01 Jun

Tailwinds for pink diamonds strengthen

It’s hard to believe that it’s already June, and that 2023 is almost half way complete.

Despite the year continuing to throw up no shortage of challenges for investors, so far it has proved relatively smooth sailing, with traditional assets like shares creeping higher, while the real estate market has largely stabilised, after months of sharp price corrections, especially on the east coast.

While it will never get the attention that more traditional assets get, the pink diamond market has also proved resilient. While turnover has been more modest than in the previous two years, prices for these unique and discrete assets remain well supported.

This has been driven from both ends of the spectrum, from the absolute scarcity of stock on the supply side, and the demand drivers that continue to strengthen.

This week saw more evidence of the tailwinds driving demand, and why they are unlikely to dissipate anytime soon, with inflation rates in Australia rising to 6.8% in the year to end April, up from a 6.3% reading in the year to end March.

The result, which is part of a global problem (more on this below) shocked most forecasters, and demonstrated clearly that:

  • While inflation may dissipate somewhat in the months ahead, it is proving sticky, and will likely remain a problem for years to come.
  • Interest rates will have to keep rising for some time, something we may see in Australia as soon as next week from the Reserve Bank of Australia, despite the obvious headwinds those higher interest rates pose to the housing market and to the broader economy.

These developments, which are part of a global phenomenon, will only further support pink diamonds in the fullness of time.

Below, we discuss this as well as the diversification benefits of pink diamonds, which will likely again come to the fore shortly.

Diversification benefits of pink diamonds

Despite the challenges of high inflation, a slowing economy and continued geopolitical unrest, 2023 has thus far been pretty good for investors in traditional assets like shares, with most markets rallying this year.

While this may sound encouraging for some, the reality is that investors in traditional assets are likely being set up for a major shock, with the equity market looking like it will soon head south again.

This is evidenced in the aptly named chart from @CallumThomas below; “S&P 500: Bull Trap Set?” suggesting that the market may be approaching an important peak, with recent price strength lulling investors into a false sense of security.

S&P 500: Bull Trap Set?

Chart showing the S&P 500

Source: Topdown Charts, Refinitiv Datastream.

While it remains to be seen how things will play out, the risks of the market turning south are growing, with other indicators highlighting how fragile things remain. These indicators include what are called “equal weighted indexes”, which don’t overly rely on market darling stocks which drag markets higher.

Equal weighted indexes suggest that very few stocks are performing well now right now, which is a warning sign that is magnified by the fact that speculators are getting far too exuberant in their positioning again. By this, we mean that the market data suggests that way too many people are betting markets will continue to rally.

It often means that the market is about to do the exact opposite.

And while it may take a while for this to play out, the smart money investors aren’t  chasing increasingly fragile markets higher. Instead, they are busy buying resilient assets that will diversify a portfolio, perform during times of market stress, and provide profit potential.

Pink diamonds are one such asset class.

The global inflation challenge

As we alluded to in the first part of this market update, the challenge posed by high levels of inflation is not an Australian-only phenomenon, even though it was local inflation results that made the news this week.

Around the world, we see the following:

  • In the United States, inflation is at 4.9% for the year.
  • In the UK, inflation is at 8.7%.
  • In Europe, inflation is at 7%.
  • In Japan, inflation is 3.5%, compared to barely 1% for most of the last two decades.

The below chart shows various inflation measures in the United States. It highlights how quickly things changed between 2020 and 2022, which was the period when inflation spiked. Just as importantly, it highlights how difficult it will be to bring inflation down.

Median Consumer Price Index

Graph showing Median Consumer Price Index

Source: Bureau of Labor Statistics, Federal Reserve Bank of Cleveland, Haver Analytics.

For while headline rates (the yellow line on the chart) are falling, some of the other inflation measures are proving far stickier, especially median CPI, which is still at 7% per annum.

This means that 50% of all the goods and services whose inflation rates are measured are rising by more than 7%.

It’s a huge problem, and one that can’t be solved quickly.

The key question is how to stay ahead of this inflation, and keep your assets growing at a faster rate than prices are increasing.

History suggests pink diamonds are one such asset class to turn too, with a history of outperformance in high inflation environments, including the last 18 months.

Indeed, we would argue that given how important the inflation protection argument is to the case for pink diamonds, the sticky pace of inflation we are seeing around the world will likely prove a major tailwind for some time to come.

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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