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Aura High Yield SME Fund: Letter to Investors 17 June 2022

This week the NAB released the May monthly business survey, reporting an easing in confidence but a strong outlook for conditions. Australian Businesses…

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This week the NAB released the May monthly business survey, reporting an easing in confidence but a strong outlook for conditions.

Australian Businesses 1

The NAB Business Survey for May 2022 reported: 

  • Business Confidence fell 4 points to +6 index points. It now sits just above the long-term average. The wholesale and construction industry led the drop in confidence.
  • Business Conditions eased 2 points sitting at +16 index points, still well above average.
  • Leading indicators demonstrated some improvement, with capacity utilisation rising to 85 per cent and forward orders rising to +12 index points.

Both business conditions and confidence eased in May, given the current economic conditions and market movements at play. There is a strong fear of uncertainty and a pessimistic outlook given ongoing inflationary pressures and global market volatility. Despite these ongoing threats, conditions and confidence remain well within positive territory. Understandably, confidence is edging lower, although confidence is still sitting above the long-run average largely due to emerging risks, as businesses face a new environment of higher inflation, rising interest rates and concerns around global growth. Despite these fears, forward indicators suggest that businesses still maintain a relatively positive outlook for the Australian economy.

Overall, conditions remain strong. Forward orders reported a rise from the prior month, meaning businesses are placing orders in advance to meet ongoing expected levels of demand. Capacity utilisation, sitting at 85 per cent, reached record highs that were previously reported before the disruptive Delta outbreak in 2021. The hope is that this will boost investment and hiring opportunities over the coming months. 

Input cost growth eased from record highs in April with both labour cost and purchase cost growth contracting. On the other hand, output cost growth remains elevated at 3.8 per cent with the cost of final goods and retail price growth increasing due to inflation. Businesses are continuing to report elevated price inflation and with little evidence of lower demand. At this stage, this is still a risk to consider over the coming months as consumers adapt to the price increases. An elevated CPI read in Q2 remains likely. 

The survey results remain relatively strong and imply sustained economic growth in Q2 2022. Inflationary pressures and RBA decisions will play a major part in the trajectory of business conditions and confidence in the coming months. 

Labour Force – May 2022 2

Seasonally adjusted estimates for May 2022 

  • Unemployment rate remained at 3.9 per cent,
  • Participation rate increased to 66.7 per cent,
  • Employment increased to 13,510,900,
  • Employment to population ratio increased to 64.1 per cent,
  • Underemployment rate decreased to 5.7 per cent, and
  • Monthly hours worked increased by 17 million hours.

The employment level increased for the seventh consecutive reporting period following the easing of lockdown restriction in late 2021. At 30,000, the average level of employment growth over the past three months continues to sit at a stronger level than before the pandemic, which was only achieving around 20,000 people per month.

In line with the trend of increasing levels of employment, we are also continuing to see an upward trend in hours worked.

Employment and Hours Worked Seasonally Adjusted

However, there has been an uptick in the number of people working fewer hours than usual due to illness, injury or sick leave. With Omicron and Influenza circulating, the number of people working fewer hours reached 780,500 in May 2022 – the highest level recorded since the start of the pandemic.

Portfolio Management Commentary

Significant market and economic shifts continue to play out and drive market volatility and uncertainty. The NAB Business Survey delivered some positive results with businesses still maintaining strong levels of confidence and conditions. We are keeping a close eye on these shifts to ensure our portfolio is built to adapt to market and policy movements.

We maintain a cautious outlook and are positioning the Fund accordingly. As stated in our previous communication, our close and long-standing relationships with our lenders and strong knowledge of their underlying loan portfolios mean that we are confident in the quality of the underlying exposures. This provides us with confidence in our Fund’s performance.

1 NAB Business Survey– May 2022

2 Labour Force Australia – May 2022

You can learn more about the Aura High Yield SME Fund here.

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FTSE 100 gains as commodity-linked stocks bounce back

The commodity-heavy FTSE 100 gained 0.4%, while mid-cap FTSE 250 index inched up 0.3% UK’s FTSE 100 gained on Monday, as an easing of COVID-19 restrictions…

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The commodity-heavy FTSE 100 gained 0.4%, while mid-cap FTSE 250 index inched up 0.3%

UK’s FTSE 100 gained on Monday, as an easing of COVID-19 restrictions in China brought relief to commodity prices, lifting shares of major oil and mining companies.

