The ASX companies that Lazard AM is buying and selling in a "late cycle" market

Some parts of the market are hovering at bloated valuations, while others are struggling. It feels like change is coming but the timing is anyone’s guess. After all, the goalposts keep changing.

As Aaron Binsted, portfolio manager for the Lazard Defensive Australian Equity Fund points out, even central banks are unsure what to do.

“If you go back to the end of last year, the Fed was telling us they were going to cut five times this year. Even just a few months ago. Now, as of the most recent updates, they’ve said they may not cut this year or they might sneak in one or two at the end of the year,” Binsted says.

All of this makes it hard to predict what is going on in markets. Having said this, Binsted suggests there are some signs, like small improvements in the PMIs (Purchasing Managers Indexes), that indicate we’re likely in the late stages of this part of the market cycle.

But it's this uncertainty across the market - and high valuations - which are also an opportunity. In this episode of The Pitch, Binsted shares what he is seeing in the market, the three drivers he is watching at the moment, and the companies he’s been buying and selling so far this cycle.

This interview was filmed on Wednesday 8 May 2024.

Edited transcript

Where are we in the market cycle and what do investors need to be aware of?

First of all, we're bottom-up fundamental stock investors. We spend our time looking at the drivers of individual stocks rather than trying to make those big macro calls on what is happening to interest rates, inflation, economic growth, etc. But you obviously need to pay attention to the environment you're in and most of the data we look at suggests we are still late cycle. 

Interest rates have gone up a lot and they are still staying high. We're not seeing interest rates come down. And, even though we have seen some small improvements in things like PMI, it still looks like a late-cycle environment to us. Indeed, the leadership you've seen in the equity market would also support that view.

What timing do you see for the next stage?

That's so hard to say. If you go back to the end of last year, just to take one of the most relevant numbers out there, the Fed was telling us they were going to cut five times this year. Even just a few months ago. Now, as of the more recent updates, they are saying they may not even cut this year, or they might sneak in one or two at the end of the year. 

They clearly don't know what they are going to do. So, as an investor who is managing capital for people, I don't want to place my bets on making a call on those sorts of things, because I don't think you can add a lot of value.

What's the single biggest opportunity you think investors should be aware of at the moment?

This has partly happened, but I think metals were a really big opportunity and still are a big opportunity. They got absolutely crunched last year. Nickel and lithium were two that we really paid a lot of attention to. In nickel, you saw five Australian mines go broke. You say some assets go into care and maintenance in lithium, and they've already started to respond quite strongly this year. We still think there's more to go.

Should investors be considering redeploying their cash out of positions with high valuations?

The first thing I'd say is that spot valuations don't tell you a lot. You've got to do a lot more work for what you are paying for. But, in general, yes of course, and we have used these opportunities to do exactly that, to move out of some stuff that has performed and reached our thesis and invest in some new opportunities.

Have you sold or bought any positions of late?

Absolutely. Something we've been reducing our exposure to is Charter Hall (ASX: CHC). We bought that last year when it was $8-9, when bond yields were going through the roof, US yields got to 5%. That's performed really well. We've taken some money off the table there.

I mentioned metals. We have invested in a couple of metal stocks. Two of note are IGO (ASX: IGO) and Nickel Industries (ASX: NIC), the bottom of the cost curve. They'll continue to make equity cash flows regardless of the cycle.

Then, some other opportunities too. We bought Dominos (ASX: DMP) in January after the last downgrade. Treasury Wines (ASX: TWE) was one where the market was very focused on the negative environment in the US and, in our view, was not capturing the potential upside from China reopening. So, that was another opportunity that the market presented to us.

How are you positioning your portfolio for the market?

There are a few buckets.

1.  What stocks have drivers that are internal to the stock and not dependent on the economy? That's the biggest part of the portfolio.
2. Thematic drivers - insurance and energy.

We've been positive on energy for a few years. That obviously did really well in 2022. We sold a lot of our exposure in 2022. We've been adding a little bit this year. Given energy has not done as well as we think it should, we're not as keen on it as we were in 2022, but we still think it's a good place to be.

Defence is the best form of attack

Aaron's Fund has historically provided capital growth and income that is consistent with the Index with less than half the drawdown, compared to the Index in negative markets. Find out more here.

Managed Fund

Lazard Defensive Australian Equity Fund

Australian Shares

View