Rudi’s View: Time For Appreciating Quality

Rudi's View | Apr 02 2025

By Rudi Filapek-Vandyck, Editor

Time For Appreciating Quality

My biggest surprise, when overlooking the local share market this week, is undoubtedly the fact that, on most measurements, the damage done thus far to investment portfolios in Australia remains relatively limited.

It can easily be argued the risks out there, predominantly stemming from the US President's favourite word (tariffs), are much greater than what has been priced in thus far.

Then again, not everyone is convinced the US administration's intention is to keep tariffs in place indefinitely, rather than using them as a temporary negotiating tactic. Not yet anyway.

The more experienced traders will acknowledge it's plain impossible to properly price in all the risks without having clear oversight of the finer details and their potential implications.

In other words: we better not read too much into share prices and index movements thus far.

They are largely the consequence of heightened fear and uncertainty, mixed with plenty of contrasting narratives and a firm belief, still, that all shall work out in a positive manner, eventually.

Simply put: we haven't reached panic station yet; markets have been volatile, and scary at times, but all in all this ongoing process of re-adjusting to the new growth outlook is occurring in an orderly fashion.

This is both comforting and scary. Viewed through a glass half empty approach, it means we aint seen nothing as yet, and share markets can fall a lot deeper if the plot thickens going forward.

Let's take a small step back and note the ASX200, when measured from January 1st, is still only down -3.94%, courtesy of an outsized negative March performance that saw the index retreat by -4% after a weak February had already wiped out all the strong gains booked in the opening weeks of January.

Of course, the first quarter of 2025 is now the second negative quarter for the local share market in succession, so our mood and perception are heavily dependent from what point we start looking back to measure what has been happening.

When we look under the bonnet of the local index, a far more disparate picture emerges.

Shares like Pro Medicus ((PME)), Goodman Group ((GMG)) and NextDC ((NXT)) are down by -20% or more year-to-date, while a2 Milk ((A2M)) --can you believe it?-- is up more than 37%.

Equally important, shares in CommBank ((CBA)) are only down -1.5%, and they did pay out an interim dividend. Ditto BHP Group ((BHP)) whose share price is only off -3.4% year-to-date.

Naturally, in a market that is beset by and guided through all kinds of narratives, those who have been calling for an end to "The Grand Bubble" are now brimming with confidence their predictions are finally coming through, but I wouldn't bet my money on it.

It's quite natural for the Winners to be punished hard when the overall environment turns Risk Off.

For starters; this is where investors and traders turn to when they seek to secure the profits made. A heavily polarised market also invites heavily concentrated exposures and portfolio positioning.

Plus, it doesn't take long before the technical set-up for those Winners reverses into the negative and now you see the traders and momentum followers piling in to the downside.

Us humans being humans, it doesn't take long before narratives appear that justify what is happening. The one that has gripped markets in recent weeks is that AI is simply a temporary fad, not the societal change it has been labelled previously. Falling share prices, of course, have become the 'evidence' this is the case.

As is always the case, there's a lot of 'copying and pasting' going on in terms of short term strategies for the ASX.

Nvidia & Co falling out of favour in the USA thus translates into selling pressure for the likes of Macquarie Technology ((MAQ)), Southern Cross Electrical ((SXE)), HMC Capital ((HMC)), and Megaport ((MP1)), to name but a few that are carrying the AI exposure label.

The FNArena-Vested Equities All-Weather Model Portfolio has exposure to Dicker Data ((DDR)), Goodman Group ((GMG)) and NextDC ((NXT)). All three have received the cold shoulder from traders and investors recently, for that exact same reason.

AI is out of fashion, for now, but I am personally inclined to look forward to when these companies make a come-back into positive attention yet again.

In a market that doesn't know whether the sun might shine tomorrow or for how long exactly, each of these share prices can continue weakening for a lot longer. I regularly see dismay and disbelief from investors about how low some share prices can fall, but fundamentals are not the key driving force during prolonged Risk Off periods.

As we all instinctively know, and as history shows us time and again, prolonged periods of Risk Off create opportunity through illogically cheaply priced assets, but there's also the uncertainty about not knowing for how long the current uncertainty might last, and about how 'cheap' share prices might ultimately be when the sustainable turnaround arrives.

To marry one with the other, the above-mentioned All-Weather Model Portfolio has increased its cash holding to circa 18%, lifted exposure to gold (ETF) to 7% and shifted the overall skew to a more defensive positioning.

Exposures are still there to some of the highest quality growth companies on the ASX --think REA Group ((REA)), Car Group ((CAR)) and TechnologyOne ((TNE))-- but those exposures are now smaller than last year, on average and as a percentage of the pie, while the largest allocations are now Telstra Group ((TLS)), Woolworths Group ((WOW)) and HomeCo Daily Needs REIT ((HDN)).

None of this will stop any further losses in case Risk Off and negative news continue to define the outlook for the share market, but it does keep a lid on the short-term damage endured, while keeping the Portfolio in the race in case good news arrives.