03 Aug

Recession proof investing & pink diamonds

It’s been another eventful week for investors, with the big news coming from the United States, where a second quarter of falling economic output has economists, policymakers and investors wondering if the world’s largest economy has fallen into a recession.

In Australia, the focus has again been on the Reserve Bank (RBA), who, as expected, increased interest rates by another 0.50% at their meeting held on Tuesday 2nd August. This brings rates in Australia to 1.85%, with the RBA having now raised interest rates at their last four meetings.

We look into these events, and the implications for pink diamond demand in more detail below.

Recession on the way?

It’s been a tough year for investors in 2022. Stock markets have seen significant falls, the bond market is having its worst year on record, inflation is soaring, and cryptocurrencies have crashed.

Even property in Australia is falling rapidly (more on this below), while it’s also slowing down in other countries.

The one bright spot has been that, in many parts of the developed world, unemployment is at or near record lows.

However, these strong results on the employment front might be threatened going forward, with news out last week that the United States saw its second quarter in a row of falling economic output.

It’s not technically being called a recession just yet (one of the reasons for this is because employment figures are so strong), though as per the table below, when the US economy sees two quarters of negative growth, it does typically end up being a recession.

US Real GDP: Consecutive Quarters of Negative Growth
(1947 – 2022)

Table of US Real GDP: Consecutive Quarters of Negative Growth

Source: Compound, CharlieBilello

Whether it ends up formally being declared a recession or not remains to be seen, but there can be no doubt that the economic situation in the United States is deteriorating.

In time, this slowdown can only mean bad news for employment, and for company earnings, as less workers equals less spending, something that will only be complicated further by record high levels of inflation.

Combine this with central banks that are still set to deliver more rate hikes between now and the end of this year (this in itself is unusual; normally central banks are cutting interest rates when the economy slows down), and these dynamics could yet see stock markets fall much further.

If this proves to be the case, expect alternative safe haven assets to see a continued period of strong demand.

We’d expect pink diamonds to be a major beneficiary, as they have an established track record of either holding, or even increasing in value through past periods of recession, including the Global Financial Crisis, and the COVID-19 pandemic period.

The property boom is over

It’s hard to turn on the TV or scan an Australian news website these days without seeing articles discussing the recent declines in the Australian property market.

And while there are those who constantly warn of impending house price crashes, this time around they are joined by a handful of respected analysts.

This includes a regular contributor to the Australian Financial Review, Chris Joye, (the chart below comes from a tweet of his) who recently noted that current falls in the Sydney and Melbourne property markets are either the worst, or second worst in just over 30 years.

Far from being a doomsday merchant, he was actually debating the bullish case for real estate about four years ago, with prices up by about 30% since then.

This time around, he’s a bear, having forecast a decline of 15-25% back in late October last year.

Australian Dwelling Values on Track for Record Slump

Australian Dwelling Values on Track for Record Slump

Source: CoreLogic

In our view, the potential for a meaningful house price correction shouldn’t really come as a shock.

While it’s only logical most homeowners and property investors would like to see the value of their homes increase in value every year, property is not immune to the bull and bear market cycles that impact every asset class.

Leading into the pandemic, property in Australia was already extremely expensive, whether compared to rental yields, as a multiple of salaries, or when compared to other nations.

The idea that property prices would soar from an already expensive starting point, which they did for a time when the pandemic started, and then stay at new even higher levels was always likely to be optimistic.

As such, I don’t think anyone should be that surprised if the property market were to end up giving back the majority of the gains seen through the COVID period. If that is indeed what ends up happening, then peak to trough you’d need to see the market fall by roughly 30%.

Even if it only does half that, the Australian dollar will likely fall, while our bank heavy stock market would also likely decline meaningfully.

It won’t be pleasant for many, but it will again drive demand for assets like pink diamonds, which can hold their value through such periods.

Massive pink diamond found

Before we finish this week’s update, it would be remiss of us not to mention the news out of Angola, where a 170-carat pink diamond, named the Lulo Rose (after the mine it was found in), was recently discovered.

Rumoured to the be the largest natural pink diamond found in the better part of 300 years, the pink diamond is expected to fetch in the tens of millions when it is eventually sold.

As we’ve stated when we’ve come across news items like this in the past, discoveries like this are great for pink diamond demand, because they help generate attention and buzz for the asset class.

And given how accessible the pink diamond market is, with minimum investments starting at AUD $20,000 or thereabouts, it’s an asset class that can play a role in most portfolios, should an investor want to allocate some money into it.

It can also be a highly profitable investment, as the release of the end of financial year performance figures for our proprietary Australian Diamond Portfolio Pink Diamond Index (ADPPDI) will attest.

Stay tuned for that, as the ADPPDI is scheduled for release within the next fortnight.

In the meantime, as always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.


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