As of 0704 GMT, the commodity-heavy FTSE 100 gained 0.4%, while mid-cap FTSE 250 index inched up 0.3%.

The risk sentiment improved after a Wall Street rally late last week and a rebound in copper and iron ore prices on Monday, boosted by an easing COVID-19 restrictions in Shanghai and relaxed testing mandates in several Chinese cities.

The burst of global enthusiasm for equities has put a spring in the step of the FTSE 100 at the start of the week, Hargreaves Lansdown analyst Susannah Streeter said.

Mining stocks led gains on the FTSE 100 index, with Anglo American, Rio Tinto and Glencore rising more than 3%, after Group of Seven leaders pledged to raise $600 billion private and public funds in five years to finance needed infrastructure in developing countries.

It is hoped this scheme, seen as a counter to China’s Belt and Road Initiative, will set off a spurt of spending and demand for commodities around the world, Streeter added.

Among individual stocks, CareTech surged 20.8% after the UK-based provider of care and residential services agreed to be acquired by a consortium led by Sheikh Hoidings in an 870.3 million pounds ($1.07 billion) deal.

Carnival Corp jumped 5.6%, extending its Friday gains after the leisure travel company forecast a positive core profit for the current quarter despite surging costs.

London-listed shares of Rio Tinto added 2% after a U.S appeals court ruled that the federal government may give the UK copper miner a right to lands in Arizona.

BAE Systems inched up 0.4% after the defence company received a $12 billion contract from the U.S Department of Defence.

The post FTSE 100 gains as commodity-linked stocks bounce back first appeared on Trading and Investment News.

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Structural racism drives higher COVID-19 death rates in Louisiana, study finds

COLLEGE PARK, MARYLAND–Disproportionately high COVID-19 mortality rates among Black populations in Louisiana parishes are the result of longstanding…

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COLLEGE PARK, MARYLAND–Disproportionately high COVID-19 mortality rates among Black populations in Louisiana parishes are the result of longstanding health vulnerabilities associated with institutional and societal discrimination, according to research conducted by an interdisciplinary team under the mentorship of University of Maryland (UMD) Clark Distinguished Chair Deb Niemeier and UMD Associate Professor of Kinesiology Jennifer D. Roberts in the School of Public Health. 

Credit: Guangxiao Hu, Nora Hamovit, Kristen Croft, Jennifer D. Roberts, and Deb Niemeier, University of Maryland.

COLLEGE PARK, MARYLAND–Disproportionately high COVID-19 mortality rates among Black populations in Louisiana parishes are the result of longstanding health vulnerabilities associated with institutional and societal discrimination, according to research conducted by an interdisciplinary team under the mentorship of University of Maryland (UMD) Clark Distinguished Chair Deb Niemeier and UMD Associate Professor of Kinesiology Jennifer D. Roberts in the School of Public Health. 

The team included doctoral students from three different programs at UMD, working together as part of an interdisciplinary fellowship program known as UMD Global STEWARDS, directed by Professor Amy R. Sapkota of the School of Public Health.

“Our results suggest that structural racism and inequities led to severe disparities in initial COVID-19 effects among highly populated Black Louisiana communities, and that as the virus moved into less densely populated Black communities, similar trends emerged,” the researchers concluded in a study published in the Proceedings of the National Academy of Sciences on Monday, June 27. 

Over the course of generations, discrimination in employment, education, housing, and access to medical care has led to higher risks of chronic illnesss (including asthma, diabetes, and obesity) among Black communities, as well as a higher likelihood of suffering a stroke, the authors noted. The Centers for Disease Control and Prevention (CDC) have linked these factors to the likelihood of becoming severely ill from COVID-19.

Both nationally and in Louisiana, Black communities encounter inadequate housing and lower rates of home ownership, reduced access to health care, and lower rates of employment. As exemplified by Cancer Alley, Black families are more likely to live in so-called “fence-line” neighborhoods, located near industrial facilities that expose them to pollutants, and typically encounter reduced air and water quality compared to white Americans. Black families are also more likely to be uninsured and face higher rates of unemployment. These and multiple other factors, all reflecting decades of institutional and societal bias, add up to a combination of stressors that undermine health and, in the case of COVID-19, have made Black communities particularly vulnerable.

