How much are jousting sticks worth Dad?

Key arguments

• Bond yields are one of the greatest challenges to current equity valuations because they underpin most valuation methodologies.
• Gold prices around $4,500 deliver significant excess returns, but sustainability of such prices and economic rents for many years is uncertain.
• BHP's share price increase reflects repricing of copper assets based on expectations of durably higher copper prices, which may be unjustified.
• AI-related electricity demand may not benefit Australian generators, as coal replacement is expensive and the Tomago subsidy distorts the market.
• Healthcare businesses like CSL and Cochlear were broadly undervalued due to cyclical, not structural, headwinds.
• High pricing power exercised by technology companies could erode economic value, making such valuations perilous.
• Economic rent requires durable privileged assets, pricing power, and cost discipline; excitement about market size and growth often leads to overvaluation.
• Ungeared companies provide diversification benefits if conditions become more challenging.

Corresponding source evidence

1. On the economic-rent yardstick, gold prices in the US$4,500 range are delivering significant excess returns to all gold producers, explaining why most are trading at their highest multiples of book value in many years. This can be translated as requiring gold prices and economic rents to remain high for many years. We are less certain. · medium-term
2. As the purported risk-free benchmark on which most valuation methodologies rest, bond yields are, in our view, one of the greatest challenges to current equity valuations. · medium-term
3. As electricity generation is emerging as an obvious bottleneck in the race for AI compute capacity, this appears to be madness. Any cost advantage in power generation and distribution should be guarded zealously. · medium-term