The Cut
Height Capital’s Weekly Update

The last week has seen markets start to factor in a few concerns that we have been discussing for the last few months. The major things that caught our eye last week are:

Markets insights

• Metal prices were down substantially due to a slowing China growth rate, which meant most hard commodity price’s dropped last week. The following table illustrates several key commodities that we watch. The graphs illustrate last year’s trading pattern to this year’s actual price with a starting price at the beginning of the year. The interesting take away from these graphs are that Gold, after a strong start to the year, is trending down. Gas and Oil after a very volatile year in 2022 have both been trading reasonably stable for the year. The commodity we have been watching with interest is the Iron Ore and Steel prices, which have fallen substantially. With the reopening from Covid of China in January, both Steel and Iron Ore bounced strongly on the hope of increased demand from China. That has not been the case and is unlikely to happen in the short term.

• In the soft commodity markets (food-based commodities) we have been a more stable market. After a very volatile 2022 due to supply and demand issues, we have seen most markets settle into a clear rhythm. In summary, most commodities are correcting from all-time highs, and that is a good sign and has been our expectation since the midpoint of 2022 as inflation rolled over.

• An area we like to follow as part of investment strategy is the Volatility Index for both Bonds and Equities as it provides good illustration of capital movement through different markets. The volatility has been with high bond markets for several months since the Federal Government started to become hawkish on interest rate increases, while the Equity markets volatility has dropped in the same period. A confluence of factors has been driving this increase, with US debt ceiling likely to be hit in the coming week as negotiations stalled. US Treasury Secretary has indicated that 1^st June 2023 could be the earliest that they run out of space in the debt ceiling (watch this space next week). Shock inflation figures out of the UK has also contributed to yields around the world continuing to go back up. UK year on year CPI printed at 8.7%, beating expectations of 8.2%.

• What interested us the most from our review was that over the past 18 months there has been the divergence between Bonds and Equities volatility. The graph below illustrates the volatility of Bonds (white line) and Equities (blue line) since the announcement of the US Federal Reserve’s hawkish views.  For the first time in decades, we are seeing the volatility of Bonds substantially increase compared with the Equities market. So what does this mean? Structural change in the view of Bonds, yes but also the longer viewed investors (Bond investors) are factoring in substantial downturn, while the Equity markets are believing that the slow down can be managed. Don’t be the last to get to the door to exit high risk Equities.

Stock snapshot: CSL Limited

This week we decided to review CSL Limited, which is a core holding in our client’s portfolio. CSL is arguably the greatest international growth story to come out of Australia. A global biotechnology company that develops and delivers innovative medicines that save lives, protects public health, and helps people with life-threatening medical conditions live full lives.CSL is also involved in research, development, manufacturing, the marketing and distribution of biopharmaceutical and allied products.

What makes the business so great is its reinvestment into Research and Development (R&D) and ability to bring these projects to market. About 7 years ago, CSL management decided to refocus the business into a substantial growth market: Plasma blood collection to support future developments. This was a game charger as their competitors exited the market, they were able to take substantial market share in the US, being the largest market for their products.

Now they have built out the product line and improved the efficiencies in the business and they have started to expand into other markets. This has led to the acquisition of Vifor last year which was one of their largest European competitors. The benefit of this takeover has not just been the increase in distribution but the new product pipeline substantially increasing. As you can see, creating effective decisions over 7 years ago to improve R&D and control the availability Plasma collections have placed them in a strong position.

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