Who bought the dip? 

We often hear how retail money often rushes in to buy the dip in scenarios we had earlier this week. Well this time it was different. When the markets crashed on Monday, it was the retail investors who sold whilst institutional investors gradually increased their buying as the carnage rolled on through the day.

Iron ore price support levels? 

We have been highlighting this in our recent weekly / monthly calls with investors but Rio Tinto’s management at their recent earnings update also reiterated that the cost curve support had increased to US$100/t. The question is when do we start seeing production cuts if prices approached US$90/t which we previously thought was the marginal cost of supply.

We have charted RIO share price with iron ore price (62% Import Fine ore in USD CFR Qingdao Port China) below – iron ore price has fallen below US$100/t level. We maintain Neutral with RIO forecasting +3% CAGR production growth out to 2028. All else being equal this story largely comes down to commodity price movement.

GLP-1s & ResMed Inc (ASX: RMD)

For most Australian investors ResMed has been a core holding for many years (though granted we have a very consolidated market to begin with!).

The recent emergence of GLP-1s / weight loss drugs has thrown a spanner in the woodworks for RMD. At RMD’s FY24 results update, management provided some colour on the impact from GLP-1s over the long-term. Long story short – weight-loss drugs can coexist with RMD’s products.

“CEO Mick Farrell noted that demand for sleep apnea devices will continue to grow in the mid-single digits, dismissing fears that the rapid rise of weight-loss drugs will undercut demand for RMD’s key product. Management provided real-world data from 811k OSA (sleep apnea) patients who were prescribed GLP-1 weight loss drugs, indicating a 10.7% more likely chance of these patients to initiate a PAP (Positive Airway Pressure) therapy. Further, management also provided analysis which indicated a mid-to-high impact ranging from ~7.5% to 15% of weight loss drugs on the OSA market by 2050 under a high adoption assumption”.

According to management’s analysis, RMD can still achieve 120m connected devices (vs 26m today) by 2050 (@ 6% p.a. growth – which is the market’s growth rate) despite pharma impact.

We value RMD using 3 methodologies and take the equal-weighted average of the 3 to arrive at our price target / valuation.

We believe investors will continue to debate what is the appropriate valuation multiple for RMD given this new threat. If you use our for 3-yr EPS estimates for RMD BUT believe RMD’s 10-yr average PE-multiple is still appropriate (e.g. you agree with management that GLP-1s will lift RMD Total Addressable Market hence benefits all), then you can arrive at 3-yr average valuation of ~$42 for RMD (AUD CDI @ AUD spot). We leave it for you to decide.

Potential way to earn higher income from elevated volatility

Clients worried about market volatility and downside protection could add Talaria Global Equity Fund to their global equity allocation. The fund does have the ability to provide downside protection (strategy runs a beta of 0.5 to 0.6 to global equities) and has historically paid an attractive dividend yield of 7-8%.

Since July-24 (as the recent sell-off has accelerated), Talaria has materially outperformed global equities (VGS) and even Australian fixed interest (VAF) – please see first table below. BUT also very important to highlight and something we have noted before about Talaria’s strategy, as volatility increases the fund derives higher income on its options strategy (they become more valuable) – so income could rise from 7% to potentially around 11% (see second chart below – e.g. 2020 yield got above 11%).

But it’s not all roses & free lunches – I do want to remind investors that when risk is on Talaria will likely lag materially (as it was year to date CY24 when the broader market was rallying – again its 0.5 to 0.6 beta plus the strategy still makes long calls on stocks which may or may not outperform!). However this is not a surprise to us as the strategy plays a very specific role for us. But some investors may be surprised by Talaria’s performance in up markets given it is still an allocation under ‘global equities’. We continue to use Talaria to give us a little more buffer during uncertain times.  If you are looking for an ETF equivalent (well as close to it from what we can find) consider JPMorgan Equity Premium Income Active ETF (JEPI).