To obtain their findings, the team members identified the spatial distribution of social and environmental stressors across Louisiana parishes, and used hotspot analyses to develop aggregate stressors. They then tracked the correlations among stressors, cumulative health risks, COVID-19 mortality rates, and the size of Black populations across Louisiana. The results suggest that COVID-19 mortality rates initially spiked in Black communities with high population densities and moderate levels of aggregate stress. Over time, the rates also increased in less densely populated Black communities with higher levels of aggregate stress.

“We find that Black communities in Louisiana parishes with both higher and lower population densities experience higher levels of stressors leading to greater COVID-19 mortality rates,” the researchers wrote. “Our work using the COVID-19 pandemic, particularly as observed in Louisiana, makes clear that communities with high levels of social, economic, and environmental racism are significantly more vulnerable to a public health crisis.”

The study lead authors include UMD graduate students Kristen Croft (Department of Civil and Environmental Engineering). Nora Hamovit (Department of Biology), and Guangxiao Hu (Department of Geographical Sciences), who worked together on the study as part of the UMD Global STEWARDS (STEM Training at the Nexus of Energy, WAter Reuse and FooD Systems) training fellowship program, which is funded by the National Science Foundation (NSF).

Allen P. Davis, Professor of Civil and Environmental Engineering, is a co-PI for the UMD STEWARDS program, which aims to bring together graduate students from a wide variety of backgrounds to work on collaborative projects. “Each student brings their own area of expertise to the table, resulting in synergy,” Davis said. “That kind of synergy is something you might not get in other disciplinary studies.”

The value of such an approach was evident in the collaboration among the three students.  “As a human geographer, my main focus was on the spatial disparities of structural racism and inequities and their effects on COVID-19 mortalities,” Hu said. “Using hotspot analysis, we identified two groups of parishes with high or low population densities located at different regions of Louisiana. Our research provides policy makers with very useful insights about the disproportionate burden of Black communities and the nonstationary distribution of this disproportion across Louisiana.”

Hamovit performed the initial data analysis that yielded stressor index calculations, which Hu then utilized for hotspot analysis. “Because my PhD research involves large and complex data sets I brought a strength of data organization and analysis to our team,” Hamovit said. Croft played a key role in defining the research topic and utilized her background in stormwater research to pinpoint specific variables that could have a bearing on health. 

Faculty mentors included Niemeier and Roberts. Niemeier, who joined the UMD civil and environmental engineering faculty in 2019 as the inaugural Clark Distinguished Chair, is an internationally-recognized expert on the equity impacts of infrastructure and engineering decisions. She is a member of the National Academy of Engineering and, in 2021, was elected to the American Philosophical Society. Her work, which details how marginalized communities are affected by vehicle emissions, development patterns, climate change, and approaches to disaster preparation and recovery, has helped spur policy and regulatory reforms.

Roberts is founder and director of the  Public Health Outcomes and Effects of the Built Environment Laboratory at UMD. She is also co-founder and co-director of NatureRx@UMD. Her scholarship focuses on the impact of built, social and natural environments, including the institutional and structural inequities of these environments, on physical activity and public health outcomes of marginalized communities. Roberts was recently named to the National Academy of Science’s Response and Resilient Recovery Strategic Science Initiative Strategy Group on COVID-19 and Ecosystem Service in the Built Environment.

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Consumer Spending Is Shifting: Should You Still Buy Lowe’s Stock?

Is this is good opportunity to buy the dip in Lowes stock that owns a duopoly in the home improvement industry?
The post Consumer Spending Is Shifting:…

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Lowe’s stock was one of the biggest winners during the pandemic. This is because the pandemic gave Americans two things: stimulus checks and lots of free time. With a little spare cash and nothing to do, people were inspired to tackle projects around the house. But, of course, no project can be completed without a trip to Lowe’s. Two years later, the pandemic quarantines are finally all but over and Lowe’s stock is down 30% YTD. Is this is good opportunity to buy the dip in a company that owns a duopoly in the home improvement industry? Let’s take a look.

Lowe’s (NYSE: $LOW) Most Recent Earnings

If you’re not familiar, Lowe’s is one of the largest home improvement retail chains in the world. In 2021, Lowe’s operated 2,197 stores across the United States and Canada. It is the second-largest hardware chain in the world behind The Home Depot. Together, The Home Depot and Lowe’s own the majority of the home improvement market. When just two companies control the market, it’s known as a duopoly.

In April, Lowe’s reported quarterly revenue of $23.66 billion for FY Q2 2022. This was down 3% from last year. Lowes also reported a net income of $2.33 billion which was up just 0.5%. Lowe’s also pays a dividend yield of 2.27%.

