posted in: Building Wealth
Montara Wealth Investment Update – December 2022 Edition
Market and Economic Overview
Most global markets rebounded solidly in the December quarter as some of the storm clouds that had been gathering over the global economy finally started to dissipate. The single biggest influence was the easing of global inflation concerns, with the US inflation rate falling for the 6th straight month in December to be well below its June peak.
United States Inflation (Annualised)
Source: Trading Economics
The other positive macro influence was China’s abrupt pivot from their zero-COVID policies, to an almost complete re-opening of their economy. While this change likely means that economic activity in China will fall further in the short term as COVID works its way through the population, experience suggests that any spike in infections, and resulting economic slowdown is likely to be relatively short-lived. Combine this with a warming in the tone of Chinese international relations, and a vow from the Chinese authorities to refocus on economic growth, and the outlook for the Chinese economy, and through flow-on effects the global economy is looking brighter.
Looking ahead, and we expect economic data to continue to worsen in the near term, as the impact of the recent flurry of global interest rate rises starts to have an impact on both consumers and businesses. We will be watching closely to see exactly how this flows through to corporate earnings both at home and abroad. Positively though, inflation looks likely to continue to abate. All in all, still definitely some storm clouds on the horizon, but a somewhat clearer outlook than we were able to point to just 3 months ago.
Portfolio returns for the quarter were strong, and would have been even stronger, had it not been for December, when negative investor sentiment briefly returned. While headline returns were solid across the board, our portfolios underperformed in the period, largely as a result of our decision to remain unhedged from a currency perspective – these means that as the Australian Dollar rallied strongly on the more positive investor sentiment, the returns from our international holdings were diluted. While this sort of headwind from currency will occur from time to time, the structural benefits of remaining unhedged alongside our acknowledgement that neither we, nor any other managers are likely to be able to predict currency movements with any accuracy, means that we are quite comfortable maintaining our unhedged position, except when we view the currency as being at historical extremes, which is not currently the case.
Our Global Equities managers fared performed well, with both AB and Bell Global outperforming the market. In Property & Infrastructure both managers generated outperformance, with 4D Global Infrastructure performing particularly strongly as a result of their exposure to Asian and emerging markets.
Looking ahead, we are very happy with most elements of how our portfolios are positioned, but this changing macro environment has seen us pull the trigger on a couple of changes to portfolios – including adding a dedicated Emerging Markets exposure to our growth-focused portfolios, as a result of both attractive valuations, and meaningful improvements to the economic outlook for China and Emerging Markets more broadly. We will provide some more details about these changes in our next quarterly update. But otherwise we remain very happy with how portfolios are positioned, and while we do expect further volatility, certainly more confident in returns moving forward after the volatility of the last year.
Direct Australian Share Portfolio
The Australian Shares portfolio returned a solid 5.4% over the quarter – the year of 2022 will go down as possibly the most ‘macro-driven’ return profile that we’ve ever seen – with spectacular returns of almost 50% from the Energy sector, modest positive returns from Financials and Materials, offset against declines of more than 10% in Telecoms, 20% in Consumer Discretionary and Real Estate, and 30% in Technology companies. Quite simply, without enough exposure to the booming energy sector, returns in 2022 were hard to come by. With some of the macro storm clouds diminishing now though, we certainly look forward to getting back to a market focused on earnings and fundamentals, rather than macro forecasts.
The two biggest drags on the portfolio in the period were Baby Bunting (BBN) and Corporate Travel Management (CTD). While their weak results in the period certainly didn’t help our returns in this quarter, the fact that we took the opportunity to top up our holdings in both companies should tell you something about our confidence in their future prospects! While many people view share price volatility as entirely negative – we vehemently disagree. As long term investors, we relish any opportunity to buy shares in quality businesses at prices far below what we think they’re worth, and that simply can’t happen without wild fluctuations in share prices. The extraordinary volatility in share prices we see on a daily basis, compared to the relative stability of most underlying business’s performance is exactly the reason why we are able to outperform the market over time.
Stock of the Quarter
Accent Group (AX1) led the way in our portfolio with a 31.3% return for the quarter on the back of a solid trading update at their AGM. Accent Group (AX1) is a company that we picked up in the early days of the COVID pandemic, and in the roughly 3 years since, has demonstrated that not all companies suffer in downturns. Accent Group (AX1) has benefited from the enormous disruption in their market over the last few years. With increasing vacancies in shopping centres during COVID-19, the company took advantage of the attractive leasing environment to significantly expand their new store rollout plan – increasing store numbers from 479 at the end of FY19 to approximately 812 at the end of December. They acquired the Glue Store – further broadening their market opportunity into the large, but closely related ‘youth apparel’ market; doubled their ‘contactable customer base’ to almost 10m customers; and grew their sales of ‘own brand’ products from $4.5m in FY19 to more than $70m in FY22. With a business significantly more than 50% larger than pre-COVID, yet a share price that is only just getting back to its pre-COVID levels now, we remain confident that meaningful further upside remains, even after the company’s strong performance in this most recent quarter.
|Bellmont Diversified High Growth
The above stated returns are per annum..
*Past performance is not an indicator of future performance
Please note, it takes over 3 weeks for returns to be finalised, hence the information in this report might be slightly delayed.