Hear the latest update from our Chief Investment Officer, Jamie Nicol as he provides his thoughts on the current market for Australian equity investors.


The outlook at the moment is quite challenging. There’s a range of uncertainties impacting the market. Investors have alternatives to invest in in regards to cash or bonds with cash rate closing in on 5% now, or 4.3% in Australia. There’s obviously geopolitical uncertainties with the issues in Israel, always creates uncertainty for investors. We don’t know how that’s going to evolve. And I think importantly with where the bond yield is trading towards that 5%, it makes it unclear for investors what’s the appropriate valuation to pay for companies. And when we’ve discussed this with other investors such as Macquarie Bank, Macquarie Bank is seeing the same thing when it comes to infrastructure investors. They think when interest rates peak, it’ll encourage investors to transact. And we tend to agree with that.

With higher interest rates comes uncertainty about the strength of the economy and what earnings our company investments will be making into the future. So we’ve got a range of these uncertainties impacting the market. Now, as we dig into this a little more, we have a look at what’s happened to US 10 year bond yields, which have gone up quite substantially over the last couple of years. So as you’ll remember back during COVID when interest rates were close to zero, bond yields were very, very low. And what it meant was that the market was prepared to pay a lot for future earnings because the alternative was such a low interest rate. That’s gone up a lot now, but over the past couple of weeks it started to peak and come off. And there’s a couple of reasons for that. It’s the fact that market sentiment or market positioning has become so extreme.

When we speak to advisors around the country, most of them are short duration. So they’ve really suffered in their bond portfolios over the last couple of years. It’s been a one in one hundred year event. So many people have abandoned that asset class or really significantly reduced it. And as a consequence, when everybody’s positioned one way, it only takes a little bit of better news to see people shift back in. And in terms of bonds, better news is worse news. So it’s like slightly softer economic data starting to emerge. And from an equities perspective, this has initially been helpful because it means we can understand what to pay for assets. However there’s the other side of the coin, which is what our earnings doing. So if we look at the economy, it’s been holding up really, really well over the last couple of years despite interest rates increasing.

But we have started to see just a little bit of data suggesting that some economies across the globe are beginning to slow. And in the US we’ve seen some softer jobs data, US business confidence starting to peak. And as a consequence, it leaves that uncertainty for investors as to what’s the future of the economy going to be and what’s that going to mean for earnings. From our perspective though, when we look at earnings, when we look at the market, we like uncertainty. Uncertainty creates opportunities. And you can see on this next chart that a lot of the investors are sitting in cash or treasury bills in the US. And so just like the bond positioning, I think investors tending to sit relatively defensively. And as a result, if there is some better news on individual stocks, it can create opportunities. What we’re seeing is two sorts of opportunities.

One is we’re seeing some really great businesses derate. And there’s a whole range of reasons for that, but they can be companies with pretty defensive outlooks. So we’re quite confident on the earnings. We don’t have to worry about the earnings outlook yet you’re paying a much lower price for those companies. A great example for us is CSL, obviously one of the great Australian businesses. It’s had issues, it’s been perceived as being impacted by the latest weight loss drugs that are emerging. Yet I think it’s going to have a very limited impact on. CSL has a small kidney dialysis business that will potentially be affected a little, but it’s not much. So it’s sort of caught up in that bucket causing the stock to derate, yet its outlook looks very, very strong, very defensive. You don’t have to worry about the economic climate for it to deliver a great outcome.

The other area we’re looking at is just thinking about which stocks are going to do well when interest rates peak. And I think there are some more cyclical stocks where the market’s really thinking through the cycle and worried about the downside side risk and as a result can throw up opportunities if you’re prepared to look through the cycle a little bit. And an example of one that we’ve been buying has been James Hardie. It’s obviously exposed to the US housing cycle. Higher interest rates typically negative for US housing. I think the difference this cycle is that a lot of mortgage owners are locked into 30 year mortgages at very low interest rates. So they’re very unlikely to move and will need to repair, remodel their homes, which will be a boon to Hardie’s over the next year, year and a half.

At the same time, if you want a new home, you’re tending to have to go buy off one of the new home projects because there’s not as many homes for sale just on the regular market. And Hardie’s tends to do well with those large home builders. So Hardie’s is producing really good results. It’s obviously a market leader, great product, good margins, and sometimes you need to buy these stocks when there’s been a bit of uncertainty around because it’s been pricing in a pretty negative cycle and that opportunity’s emerging.

So in summary, clearly there’s uncertainties around at the moment and those uncertainties can undermine equities in the short term, but we look for uncertainties to create the opportunities to buy stocks at attractive valuations where we are looking to buy quality companies when there’s that valuation on offer, when they’re out of favour for various reasons. And I think this sort of market creates those opportunities. We want to look through the short term, think about what these companies are going to look like in three to five years and don’t get caught up in the short-term noise too much. And that creates the opportunities.



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