Our Director of Trading, Trent Primmer, was live on Ausbiz today discussing the conclusion of the Santa Claus rally, the implications of high inflation on financial markets and the opportunities that arise in such an environment.

Investors are waking up to new investment strategies for inflation

Trent suggests: 

“The best thing that you can do is sit defensively. Look at some of the commodity-based businesses out there that can pass on higher costs in a higher inflation environment and look defensively, hold some cash on the sidelines, don't be fully invested so you can scoop up bargains once the market's bottomed out.”

Watch the full video here!

Read the Conversation

Andrew Geoghegan:

"Alright, let’s get to what’s going on in equity markets at the moment. The Santa Claus rally, remember that? Goodness seems like a long time ago. Well, it seems to be well and truly over, of course. So where to from here and what's investor sentiment telling us, and where's the opportunity to be found. Trent Primmer, joining us from Barclay Pearce Capital to discuss.

Trent, good morning to you. We’ve just been talking about that wild ride we've seen obviously in the crypto space, reflecting also, we've seen those steep falls on the broader equity markets at the same time. And I did reference the Santa Claus rally there, that's well and truly past us now."

Trent Primmer:

"Well and truly past, a hundred percent. Look, a lot of investors are starting to wake up to higher inflation and how that bears on equity markets. You've had massive moves in the NASDAQ in particular. It's 14% down from its highs in November. We're seeing a sell-off basically across any equity market exchange globally.

A lot of sentiment has turned negative quite quickly, but this is something that we kind of foresaw. It was hard to pick timing because a lot of people were buying the dip. We did around December and unfortunately removed some of our high risk positions, but speaking of inflation, oil is on a tear and we believe that it will surpass probably the US hundred dollars a barrel mark.

There hasn't been enough investment into oil, so that's really squeezed supply. We see this type of oil price underwriting higher inflation for quarter one this year. That's essentially what we've seen thus far."

Andrew Geoghegan:

"Yeah, as you say that's just further likely to feed into inflation at this point. So Trent, if you’re looking to make a move and with some reallocation here, perhaps away from those loss-making growth stocks, um, where are you going? Is it commodities?" 

Trent Primmer:

"It is commodities. A lot of investors moving away from loss-making growth stocks into inflation safety of commodities. Uh, we'd be looking at oil for sure. Some of the renewable energy boom exposed stocks, Rare Earths based metals, some defensive consumer stocks like Coles and Woolies, which haven't really got much love lately from the broader market, but in periods where there's sell-off in broader markets, generally they're fairly safe.

Anything exposed to US fed rate hikes. So we've got some Aussie stocks that have US earnings exposure. Companies like Aristocrat Leisure, James Hardie, Cochlear and CSL are worthwhile looking at. Some battery and EV exposed stocks, Panoramic Resources, Talga Group, Rare Earths Lynas Corp.

Looking at technically now, it's quite expensive and you can pick it up cheaper obviously by being patient. We do like iron ore at the moment, and this is for two reasons. Firstly, China’s growth is slowing, which is obviously quite bad for materials. This is prompting lower rates and monetary stimulus by the CCP in response.

Now, if you couple that with the conclusion of the Beijing Winter Olympics ending, steel production likely is going to ramp up again, obviously on China's end, and then you have a perfect storm for high demand. Secondly WA, they’ve largely been shielded from the pandemic and potentially mine shutdowns.

McGowan recently moved away from their Feb 5 opening date, which is going to provide some sort of defense against some of the Aussie listed miners and potentially shutdowns on their mines from any lockdowns or any issues with the omicron variant. 

So I think the risk is probably there with iron ore. We haven't seen that yet, so no need to worry about it I think. I think iron ore at the moment is definitely where we want to be and something that I know that we've been buying up a considerable amount over the last three months."

Andrew Geoghegan:

"So when you say buying up, so are you looking at the top miners, the BHP, Rio, Fortescue?"

Trent Primmer:

"Yeah, our favourite’s always been Rio, Fortescue because of the dividends that they pay. And Champion Iron ore have done quite well and iron ore price at the moment. With Fortescue in particular, it's sort of trapped up to around the levels that we were buying it and once you factor in the dividend that's paid we're well ahead.

So I suspect that they'll continue doing quite well. Infrastructure spends are going to continue and obviously as China ramps up production coming out of Beijing Winter Olympics, we should see a nice little boost behind the iron ore price."

Andrew Geoghegan:

"So Trent overall then, you are taking a significantly defensive stance when you're talking about this reallocation given what's going on with the macro picture, and I mean how critical is the Fed meeting this week? What's your bet as to what they're going to announce and how markets are likely to react?"

Trent Primmer:

"Look, I think we'll see obviously quite some hawkish commentary from the Fed this week. It'll give us a good view of obviously the RBAs kind of sitting on their hands. This is why we're sort of aiming for some of those US earnings exposed stocks domestically. Like your James Hardies, your Aristocrat Leisure, Cochlear, CSLs. Look, I think it would provide a really good picture on where we sit moving forward.

You had one of the guys on before from Pepperstone starting talking about US earnings week. I think that coupled with the Fed meeting is the two biggest things that you can look at in this market. It's difficult to tell what will happen. The Fed generally surprises so we'll be watching it closely and making moves from there. 

But the best thing that you can do is sit defensively. Look at some of the commodity-based businesses out there that can pass on higher costs in a higher inflation environment and look defensively, hold some cash on the sidelines, don't be fully invested so you can scoop up bargains once the market's bottomed-out or near enough."

Andrew Geoghegan:

"Yeah, I was just going to ask you about you're holding cash at the moment. What sort of percentage are you holding at this point and as you say, perhaps ready to pounce?" 

Trent Primmer:

"We're looking between 30 to 40% on any given day at the moment. We cashed up quite a bit early this month. I just think it's prudent to keep your powder dry, so to speak and attack when necessary.

I wouldn't be surprised if the US markets potentially could be in a bear market into this quarter. NASDAQ's in correction territory. It's difficult to see where we're going but when we don't have a clear reading and markets have ran quite hot over the past year or so, it's always better to err on the side of caution, be defensive, hold some cash and be patient.

That’s how you get through these market moves. And don't stress, markets move up, they move down, they trade sideways. It's just about mitigating that risk as much as possible and you just need to be very, very prudent and very, very diligent with your strategy. Part of that is holding cash when necessary."

This interview was arranged by Hans Lee, producer and journalist at ausbiz.

Barclay Pearce Capital team members are often featured by the media, sharing their insights on the market. Receive the latest market summaries and market-moving news, subscribe to Deal of the Week