Fund (ARSN 653 717 625) (‘the Funds’). Pinnacle Fund Services Limited ('PFSL') (ABN 29 082 494 362, AFSL 238371) is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the relevant Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.

Links to the Product Disclosure Statement: WHT3810AU, WHT5134AU, WHT3093AU, WHT7794AU

Links to the Target Market Determination: WHT3810AU, WHT5134AU, WHT3093AU, WHT7794AU

For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email service@pinnacleinvestment.com

This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance.

Whilst Firetrail, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Firetrail, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication.

Any opinions and forecasts reflect the judgment and assumptions of Firetrail and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future.

Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Firetrail. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication.

This may contain the trade names or trademarks of various third parties, and if so, any such use is solely for illustrative purposes only. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with, endorsement by, or association of any kind between them and Firetrail.

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