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  • Writer's pictureMarcus Bogdan

Investor Update - May 2024

The ASX 200 rose 0.9% in May, materially lagging the strong rebound of +4.3% in US equities led by the Technology sector, which continues to benefit from robust earnings growth. While Technology was the best performing sector in the ASX 200, it was the significant weighting of the Banks (+78bps) that contributed much of the Index return.

At a portfolio level, BHP, Goodman Group (GMG), and Macquarie Group (MQG) were notable strong performers. Whereas James Hardie (JHX), Spark NZ (SPK), and Ramsay Health Care (RHC) weighed on performance. GMG continued to be buoyed to the secular growth story of data centers and AI. By contrast, the underperformance of the portfolio was largely driven by a sharp sell-off in SPK due to SPK lowering its FY24 guidance by ~3.5%, and primarily it was a one-off impact of the change in NZ’s weighting in the MSCI Index that led to its recent share price weakness.

Our portfolio remains focused on companies with competitive positions and robust balance sheets, capable of generating earnings momentum in an environment where bond yields stay elevated for longer. As we navigate through 2024, our investment strategy is anchored by both current market dynamics and our long-term outlook. A theme of focus is the requirement for decarbonisation and energy transition in a world with increasing demand for resources and energy.

We believe energy and resources stocks remain attractive, buoyed by increased demand for resources as the world advances with cleaner energy and technological innovations. Several dynamics in the commodity space bolster this view, including the tightness in supply due to disinvestment and how the imbalance draws higher prices to attract further investment during the transition.

We remain invested in base metals including high quality Iron Ore, Copper and Lithium to meet the burgeoning demand for green steel and electrification. As governments globally implement policies to reduce carbon emissions, the demand for these minerals will continue to rise given their essential role in the global transition towards a sustainable future.

Our recent initiation in Origin Energy (ORG) reflects our strategic focus on utilities essential for supporting increased demand for power. As the incumbent electricity provider in Australia, ORG is well-positioned to drive future energy innovation. The AI sector's thirst for electricity is reshaping power consumption patterns and grid reliability, pushing utilities to extend the operational life of traditional power plants while integrating more renewable energy sources. The delayed closure of the Eraring coal-fired power station underscores the critical role of reliable power sources in balancing increased demand with decarbonisation efforts. With the development of the Virtual Power Plant, ORG plans to grow its renewable generation capacity to 4GW by 2030.

While the prospect of easier monetary policy and fiscal policy (including 1st July tax-cuts) should help underpin spending, economic growth remains subdued with the annual growth in Australian GDP at an anemic 1.1%. Notably, it is the slowest rate of annual growth in GDP in 3 decades excluding the pandemic period. Undoubtedly the start of the interest rate easing cycle being delayed has had a harsh impact on cyclical sectors exposed to discretionary spending and housing. With this in mind, there is a risk that a cyclical recovery in earnings could be delayed, highlighting the requirement that the portfolio’s exposure should be skewed to companies that exhibit earnings and balance sheet resilience.


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