January 13, 2022

In the Frame - Issue 12, Market insights
Co-Portfolio Manager

An interview with Hue Frame

This market insight is an interview with Hue Frame, Founder of Frame Funds. He answers a selection of questions from investors, which we hope will provide further insight into 2021 and our outlook for the upcoming trading year.

1. How did 2021 compare to your expectations?

Well, we were very bullish on equity markets for 2021 and thought that it would be the year that governments and central banks attempted to ‘reflate’ their economies. Outside of Australia it was certainly a big year of performance, with the S&P500 rising ~27% for the year. We did expect it to be a year that produced above average returns, but the performance of the S&P 500 exceeded our lofty expectations. The Australian market had a superb first half of the year but lacked direction in the second half which was a little unexpected.

2. What was your best and worst investment of the year for the Frame Futures Fund?

The best performer for the year for the Frame Futures Fund was by far our investments in the battery 

material space. Although the basket of companies we owned performed well, the outstanding performer was Liontown Resources (ASX: LTR). The worst investment for the year was our position in the China A50 futures contract. Over the course of the year, the Chinese government adjusted regulations surrounding their share market and individual sectors within their markets (education, financial services, insurance and marketplaces, to name a few). At the tail end of the year, they attempted to cushion the blow with a loosening of their financial conditions, however this failed to provide the catalyst needed. Their actions over the course of the year have nearly made the market infeasible as an investment.

3. What was your best and worst investment of the year for the Frame Long Short Australian Equity Fund?

I would say that our best and worst investment was Fortescue Metals Group (ASX :FMG).  Fairly close to the time when we initially invested in FMG, the Chinese government started to talk down iron ore and steel prices prior to the Winter Olympics. Iron ore subsequently fell over 50%. As a result, FMG sold off aggressively – it dropped from ~$26 to lows of ~$14. At its October lows, FMG was our worst investment of 2021. Fortunately, we added significantly to our position during October & November lows at the $14-$15 level. This meant we capitalised on a more than 35% rally throughout late November and December.

4. Biggest lesson from 2021?

That price is king. Reflecting on our investment in China for the Frame Futures Fund, we completed extensive research from both a fundamental and technical perspective, however the market just didn’t want to turn. The takeaway from this is that price action is a key input to the timing of our investments and that we should always focus on price action to determine if we are on the right side of the money flow.

5. Are you bullish or bearish on equity markets for 2022?

We are net bullish for equity markets for 2022, however think there may be a lot more volatility along the way (compared to 2021). That being said, it depends on what happens with inflation globally. Our focus is on the action of central banks to slow inflation, and what impact this has on global growth.

6. You identified the battery material theme in 2019, what is your outlook for that theme now?

Well, we have continued to see demand for these components accelerate, even as supply is brought to market. Our view is that the next stage of this secular theme is the consolidation and integration, both vertically and/or horizontally across the supply chain. We saw it with the Galaxy and Orocobre merger (now named Allkem) and expect it to continue to happen this year. This is a key theme for us, and we will continue to be heavily involved in it for the foreseeable future.

7. What is your outlook for US interest rates for 2022?

Our expectations are that we may see one or two this year. Although inflation is running hot and the Fed needs to reel it in, they must be careful due to the amount of leverage in the market. The last thing they want to do is increase rates too quickly and squash growth, which has been somewhat sluggish since the GFC. US midterms in November are another consideration, so pressure from the White House will most likely be to increase rates somewhat aggressively earlier in the year but to provide accommodation around election time. 

8. What do you think are the biggest risk to markets for 2022?

Inflation. Consumers expect prices will rise by 5.7% over the next 12 months. Our view is that inflation is both realised and expected. If consumers expect prices to rise at an ever-increasing rate, then they will adjust their spending habits accordingly which ultimately becomes self-fulfilling. If inflation continues to run a lot hotter than the Fed expects, they will be forced into increasing rates abruptly. The net result of this policy will be headwinds for equity markets.