Three things that got the team talking this week - Firetrail Investments

Weekly insights from the Trail

Three things that got the team talking this week

December 9, 2022December 16th, 2022

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1. Peak fear for the US housing market?

Markets are pricing in a gloomy outlook for US homeowners… The spread between US 30-year mortgage rates and 30-year government bond rates (shown in the chart below) measures the perceived credit risk in the US housing market. A higher spread means lenders expect more defaults in the future and are demanding higher compensation for the risk.

Amazingly, the 30-year mortgage/30-year government bond spread has now risen above its GFC level. With interest rates rising rapidly and housing affordability plummeting, tough times are ahead for US households. Based on history, we are at peak pessimism.

Source: Jarden, Bloomberg

2. Rome wasn’t built in a recession… but it might have been renovated

When a recession is looming, you generally see a decline in homebuilding activity, and this is currently weighing on homebuilding company share prices. The market is extrapolating the same weak outlook to the home improvement (repairs and renovations) market as well.

However, new data from Lowe’s in the US suggests that homebuilding and home improvement don’t necessarily move in lockstep. During the 1990s, there was a sharp decline in housing construction, but home improvement sales remained resilient.

The takeaway: market pessimism towards companies exposed to home improvement may be overblown. We believe companies like James Hardie and Reliance Worldwide offer significant value at current prices.

Source: Lowes

3. Mums look away now…

Mums around the country are in a state of alarm this week following the ABS’ September quarter economic data release.

It wasn’t the economic growth, inflation or consumer spending data that caused the shock. Rather, it was at-home food consumption data, which revealed that fresh fruit & veg consumption is down 2.5% vs. last year!

And we don’t expect diets to improve any time soon with the silly season approaching full swing…

Source: ABS, Macquarie Macro Strategy

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

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