Company Interview / Is this the most uncertain outlook in a generation?

Talking points:

Paul believes the Australian and US markets are significantly overvaluedBusiness mechanics and survival chances are more important than hype and AI for market leadershipHamilton Chase is adopting a defensive financial strategy amidst current uncertainty in the market

Paul Huggins, founder of Hamilton Chase, asserts the Australian and US share market might be significantly overvalued – up to 18% for the former and potentially more for selected sectors in the latter. Paul attributes this inflation, in part, to factors such as the "Magnificent Seven" driving values in the US and trading ratios sitting at 50-60 times multiples – a situation many analysts consider unsustainable. He refers to warnings by the Wilshire index, a barometer used by US institutions for over four decades, which suggests the market is overvalued.

Discussing business sustainability, Paul notes that understanding business mechanics, future ROI potential, and survival chances in the current market are crucial. He prompts us to ask how companies, like Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL) , will generate profit and integrate their products with other services. Consumer hype and AI have driven Wall Street's narrow leadership, but real businesses and their mechanics will be the focus point in the future.

The future financial climate in Paul's view is uncertain – the most he has seen in 35 years. The current strategy of Hamilton Chase is a defensive one, holding 45% in cash reserves and only 32% in Australian equities. Paul speculates the forthcoming US election, geopolitical events and the unpredictability of Trump's potential re-election present substantial risks for Australian and US equity markets.

Full unedited transcript:

0:00

Well, let's get across the broader market what we're seeing on global markets. Our next guest saying that the Australian sharemarket right now is overvalued by up to 18%, the US market even more overvalued depending on the sector. To unpack that, Paul Huggins is the chief executive and founder of Hamilton Chase. He joins us now. Paul, welcome. Thank you. Interesting times on markets isn't it, given that volatility we've seen in the past week, I gather you have seen this coming. Given, as I just said, you see those markets as being somewhat overvalued.

0:34

Yeah all I do and I think that when you have a look at what has transpired with, with institutions over the last between 5 and 20 years, I mean, if you read lately about Warren Buffett, for example, they've always measured the we'll share 5000 and the Wilshire 5000 index is been something that's been used by Berkshire and a lot of the US institutions for, for, for 40 years. And when you read that now that barometer is showing that that's sitting at about 190. And so what does that mean? It means that fair buying is 100. Great buying is at 70. So that's not to say that the entire stock market is over, but it's that's taking the whole Wilshire 5000. There's certainly certain sectors in there that are probably, um, that that are not overvalued. But overall now the that Wilshire Index has been a great barometer for the last 45, 50 years. And it's saying generally

1:34

that the equity markets both here in the US, um, are overvalued. Why are they overvalued, do you think why have we seen that. What I guess you could term as irrational exuberance then. Well, I think if you go back, uh, 25 years ago or even 20 to 25 years ago, people would say, if you measure that index where it's a bit misleading, that the four banks and BHP and Rio howled up the economy. So six, you know, four banks and two mining companies actually held up the index. And so what's driving that?

2:07

That valuation now increase is driven from the Magnificent Seven in the US. Um but also companies that the trading ratios now of between um, what should be 27 to 30 now at 50 to 60 times multiples, which a lot of analysts are saying can't be sustained. So a bit, if you look back at what to to relate it back in Australian terms, that the four banks, two mining companies that really held up the index, well, that's happening on a massive, gargantuan scale in the United States by the Magnificent Seven and some. Well, that's right, because it's been that very narrow leadership that, uh, that we've seen, um, on Wall Street. But of course, a lot of that driven by AI and the hype associated with that, uh, which I guess investors are now start to question as to whether they're going to get the returns immediately, or actually it's going to be pushed much further out across the horizon. How do

3:07

you view that? I thematic and the way it's playing out at the moment? Well, just speaking to people this morning about that, the what comes back down to there's a lot of people that get caught up in yesterday's race guide or the forecasts of these multiples. I think getting down to it, the investors that drill down to see and understand the business mechanics of actually how these businesses will bring about the returns, which businesses will survive. And I think that's and how that integrates, how the mechanics operate for for them to produce an earnings and survive. I mean, I remember reading last year that in the last 75 years, 87% of the Forbes 500 are no longer with us.