The last three quarters haven’t been particularly impressive for Lowe’s. Here’s one reason why.

Tough YoY Comparisons

The pandemic created a nightmare scenario for many businesses. But, as mentioned, home improvement retailers actually faired quite well. In particular, Lowe’s experienced a 24% spike in revenue, from $72.15 billion to $89.6 billion. This is impressive for a massive company like Lowe’s which already operates over 2,000 stores. Consequently, Lowe’s stock rose nearly 120% from 2020 to its all-time high in 2022.

Now, the quarantine pandemics are mainly over. Consumer spending is shifting away from home improvement towards other categories such as travel and dining out. This transition isn’t necessarily hurting Lowe’s sales, but it’s not helping either. The toughest thing for Lowe’s stock right now is the tough year-over-year comparisons. Since Lowe’s had such a stellar 2021, 2022 looks very average by comparison. This trend could continue through the rest of the year.

Lowe’s essentially had a 4.0 GPA in 2021. In 2022, it’s earning a 3.75 GPA. Still good, but not when you compare it to a 4.0.

Fortunately for shareholders, Lowe’s has a plan in place to start growing again.

Lowe’s 2022 Strategy

In 2022, Lowe’s strategy is to go after the professional market. This means that it wants to focus on serving customers that own construction businesses, as opposed to do-it-yourselfers.

Lowe’s estimates that the professional market is worth approximately $450 billion. If it can expand this segment of its business then it should be able to start growing revenue again. Part of its plan to grow this segment is to institute professional services in its stores including loaders, drop zones, and an entirely separate customer relationship management (CRM) software.

On top of that, here are three other factors that Lowe’s thinks will accelerate its business:

  • Increased wear and tear on homes due to remote work
  • Baby Boomers deciding to age in their home
  • Strong home price appreciation

Additionally, Lowe’s is in the process of transitioning to an omnichannel strategy. This type of strategy means that Lowe’s customers will be able to buy products online, pick them up curbside, as well as buy them in a store. Lowe’s enhanced digital experience will even allow customers to enjoy next-day (or even same-day) order fulfillment.

Omnichannel strategies have been particularly effective for other major retailers. In particular, Dick’s Sporting Goods has had a lot of success with an omnichannel strategy. Offering customers more ways to shop helps improve the customer experience, which typically leads to more sales.

Final Thought: Should You Buy Lowe’s Stock?

Lowe’s has an incredibly strong business and is a runner-up in a large market. The DIY home improvement market has been growing for years and is proven to be pandemic-resistant. These are both strong reasons to consider buying Lowe’s stock.

Additionally, since Lowe’s stock has had a dismal start to 2022, its valuation has improved. Lowe’s now has a price-to-earnings ratio (14.5) that is lower than its rival The Home Depot (17.9). This metric could be a sign that Lowe’s is valued more cheaply relative to The Home Depot. However, P/E ratios often don’t tell the full story.

Another reason to consider buying Lowe’s stock is that its management team is committed to  providing value to shareholders over the long run. This is evident through Lowe’s stock repurchase plan and strong dividend payments. Lowe’s plans to repurchase $12 billion in stock during 2022 and pays a 2.30% dividend yield. In general, companies don’t repurchase shares of stock unless the business is performing incredibly well. This is a sign that Lowe’s stock is a relatively safe bet for investors.

The biggest thing to be aware of before buying Lowe’s stock is the risk of inflation damaging its business.

What’s inflation risk?

Lowe’s sells lots of products that rely directly on raw materials. For example, it sells plywood and a number of other lumber products, plenty of steel products, fertilizers, etc. Right now, the prices of most raw materials are skyrocketing. If this doesn’t let up, it could squeeze Lowe’s profit margins and reduce its profitability. Or, it could force Lowe’s to increase its prices which could potentially hurt Lowe’s sales.

A few major retailers have already been hurt by inflation. Notably, Target. Target’s costs have increased but it has so far refrained from raising prices, so as to not alienate customers. This is one of the main reasons that Target’s stock slumped 30% in May. If you are considering buying Lowe’s stock, be sure to keep this inflation risk in mind.

I hope that you’ve enjoyed this Lowest stock forecast! Please remember that I’m not a financial advisor and just offer my own research and commentary. As usual, please base all investment decisions on your own due diligence.

The post Consumer Spending Is Shifting: Should You Still Buy Lowe’s Stock? appeared first on Investment U.

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