Take Lendlease (LLC) as an example. The property giant is benefiting from pent up demand, in its ambition to achieve $8bn worth of project development completions forecast for next year. But more important than this, LLC has been building a more efficient cost structure, having been a chronic underperformer for a number of years now. 

The pathology specialist Healius (HLS) has been the victim of a Covid hangover, more so than most. Last half, and operating earnings fell 60%, profit margins almost halved and income fell 90%, reflecting the drop off in Covid testing volumes. Dividends have shrunk to almost zero. On the other hand, the group’s cost base has been reset, notably below pre-Covid levels, with $67m annualised savings, on top of reduced support costs. As well, industry volumes are slowly rebounding, with the resumption of elective surgery. 

In both cases, the companies are changing their CEOs. The same with Coles (COL), which has promoted a woman into the top job. Woolworths (WOW) is churning out profit growth amid difficult times. Alumina (AWC) is poised to benefit from growing demand for alumina as a result of the need for aluminium in decarbonisation initiatives.

ECONOMIC ANALYSIS 

We are seeing big moves in markets, reacting to the failure of Silicon Valley Bank and the duress being experienced by Credit Suisse. These have come from left field, but are both due to the rapid rise in interest rates since May last year. The US official overnight rate has gone from 0.5% and before this week was projected to reach 5%. 

The SVB collapse was not envisaged by the US Federal Reserve and lies behind the rapid changing expectations for rate rises to be paused (and even for a decline). This was spectacularly seen this week with the 100 plus basis point collapse in the US 2 year Treasury bond yield, going from over 5% to below 4%. 

The underlying cause, as we all know, is inflation, which shows little sign of abating. Inflation in the US is still running at over 5%, before you include volatile food and energy prices; while here the same measure is running at close to 8%.

Getting back to the financial system and the maelstrom is big, there is no mistaking that, but it’s contained. It’s not systemic; this is no black swan moment. Banks are well capitalised and US authorities, led by Treasury Secretary Janet Yellen, Fed chair Jerome Powell and the FDIC’s Martin Gruenberg, have cauterised the wound by making a “systemic risk exception” and guaranteeing all SVB depositors, whether insured or not, will be “made whole”. These protections also apply for the NY based Signature Bank. Credit Suisse has had problems since before the financial crisis; 1978 to be precise, when it merged with First Boston.

Interest rate rises might be paused, but over time they’re going to keep climbing while inflation is running hot. Behind the inflation are economies where demand is too high, in absolute terms, compared to the capacity to meet that demand (supply). The supply side won’t change; what needs to happen is further dampening of demand, which is where interest rate rises comes in.

A FINAL WORD

Stay on the value train. This means companies where there is earnings visibility and you’re not paying too much for growth. You don’t pay for blue sky at times like this. Every investment has to compete with interest rates that are much higher now than they have been for a number of years, even after the rally induced by the collapse of SVB.

The stocks we mention above are able to grow whether or not overall economic growth falls. This is the same reason you need to include Small Caps in your portfolio. This is both your weapon and your protection to ensure that you grow your wealth to combat life’s arrows.