Executive Summary: Navigating Global Shifts and Australian Challenges
This article provides a breakdown of a discussion with Chris Judd, founder of Cerutty Macro Fund, exploring the principles of macro investing and its application in the current global and Australian financial landscape. Judd outlines his fund’s top-down approach, driven by identifying long-term secular themes, and contrasts it with traditional bottom-up investing. He shares insights on key macro trends, including shifts in US policy priorities, the emerging focus on manufacturing capacity, and the evolving dynamics of the US dollar. Domestically, the discussion highlights the significant challenges facing the Australian economy, particularly the cost of living crisis and high private debt levels, while noting potential investment opportunities arising from these conditions and the anticipated interest rate cycle. The piece concludes with reflections on the personal attributes necessary for success in macro investing, emphasising self-awareness and embracing volatility.
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Key Takeaways:
- Macro investing identifies long-term, secular themes that persist across multiple business cycles. While traditionally encompassing currencies and commodities, Cerutty Macro Fund applies this to long-only equities.
- A top-down macro approach helps narrow the investment universe, making research more efficient for smaller teams and focusing on stocks with potential tailwinds.
- Successful macro investors possess the ability to change their minds quickly and the flexibility to generate returns across different market cycles (unlike style-specific investors who may underperform when their style is out of vogue).
- The balance between favouring growth or value stocks is influenced by liquidity conditions; loose liquidity supports growth, while tight liquidity and high uncertainty favour value (companies with current earnings).
Global Macro Themes:
- US Policy Priorities: The primary focus for US leadership (Besson, Trump) appears to be managing the national debt by terming out significant amounts at lower yields. Creating market uncertainty may be a tactic to achieve this by pushing down the 10-year yield. The stock market is currently not the main priority.
- Trade and Manufacturing: Geopolitical events have highlighted the strategic importance of domestic manufacturing capacity. Both the US and Europe are prioritising increasing their manufacturing bases for economic and national security reasons. This theme is considered to be in its early stages, with automation and robotics playing a key role due to potential labour constraints.
- US Dollar Dynamics: Policy measures are anticipated to weaken the US dollar to support domestic manufacturing and exports. The historical dynamic of China supporting the USD by holding US assets is unwinding, contributing to potential USD softening.
- Multipolar World & Self-Sufficiency: A shift from a highly globalised world to a more multipolar one is increasing the focus on national self-sufficiency in critical areas like manufacturing, food, water, and energy refining capacity. Assets without a “kill switch,” such as gold, may become more attractive in this environment.
- Europe and Emerging Markets: The significant concentration of capital in US tech stocks (Mag 7) is seen as a long-term trend that is beginning to unwind. This structural shift is expected to benefit European and Emerging Markets over time, although the process will be gradual due to the slow movement of large institutional capital.
Australian Market Insights:
- Economic Headwinds: Australia faces a tough economy marked by a significant cost of living crisis and high levels of private debt. Recent per capita GDP figures highlight underlying weakness, masked by population growth.
- Misleading Data: Traditional economic indicators like the headline unemployment rate may not fully capture the economic reality, as they can be influenced by factors like the gig economy and immigration impacts on wages and service costs.
- Interest Rate Outlook: Consensus suggests further rate cuts are likely this year. However, the challenge for policymakers is to provide rate relief without exacerbating property price inflation, potentially requiring complementary regulatory measures.
- Investment Opportunities: Despite economic softness, asset prices may perform well, particularly with the prospect of rate cuts. However, the market environment is shifting away from simply buying past winners (high-multiple growth/quality stocks).
- Valuation Focus: There is a perceived “bubble in quality” where excellent companies trade on very high earnings multiples. Investors may increasingly look towards businesses with tangible assets on their balance sheets, representing a potential shift back towards more traditional valuation approaches.
Portfolio Implementation:
- Translating macro themes into a portfolio involves rigorous stock selection, but also disciplined portfolio construction to ensure conviction is reflected in position sizing (favourite stocks should be the largest holdings).
- A basket approach may be used for sectors where the fund lacks a specific edge (e.g., mining) to gain exposure to a theme (e.g., gold, uranium) without taking on excessive idiosyncratic risk.
- Portfolio construction considers diversification not just by industry but also by financial characteristics to avoid unintended correlations.
- Current portfolio positioning is skewed towards “midfielders” (reasonably valued quality) and “defenders” (low PE, gold), with a higher cash allocation, reflecting caution in the current uncertain environment.
Personal Attributes for Success:
- Deep self-awareness is crucial to understand one’s own personality and ensure the investment strategy aligns with it.
- Embracing discomfort, such as volatility, is seen as a superpower. Opportunities often lie in areas that others avoid due to discomfort.
- Managing external capital introduces accountability and pressure, which can be a positive force, driving greater discipline and effort compared to managing only personal funds.