We may be entering a rewarding period for investors and commentators making doomsday predictions, there could well be pyrrhic victories though. In this latest insights piece, Dion Hershan, Head of Australian Equities, details why.
It is blatantly obvious that a surge in interest rates (>400bps) will cause the consumer to weaken dramatically, inflation is crimping corporate margins, geopolitics will remain volatile, and China’s economic miracle might not play out as planned. ASX 200 earnings estimates are also too high (which is typical, occurs 8 out of every 10 years). For many this will be the confirmation of their views, victory laps will likely abound, and many will feel comfortable and confident in their ‘crowded’ views.
As per normal, markets tend to over-react to short term disappointment and extrapolate recent events and datapoints. The violent moves in markets are often largely explained by behavioural finance rather than long term changes in fundamentals (which should be the driver of value).
We will continue to act as long term investors, avoiding thinking like amateur economists or the financial flashmob (who suddenly and dramatically appear, moving in a synchronised fashion).
With that in mind we stand ready and believe there will be excellent opportunities over the coming six months across multiple dimensions. It is our hope we can step into the panic and build large positions that will set up the portfolio for the next five years, looking beyond the immediate economic circumstances.
Our shopping list includes the following five themes (for obvious reasons we won’t cite the target companies but cite a few historical precedents):
1. Quality retailers & media companies under cyclical pressure
- By way of historical example you would have almost doubled your money if you bought JB HiFi during the height of the COVID panic in March 2020
2. REITs after some but not all negative valuation adjustments have occurred (waiting for the last downgrade is probably too late)
- By way of example if you bought GPT in 2008 you would have almost tripled your money inside of two years
3. Resources companies that sell off on short term demand concerns, oblivious to the looming supply crunch from under-investment
- BHP was $15 in 2015 when China faltered (now $45)
4. Industrial companies with temporary rather than permanent margin issues
5. Businesses undertaking significant and favourable structural changes that might be overshadowed by the ‘Macro of the day’
- Worth noting Seek has gone up 8x from the Macro turmoil of 2008
FY23 was a solid year for our investors with the Broadcap fund returning 22.8% with an alpha of 799bps (the fund has also generated +14.8% pa over the last three years, alpha of +372bps pa vs. the ASX 200) largely on the back of long-term analysis and disciplined investing, attributes which we believe will be equally important in FY24 and beyond.