A Clear and Present Dilemma

January 30, 2018
A Clear and Present Dilemma

“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” Andy Grove, Former Chairman and CEO of Intel.

There is a long list of reasons why people are becoming more optimistic globally and now even locally as we head into 2018. Phrases such as “synchronized growth”, “structural bull markets”, “Goldilocks economy” and “super-cycle” are back in vogue, while terms like “valuation” appear to have become a footnote. The fact that people are even debating the true value of a bitcoin is also telling.

Past corrections tell us that it’s often times like these when complacency kicks in. Looking at the VIX (refer 20-year chart below), which has spent the last 12 months bouncing along the floor, and the litany of geopolitical threats (we stopped counting at double-figures) that are being dismissed, it causes us to question whether we’re already there.

The dilemma for investors right now is pretty clear: against this backdrop fundamentals are solid and now locally are actually improving (employment, consumer confidence, capex) but valuations are running ahead of long-term averages (as they typically do in strengthening environments).

Our approach in the current environment is relatively simple: focus on a small sub-set of the market (typically around 30 stocks) comprising high-quality companies (e.g. Seek and Resmed) and listen acutely for ‘tremors’ which typically are the precursor to a major shock. In our view, a portfolio of these securities will prove to be more resilient than hyped stocks (e.g. lithium and infant formula) and would likely rebound faster in the event of a shock.