Rudi’s View: Preparing For Tougher Times Ahead

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In this week’s Weekly Insights:

-Preparing For Tougher Times Ahead
-Invitation To FNArena Subscribers & Readers
-On The Money Puzzle Podcast

By Rudi Filapek-Vandyck, Editor

Preparing For Tougher Times Ahead

A little over four months since the 2024 presidential election and circa seven weeks after Donald J Trump was sworn in as the 47th president of the USA, financial markets are grappling with the realisation this new administration is not simply about getting rid of red tape and lowering taxes.

There’s a much more radical strategy that is being rolled out, making America more isolationist and American businesses home base-focused. Forcefully unwinding 80 years of trading and investing globally will never be a rapid and smooth process.

Can it ‘work’ in the way the Trump administration thinks it should?

One of my favourite expressions, one I often use in relation to central bank policies and specific economic initiatives is: in theory, there is no difference between theory and practice. In practice, however, there almost always is.

It’s quite popular among investors these days to mock all those forecasts that economic recession and a savage bear market would be the result of never-before-witnessed central bank tightening but the consensus recession never arrived and the brief bear market for Quality, Growth and Technology stocks that did eventuate has long been forgotten about as these stocks rallied to fresh all-time highs by late last year.

Both economists and financial markets have an abysmal track record when it comes to accurately predicting the future, but one thing cannot be ignored or denied: markets don’t like uncertainty.

Right now, there are very few matters that remain set in stone or that can be relied upon with 100% certainty.

To a very large extent, this is of the US president’s own making as we all know he likes the broad media attention, as well as creating chaos to leave everyone else guessing about his next possible moves, and thus there are no guarantees left for financial markets looking for clues and likely outcomes.

The one question that remains on my mind is how much of a backflip, and how many backflips, will follow once protests in the streets reach enough members of Congress and inside this administration as many actions and inititiatives will hurt US businesses and households hard and, frankly, they often seem to make little sense, also taking into account many US citizens that will be feeling the pain voted for Trump at the November election.

Even more important, the radical change that is being forced upon the US economy has never been attempted before. There is literally no historical precedent.

Sure, there have been times when the US, and other countries, actively applied and relied upon tariffs, but that never before has occurred in the context of weening the entire economy away from international trading.

No precedent means there’s no historical framework investors can rely upon for what’s coming up next. Are tariffs inflationary? They can be, assuming consumers simply keep buying irrespective of higher prices. They can also be deflationary if higher prices have the opposite effect.

Pick your pick. It is well possible that inflation comes first, then the economic slow down and deflation.

Constant messaging by the US administration that plans and implications have been well-thought through and offer no surprises will only harden the market’s anxiety that things may well become a lot worse first.

No surprise thus, the overall climate for US equities, and in Australia as well, has deteriorated in recent weeks. Gone are the widespread enthusiasm and forecasts of yet another year of positive return.

Right now the mood is Risk Off and general anxiety revolves around how low can these markets fall?

How we respond to this change in the overall climate and direction of the share market is very much a personal choice. One school of thought tells us anything nefarious will prove to be but temporary.

History shows things always get back on the right track, as that’s the scenario that always plays out, even after global wars, financial system meltdowns and severe economic recessions.

The flipside is, of course, there are plenty of stocks around that never recovered from the Nasdaq meltdown (25 years ago), or from the GFC (18 years ago), or more recently the covid lockdowns (4-plus years ago).

Plus it can take many, many years to make up for the fall in capital value of our investments in case markets do experience a deep and prolonged bear market.

The other factor to note is it is one thing to look back at history and conclude troubled times never last, it is a complete different experience to be in the thick of market turbulence and see the dollars flying off one’s investment portfolio.

Who really has the stomach, and the confidence, if given the choice?

Others prefer to simply sell out and retreat to the sideline. After all, if you’re going to panic, you better do it early and capital preservation, for most among us, is not a luxury.

This strategy is not without its pitfalls either. Plenty of examples around of investors who miss the turnaround or who are misled by the next bear market rally and end up being worse off.

Some investors who had abandoned investing in the share market back in 2020 only returned last year. Confronted with the same dilemma, after having missed out on the strong gains in between, surely those investors must be thinking this is getting all too hard?

The way most humans operate, having no skin left in the game it usually doesn’t take long before general interest wanes and finds something else to focus on.

But investing is like playing golf. If you want to retain any chance of success, you must continue to focus and practice, even during the down times.

All bear markets present long term opportunities, but to grab such opportunities, and leave as little to plain good luck as possible, it’s probably best investors continue to research and prepare, and resort to that rather rare commodity: patience.

The market does what it does and does not care about our goals, strategy or level of experience.

The first thing to make sure is to reduce our own anxiety. Having sleepness nights is never a recipe for throughtfull actions and success.

Which is why my personal strategy consists of cleansing the portfolio by getting rid of the duds, the disappointments and the less reliable performers.

This, by the way, is the complete opposite of what most investors do when confronted with these tougher-outlook dilemmas.

They sell the winners in order to save the profits that were made. This is why we see bigger share price falls in last year’s winners. At least, this is what happens in the first phase.

As not every sell-off or downturn follows the same script, and given nobody is familiar with mass-tariffs and their impacts, we can only speculate exactly how the script for 2025 unfolds, but a few general rules might well apply:

-if this is the start of a prolonged Risk Off period, solid, dependable, cash generating, lowly indebted, higher quality businesses will prove their mettle, eventually

-Risk tends to show up during Risk Off periods, meaning cyclicals are ultimately hit harder and large cap companies outperform their smaller cap peers

Regarding the latter: if there’s one lesson to draw from the February results season just concluded it is smaller cap companies are much more likely to disappoint when the operating environment is tough and challenging.

