Rudi’s All-Weather stock portfolio revisited

Bonds are back, and equity investors better start accepting it. That was the broad message from my recent chat with Rudi Filapek-Vandyck of FNArena.

“Everyone in the share market has been narrowly focused on corporate profits, dividends and maybe debt. They’ve completely ignored the bond market. But in a very simplistic way, the bond market is god for assets,” Rudi says.

Throughout our conversation, his view that tough times for markets lie ahead was a recurring topic. And yet, seated at a bustling café next to Sydney’s Wynyard train station – at a time when the pedestrian traffic in Australia’s biggest city seems to be finally approaching pre-pandemic levels again – there’s an unmistakable irony.

This is a point we also discussed – the ongoing strength of consumer activity despite the RBA’s ongoing efforts to tamp down inflation by hiking interest rates.

Rudi alludes to the initial sudden effects of the pandemic, which contrast markedly with what’s happened since.

“It was very sharp and brief, but the response has been very elongated – we’re here towards the end of 2022 and are still feeling the effects of the reopening,” he says, pointing to Qantas (ASX: QAN) as just one example.

The latest forecast from the airline predicts net profits for the six months ended December 31 to be more than double analyst forecasts. Qantas isn’t one of the stocks Rudi picked for his pandemic-proof portfolio back in August 2020. Repurposed into something more aptly titled a “recession-proof” portfolio, the defensive nature of the selected stocks remains.

And while there are a few changes in the list – Afterpay has since been bought by Block (ASX: SQ2), for example – many of the stalwarts are the same.

It should also be noted that several of these companies were either chosen - or strongly considered - for their ability to retain and grow dividends, rather than share price valuations. For example:

• Telstra (ASX: TLS) 
• APA Group (ASX: APA) 
• Waypoint REIT (ASX: WPR)
• Aurizon Holdings (ASX: AZJ)

Rudi emphasises that local software stalwart TechnologyOne (ASX: TNE) wasn't mentioned at the time, "but was definitely owned and still is today (and will be tomorrow)."

And in a broader sense, he says the general context since has changed quite dramatically, anticipating the general focus will change yet again if, as many expect, we see a global recession in 2023.

"While most companies have been mentioned with a longer-term horizon in mind, I think the general macro-comments make it clear the 2023 slow down should be on investors’ minds," Rudi says.

And of course, before reading the following list, remember this is not financial advice. Please consult your own independent expert before making any investment decision.

Biotech company CSL Limited (ASX: CSL) remains an anchor stock, as do property technology firm REA Group (ASX: REA), automotive portal Carsales.com (ASX: CAR), as well as healthcare names ResMed (ASX: RMD) and Fisher Paykel Healthcare (ASX: FPH)

“These are the guys that will keep on growing, not just for a year or two but for the next decade,” Rudi says.

Looking through the list of companies he named back in August 2020, the share prices of CSL, Telstra, and REA Group are roughly in line with that period.

ResMed’s share price is up almost 35% since then and Macquarie Group is his portfolio’s other big gainer, up more than 25%. Carsales.com shares are up a more modest 6.5%.

On the other side of the ledger, local AI technology firm Appen (ASX: APX) is down 92% over this period.

And yet, technology firms that sit within the sector’s Quality bucket are among Rudi’s top picks over the medium term. While it wasn’t named in his pandemic-proof portfolio, TechnologyOne (ASX: TNE) has long been one of his preferred companies.

“It’s an incredibly consistent performer, which isn’t always appreciated by the market,” Rudi says. TNE’s share price has grown more than 40% over the last two years.

“Inflation will dive again”

Rudi believes it’s too early to talk about inflation falling and interest rates either flattening or declining, again returning to the bond market to illustrate this.

“The trend is not so much in bonds’ favour, as I’ve been pointing out for a couple of years now,” he says.

“Everyone except a few gold bugs is convinced that at some point inflation will dive again. So, you get a combination of higher bond yields because central bankers are still raising rates, everyone’s waiting for it to happen – a combination that’s negative for gold.”

Rudi compares our current economic climate with that of the 1970s when he believes central banks were too late in moving rates and inflation didn’t fall again until the 1980s.

“That was fantastic for gold, and people are expecting that to happen again. We see a lot of signals that validate that view,” he says, pointing to what’s happened in oil and hard commodity prices as examples.

“Earlier this year, people were telling me it was impossible for the oil price to fall below US$100 a barrel.” (Brent crude sits at US$93.63 as of 24 October)

“The price of copper has also come off. And if we are going into a recession, there are more falls to come. The bond market is upsetting the whole concept of defensives,” Rudi says.

He believes that when inflation does eventually start to fall, “the market response could be extremely violent."
“In 2016, you had the laggards rallying by 20% and the previous winners falling by the same amount. I suspect we might see something similar happening now.”

Which sectors are safer?

Rudi prefers to be positioned in the gold producers, REITs, and quality technology firms – such as Xero (ASX: XRO), Altium (ASX: ALU), NextDC (ASX: NXT), Technology One – for when the bond market rolls over.

“When the bond market lets loose a little bit, some of these REITs will gain 5% to 7% in a single day. That gives you a bit of an idea of what can happen, but it’s anyone’s guess when it will,” he says.

“The power of bonds is amazing.”

“There’s relief here and there but it’s still weighing on markets. The safest thing to say is that it’s not going to last forever, but I’m genuinely worried that something’s going to break,” Rudi says.

“And that’s already happened in the UK, which is an early sign, and I can assure you that central banks are watching that closely. Because other things are going to break.”

In this context, he believes the question of whether Australia will enter a recession or not – as the US and Europe almost certainly will – is a moot point. Whether we technically enter a recession or not, the outlook for GDP growth is sluggish at best.

“My focus would be on holding recession-proof companies that have been victims of bond yields,” Rudi says.

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Editor's note: The above article was edited for clarity on Friday 4 November, including further comments from the interview subject.