Certainty Is Absurd

One of our aims in teaching investment strategy is helping people get comfortable with uncertainty. It is not an easy task. It runs against the human condition, and ongoing tension and anxiety are not good for anyone's mental or physical health. That is why we lean so heavily on market history and evidence. It gives the brain something solid to hold onto when uncertainty shows up, and it always does.

Contrary to a lot of finance commentary, we think markets, not individual stocks, are actually fairly predictable over the long run. Simple tools like CAPE and market history will not make anyone certain, but they give you logic and history on your side. Markets cycle. Expensive markets become cheap, and cheap markets become expensive.

We do not hold to any political or economic ideology. We would rather look at the numbers and let history inform how we allocate. That means we prefer investing in cheap markets with mean reversion in mind, rather than buying expensive markets and hoping they get more expensive. Investing against the crowd is hard, because it always feels like everyone else must know something you don't. Usually they don't. There are many ways to make money in markets. We rely on a solid base of history and valuation to be comfortable buying cheap while everyone else chases expensive.

The global order is being renegotiated in real time, and the tool of choice has shifted. Where the first phase leaned on diplomacy and military posture, this phase looks a lot more like economic pressure: tariffs, trade terms and financial leverage used as the primary weapon. It is a theme our latest podcast digs into properly, and worth understanding because it changes how quickly conflict actually shows up in a portfolio. Trade flows and capital flows move faster than armies do.

On government debt, we would push back on the doom-laden headlines. Debt-to-GDP ratios climbing is not new, and predictions of an imminent debt crisis have a long history of being wrong. That does not mean debt levels do not matter over the long run, they do, but a rising number on its own is not a reason to panic your portfolio. The question that actually matters is whether the debt is funding productive capacity or just propping up consumption, and that answer varies a lot by country.

Ray White chief economist Nerida Conisbee has been making the case this month that Australian property investment returns are being squeezed, not helped, by the Federal Budget's removal of negative gearing on established homes. New investor loan commitments dropped 8.6% in the June quarter, and Ray White's own modelling shows investors now need gross yields of roughly 5.15% just to break even. On her reading, restoring that equation needs a mix of rising rents and softer prices working together.

Separately, Conisbee has also argued the current downturn is unlikely to turn into a GFC-style crash. Her modelling shows national prices would need to keep falling for nine months straight just to match the GFC's 7.9% decline, and a housing shortage estimated at 220,000 dwellings below government targets means any recovery is likely to start before interest rates do. Two different arguments, both worth holding in mind at once: property is becoming a harder investment case on the numbers, while an outright crash still looks like the less likely outcome.

Debt levels sit underneath both stories. Investor gearing, mortgage stress and household debt-to-income all move together, and none of them are helped by an investment case that requires either much higher rents or lower prices to work.

Here is the latest read on the ten cheapest markets globally by CAPE. We prefer cheap to expensive, and the longer a country has traded cheap, the higher the probability of a stronger future return once it turns.

Indonesia tops the list, and it has earned its cheap rating the hard way, with negative returns in 2024, 2025 and likely again in 2026. But mean reversion appears to be doing its work. The Jakarta Composite has climbed roughly 20% off its early-June low, helped by two rate rises from Bank Indonesia, a delayed MSCI status review, an affirmed sovereign credit rating and a scaled-back government spending program that eased fiscal concerns. One of the clearest beneficiaries has been Indonesia's largest data centre operator, whose profit rose close to 19% in the first half on genuine third-party demand from the region's AI infrastructure build-out, not internal deals. Its share price is still down around 18.6% over the past year despite the earnings growth, an unusual gap where profits are outrunning the stock rather than the other way round.

As Robert Shiller notes in chapter eight of Irrational Exuberance, countries tend to run a good five years followed by a weaker five, and the reverse pattern is exactly what has played out in Indonesia. If you remember the diversification lesson, the strongest future returns have historically come from countries and sectors that have just been through three or more down years in a row. Buying ugly rarely feels comfortable. We still think it beats paying up for the United States, sitting on a CAPE near 42, a bull market running seventeen years, and no shortage of AI euphoria.

Lynas is named here for education only. This is not a recommendation to buy, hold or sell the stock, and should not be treated as personal advice. We flagged Lynas last issue on the back of its quarterly numbers. Its full-year result is now out, and the rare earth story keeps developing.

Lynas posted net profit after tax of A$222.4 million for the year to June 30, up sharply from A$8 million the year before, though it missed the market's consensus estimate of A$242.5 million and shares fell as much as 8% on the day. The average selling price rose 59% to A$80.7 per kilogram, helped by floor-price agreements with Japanese and US customers that reduced volatility, and a higher share of heavy rare earth sales. The company flagged ongoing ore quality challenges at its Mount Weld mine, alongside rising costs, but said it has resolved earlier quality issues at its Kalgoorlie plant.

Interim CEO Pol Le Roux said Lynas is in talks with ionic clay project developers globally to secure new supply, with announcements expected soon, and is in early discussions to support a magnet-making supply chain in the United States. The strategic backdrop has not changed: China still accounts for roughly 90% of global rare earth product supply, and a one-year suspension on Chinese export controls for several medium and heavy rare earth products is due to expire in November. The company is also still searching for a permanent CEO following Amanda Lacaze's retirement.

This week's podcast covers the shifting global order, why the US is pulling back from being the world's policeman, and what that means for trade and tariffs. Steve, Jacob and Tom also break down new bank lending data out of China, the risks building in private credit and AI infrastructure financing, and why Australian investor loans have dried up now that negative gearing incentives on new builds have changed. They close on why blanket "average return" statistics for property and super are misleading.