A second conclusion from February is that a tough environment means companies in struggle most likely continue to struggle.

Regardless of what we all had in mind in January, February and now March are signalling the likelihood of rough(er) and tough(er) times ahead.

In my playbook now is the time to be more cautious, not necessarily to panic, but to make sure we sleep at night and we prepare for better times ahead.

In the end, all this might eventually not generate the outcome we are preparing for, like Tropical Cyclone Alfred this month, but we cannot be sure about these things in advance.

So… dial back on the risk taking, lower the overall risk profile of the portfolio, have cash on the sideline, be patient and don’t lose interest. Take heed of the lessons from historical precedents and from February results.

The FNArena-Vested Equities All-Weather Portfolio has over the past decade never gone 100% in cash, but being more conservative and having cash on the sideline has more than once proven its utility and value, like in 2020 and during 2022.

These are times to hunker down rather than speculate on tiny specs and hope for the best. The Portfolio includes a standard allocation to gold (ETF) and sturdy, trustworthy dividend payers, which currently include Telstra ((TLS)), HomeCo Daily Needs REIT ((HDN)), and Dicker Data ((DDR)).

The change in general climate, after a disappointing February, has already triggered revisions and a rethink by market strategists and analysts at Goldman Sachs and Ord Minnett, to name but two. More about those changes in Rudi’s View follow up on Thursday.

I have equally made a number of changes to my curated stock selections, as also highlighted on Thursday last week.

One of my personal disappointments in Febuary came from Integral Diagnostics ((IDX)), a tie-up with Capitol Health that should take out joint synergies and see profit margins increase further as the business scales up, but February arrived too soon for such benefits to show up.

So instead of starting what seemed like a pre-determined, multi-year growth story, the share price tanked by some -28%.

In light of the level of disappointment, which was in the single digits and nowhere near the level of punishment received, and the outlook for the company and the industry overall domestically, the market’s response looks well overcooked.

Let this be yet another reminder to us all: smaller cap companies do represent higher risk.

Not only because smaller setbacks can have a relatively larger impact on their operations, but also because less liquidity in the share price and less familiarity among investors can easily lead to outsized outcomes; in this case to the downside.

As also highlighted last Thursday, healthcare analysts don’t think the investment thesis has now been invalidated.

Some analysts have made Integral Diagnostics their number one favourite for healthcare sector exposure on the ASX.

Stock Analysis shows all seven brokers actively covering the company rate it a Buy with price targets set well above that beaten down share price.

All of a sudden there are market rumours too that private equity is now eyeing the company.

Integral Diagnostics will remain on my personal radar, but to be selected and included in my curated lists requires a higher level of dependability and performance. After all, a label of higher Quality cannot just be handed out to every company with favourable growth potential.

Not to mention the general context right now. Hence, why Integral Diagnostics might well still enjoy a favourable view among sector analysts, it cannot remain on my selected lists.

The story of chemicals distributor Redox ((RDX)) post February is not that dissimilar.

Higher costs, albeit for different reasons, equally meant Redox’ interim performance in February fell short of forecasts and its share price got duly shellacked in response. The share price has to date failed to recover and is down circa -34% from the day prior to the release.

Redox originally attracted my attention as Macquarie Quant analysis into Quality Compounders on the ASX highlighted this domestic market leader as exhibiting the same key characteristics that have made the likes of REA Group ((REA)), TechOne ((TNE)) and Pro Medicus ((PME)) such a wonderful asset for such a long time.

Redox only listed in mid-2023 but its share price had enjoyed a steady up-trend since, until last month.

Same as with Integral Diagnostics; Redox cannot at this stage be included in my selections of Higher Quality Performers on the local bourse, but I am keeping a close watch on further developments.

For the coming weeks, the focus in my writings will be on companies that are on my personal radar as markets travel through volatile and uncertain times.

Hopefully, my own observations and insights can assist investors with navigating the challenges forced upon markets this year.

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See also: https://fnarena.com/index.php/2025/03/07/in-brief-top-picks-in-financials-retail-healthcare/

Prior Rudi’s View updates:

https://fnarena.com/index.php/2025/03/06/rudis-view-to-sell-or-not-to-sell-2/

https://fnarena.com/index.php/2025/03/05/rudis-view-februarys-reality-check/

https://fnarena.com/index.php/2025/02/20/rudis-view-best-ideas-conviction-calls/

Invitation To FNArena Subscribers & Readers

Researcher Bletchley Park and ASX-listed de.mem ((DEM)) are organising investor lunches this week, offering a personal meet and greet opportunity with management at this emerging micro-cap growth story inside the water treatment industry (current market cap is $32m).

Lunches are on Wednesdag, 12 March in Sydney and on Thursday 13 March in Melbourne.

Investors registered with FNArena have the opportunity to attend. If interested, send an email to Support@fnarena.com

Bletchley Park is offering its most recent research update to all who show interest.

On The Money Puzzle Podcast

Last week Thursday I joined The Australian’s James Kirby for a 39 minutes talk about equities, investing and what to do right now.

The podcast is available through all major platforms.

On the Apple platform: https://bit.ly/4bCviX4

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 10th March, 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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