Rudi’s View: This Too Shall Pass

Rudi's View | 10:00 AM

In this week's Weekly Insights:

• This Too Shall Pass
• FNArena Talks

By Rudi Filapek-Vandyck, Editor

Today's will be my final Weekly Insights for 2025.

My regular Rudi's View writings on Thursdays will continue until the Christmas and year-end break.

This Too Shall Pass

A few years ago I quoted research by Morgan Stanley suggesting a basket of the highest quality growth companies generates an average annual outperformance of 200 basis points (2% points) versus the market index over time.

Certainly, the ten year performance of the FNArena-Vested Equities All-Weather Model Portfolio fits in with that observation, even though underlying methodologies are not exactly the same and the All-Weathers are being complemented with a standard allocation to gold and to some higher yielding, dividend paying exposures.

But on a rough comparison, the ASX200 has been returning circa 9% (dividends included, ex-franking) against the All-Weather's 11% (before fees) up until December 31 last year.

What was not highlighted in Morgan Stanley's research, but has been very much confirmed by my own experience, is that, on occasion, a portfolio filled with high quality and growth companies must be prepared for significant and persistent under-performance, in particular in a market such as Australia's.

Up until recently, the final four months of 2016 had been the toughest period for those not invested in banks and resources and smaller cap cyclicals, but this year the second half of 2025 is easily replicating that experience.

This time around, the end outcome for the calendar year might not be positive for the higher-valued basket of stocks, so it's actually worse overall.

Possible explanations include a persistent narrative that AI is the next market bubble waiting to burst (plenty of stories and predictions swirling around on social media), but expectations of better economic growth and thus a broadening of earnings and the equities bull market are equally playing their part, as are higher inflation and a local central bank and bond market that are no longer in sync with the Federal Reserve and US Treasuries.

Add low trading volumes, a market that is increasingly dominated by 'momentum', algorithmic trading programs targeting higher PE stocks under bear market-alike conditions (for this market segment) and investors anxious about catching falling knives, plus troubles in the world of crypto assets (taken as a sign of cracks in global liquidity) and it is not difficult to see why share prices for the likes of Goodman Group ((GMG)), REA Group ((REA)), ResMed ((RMD)), TechnologyOne ((TNE)) and Xero ((XRO)) have had a horrible time post mid-year.

Many a smaller cap peer has fared worse.

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Australia doesn't like AI & Technology

The irony remains, of course, in contrast to the many scaremongering predictions and reports, there has been no Nasdaq meltdown with plenty of US market commentators preparing for the next end-of-year rally into a positive finish for calendar year 2025.

While shareholders in offshore peers including Intuit, SAP and Apple (Atlassian too) are unlikely to look back with a warm, fuzzy feeling over the year past, one cannot help but note the general departure from former highflyers on the ASX has resulted in a much harsher 'punishment' for those who stayed the course locally.

I have yet to read anyone else's explanation, but my five cents' worth is local institutions do not need to own any of these companies as long as they own plenty of banks and large-cap resources, plus low sentiment and low trading volumes create an ideal environment for those who wish to attack and tear down specific targets.

But let's not sugarcoat it: as the calendar enters the final four weeks of the year, the local share market is merely stumbling along, exhibiting no confidence and no direction, and many will be questioning whether an early zoom-out is most apposite before festivities and the annual holiday.