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  • Writer's pictureMarcus Bogdan

Investor Update - June 2024 - End of Financial Year

The ASX 200 rose 0.9% in June, lifting the benchmark’s total return for the 2024 financial year to 12.1%. A notable observation of equity markets in 2024 has been the wide divergence of returns across industry sectors.

The best performing Industry Group was the Banks, which posted returns of +5.0% in June and +34.9% for FY24, compared to Metals & Mining which fell -7.2% in June and -4.2% for FY24.

The strong returns for the Banks were entirely driven by a willingness of investors to pay a higher price earnings multiple for the sector, rather than an underlying improvement in earnings expectations. Clearly, the banks were a beneficiary of the remarkedly resilient Australian economy, which underpinned a benign credit cyclical for the banks.

Our portfolios held an underweight position in the banks, and this heavily weighed on our performance in 2024. In marked contrast, our portfolios held overweight positions across healthcare, industrials, and consumer staples, all of which delivered returns well below their long- term average. We remain steadfast in our belief that the portfolios exposure to leading healthcare, industrial and consumer staple companies is not only prudent but best placed to deliver more resilient earnings through the economic cycle. We believe our conviction is supported by growing evidence that economic momentum has started to decelerate which leaves equities more vulnerable to disappointments, particularly in those sectors, namely the banks, in which valuations are high.

A further potential risk that has emerged over the last year has been a meaningful increase in the concentration of equity market returns. Growing stock concentration has been evident in many markets, including Australia (Banks), but has been most pronounced in the US where the top 7 companies have contributed to over 60% of the return in the S&P 500 in 2024.

Summary of recent portfolio changes

The combination of elevated valuations and a weakening economic backdrop has prompted us to increase our weighting in June to higher quality earnings companies, namely Origin Energy and Woolworths, whilst reducing our exposure to smaller capitalization stocks. An increase in the portfolios cash weighting also provides an important ballast to market volatility and the ability to take advantage of any meaningful pullback in prices of higher quality companies.

A higher-for-longer interest rate environment in Australia underscores the importance of earnings quality and balance sheet strength. Greater risk vigilance is required as interest rates and bond yields remain elevated as inflationary cost pressures persist. While there has been some moderation of input costs over the last year, renewed supply chain bottlenecks due to trade route disruptions and labour cost/availability are proving to be unwelcome headwinds for inflation.

Moreover, the RBA’s rate hiking cycle is now clearly slowing demand growth in the economy, with the latest annual growth in GDP the slowest rate in more than three decades outside the pandemic.

With this in mind, we have increased the portfolio’s exposure to large industrial companies, namely James Hardie, Origin Energy, and Woolworths. At the same time, we have reduced our exposure to the smaller capitalized companies Hansen Technologies, Integral Diagnostics, and Iluka Resources.

The broadness of uncertainties has also prompted us to increase the cash weighting for the portfolios, providing an important reserve for future opportunities.


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