3:53

They kaput. So what? I'm what I'm saying here is, is that how do the companies that are around today? I mean, what what Microsoft the innovation of Microsoft has been sensational. Google will anyone catch Google? Question mark and Apple with AI? How does that work? How do they make a dollar and how do they integrate between other services? Um, and what falls out of that? I think that real business now has come that that's the question, not just one company going from 30 times to 70 times. And will it survive? I think it's the real business mechanics and the outcome of that. I think that's going to be the question, Paul, how are you negotiating this volatility? We're seeing that I mean how defensive are you positioned. Well we have a retail side. The momentum group has a retail side. And we manage just under 2 billion on that side. And that's more or less retail and wholesale Hamilton Chase has a family office business which

4:53

I manage. And this is in our book, Intelligent Leverage, the book that we've just published, but that we're managing more fixed interest. So there's probably 75 clients that I look after there. And my job day to day is managing high net worth, uh, short term money. Um, people that have sold businesses coming out with between 100 and 500 million right now is, is that it's a bit akin to, um, you know, what to buy. And at the moment we're looking at, um, treasuries, a stack of fixed interest, uh, capital guaranteed A and AA rate of paper. And that's looking at now between 6.8 and 7%.

5:35

Two of those or three of those out of five fund managers that we use are actually international offshore. And we're getting, you know, when we start talking about 6.5 to 7.3% with a rated AA or AA rate of paper, um, and these clients are 65, 8575 years of age. My view is short term. Wait and see what the outcome is between now the election and the new year. What do you buy? That's value. Now that's on the cash side than fixed interest.

6:10

The answer to your question is, is that most fund managers, I mean, normally sit between 6 and 7% in cash reserves and balanced portfolios. I mean, we're at 45.

6:21

We're very defensive at the moment because we think there's so much uncertainty, more so than what I've seen in 35 years. Diminishing exposure to having two equities at the moment. Then Australian equities have been about 32,

6:34

which is quite low. But what we're seeing now before this time before pandemic, the balance investors or the industry funds, if you like, um, were earning 10% if you like, if you take the average industry fund with between 68 and nearly 80% share market exposure.

6:55

What we're saying to air horn ultra high net worth clients is we think we can achieve the same rates of return with 40% share market exposure. So we think that because of the shift in interest rates and fictitious and treasuries, you can earn the same rate of return with fairly much half the risk.

7:14

Um,

7:16

the other side of the argument is, is that what if what if we're wrong and the market takes off? Yeah. And the valuations, you know, when you have a look at the the Forbes or look at the the Wilshire index at 5000 and, and then we're at 190. If you go back and study what's happened over the history of time is, is that when you've seen these busts with these corrections, 31% of those busts in the in those that has been the floor and those companies have taken off. For example, Amazon was part of that going back 20 years ago with all bust. and then that. But that was the lowest point of Amazon. So 31%. This is the other interesting investigation is that through this bust, even though there's a correction I think coming on the market. But which companies is Novita a $200 stock. Is it I mean, you know is is is Berkshire Hathaway with its cash reserves now at

8:16

300 billion, is there potentially going to increase by 2,530% in the next 2 or 3 years. So even though you've got a correction history, it says that 31% that was the floor and they've had upswing and never look back. So I think again, what I mentioned before about the mechanics of business, understanding how business operates and also the ones that are just beginning,

8:45

you know, that's that that's the for me that that's what I spend most of my time on. The paranoid will survive. He's trying to find out why will this work? And removing yesterday's race guide. Because the research yesterday is yesterday's weather report. And, Paul, how much focus are you on on the macro picture and also what's going on perhaps geopolitically given, as I mentioned earlier, the events unfolding in the Middle East, but also the risk ahead just in terms of the November US presidential election. Well, there's two sides to that. I mean, 2017, 2018 was the biggest runs on the stock market in history. The history of the US, and one of the reasons why that run so

9:26

long and far, I think that what Trump did to US tax bringing down corporate rates from 35 to 21, that was the most I mean he might have buggered up is

9:39

Covid and what he thought he was going to have. He was going to tackle that. But one thing he got right um you know, moving corporate rate from 35 to 21 this side going in now, I would say as of today, um, that there will be more votes. I think Paul, she'll probably pick up more votes. Harris. Um, on people that haven't voted or we're swinging. Um, it's a problem you get on non compulsory voting in a country like the US. Um, if she does get in, I think that um,

10:08

that for the economy I think will not be good. Um

10:13

both economically and for Australia. I think if if Trump gets in it'll be a terrific move um, from an investment wise trade, but then also gives, um,

10:27

ramifications for our trading partners being China. Um, and so that that for Australia, um, is is problematic. Um,

10:38

great for the equity markets, great for the US equity markets, not too good politically for Australia. I think if Trump does get in how he handles well, he's just an uncertainty.

10:48

Um an unpredictable.