My half-yearly investment update and outlook for 2024

I’m really surprised with how this year has panned out. Late last year, I wrote about the five key themes I thought would dictate markets in 2023 (Building the 2023 investment plan). In it, I focused on commodities, food, climate and disruption. All of these themes are having a profound impact on the global economy.

However, markets are still based on liquidity and the direction of interest rates. I find myself going into the second half of this year in a somewhat frustrating environment, but one which is normal to long term investors. The themes you believe in aren’t necessarily reflected in the movement of day to day markets. But that’s ok, that’s where maturity comes in.

Food, climate and disruption are all playing out as expected. I haven’t changed my view and continue to see these three as the main focus points driving opportunity. My view on commodities has evolved, I’m starting to get perhaps even more bullish and excited than I was at the end of last year.

When I’m buying stocks or real estate, in the current interest rate environment, I’m driven by these three things:

• Investing in assets that can hedge against inflation. This includes assets such as copper, nickle, real estate, and gold.

• Investing in companies that are well-positioned to benefit from the secular trends of globalization and technological disruption. These companies are likely to be able to pass on higher costs to consumers and grow their earnings even in a slow-growth environment.

• Investing in companies that have strong balance sheets and can weather the storm of a recession. These companies are likely to be able to maintain their dividend payments and avoid bankruptcy in a downturn.

As an Aussie, I have a big home ground bias and given all of the above, I can’t ignore the amazing value that I see in BHP at the moment. The business is a global commodities powerhouse, developing the right minerals, based in excellent geographies and now a free cashflow machine.

To summarise, BHP is trading at around $200bn market cap, generating around $20bn per year in free cash, paying out half to investors and reinvesting the other half in a much more stringent manner given lessons learnt over the past two decades.

My focus remains on hard assets like real estate, commodities, food and gold. I feel that oil is in a difficult basket for the time being because there is so much uncertainty as to how the world emerges from the past few years and how we think about energy long term. So I’m staying away from that all together.

But in a higher inflation environment, free cashflow is king. I’m not sure when the US Fed breaks the economy, I stopped trying to forecast timing a few months ago. But I do know that it will, things will break and then we are off to the races again with more stimulus and liquidity. I just don’t know if rising debt issuance and a change in dollar sentiment around the world will mean rates much lower.

It could just mean more liquidity, in a higher rates environment, with free cashflow assets being sought after more and more. Institutional investment into residential real estate is an obvious sign of that.

Mining and commodities are hard investment classes, but a shortage in base metals and a new cycle of economic development continues to make Australia and Canada among the world’s most attractive economies.

Let’s hope our politicians don’t mess that up.

Peter Esho is an economist and Founder of Esho Group. He has 20 years of experience in investments and markets.