The dogs and darlings of the ASX in 2023 (and what to back in 2024)

We all know 2023 has been a challenging year for investors. And that’s not necessarily because overall returns have been low, but rather because of the extremes we have seen.

There have been significant bouts of volatility, although volatility overall is near all-time lows.  

This is particularly true for the US, where markets have rallied but only seven stocks have done the heavy lifting. Interest rates have surged but nothing has broken... yet.

As for the ASX, if not for the 600-odd point rally off the late October low, this year would have been best described as a sideways grind. As it stands, the index is up nearly 7% year-to-date, things are looking decidedly more bullish, and we may just get a fabled Santa Claus rally to top things off.

That’s the kind of year it has been – one punctuated by major trends and then smaller countertrends that exist within them. To invest well, you had to know the macro and the micro, consider the extremes, and stay nimble. Most of all, you had to pay attention.

With all this in mind, in this episode, we’ve asked our guests to consider the extremes by looking at the dogs and darlings of the ASX in 2023. To do that, we’re joined by First Sentier’s David Wilson and Atlas Funds Management’s Hugh Dive.

Plus, we also ask our guests to name one darling (and one dog) for the year ahead.

Note: This episode was recorded on Wednesday, 13 December 2023. You can watch the video, listen to the podcast, or read an edited transcript below. 

Edited Transcript

Ally Selby: Hello, and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and in this episode today we'll be taking a look at the dogs and darlings of the ASX from 2023. Plus, we'll also be asking our guests to name one darling and one dud for the year ahead. To do that, we're joined by David Wilson from First Sentier and Hugh Dive from Atlas Funds Management. Let's get straight into it. David, if you had to describe 2023 in one word, what would it be?

The year in one word

David Wilson: My word's pretty boring. It's flat. The market is going to finish the year pretty much where it started, despite the fact that during the year it visited 7,500 twice and it went down below 6,900 twice. But that's despite all interest rate volatility, commodity price volatility, it ended up pretty flat for the year.

Ally Selby: Incredible. Over to you, Hugh. What's your word?

Hugh Dive: Well, I think sitting here in December last year, I'd be pretty happy if it was flat. I think my view is resilient. Sitting here last year we'd seen a three percent rise in interest rates, with more to come in 2023. We had the looming fixed interest rate cliff, retail sales were supposed to crater, house prices were supposed to be down 16%. I think Westpac were forecasting a 4% interest rate by the end of the year and 16% fall in house prices. None of that's really happened. I mean, it's up a couple of percent including dividends at 6.5%. It's been surprisingly resilient and strong. I think I would have accepted flat and boring sitting here this time last year. I've been pretty happy with the year.

Ally Selby: Yeah, despite the market ending the year flat, there's been quite a lot of runners in the market. What do you wish you backed at the beginning of 2023, and what's one stock in the portfolio that you feel like, "Oh, I really wish I didn't back that stock"?

What do with you backed and what did you back you wished you didn’t?

Hugh Dive: Well, I write a Dogs of the ASX for you guys every year at the start of January. And good looking through the track market's trash and treasure. I looked at them and I looked at James Hardie (ASX: JHX) and Boral (ASX: BLD), and I thought that they were going to struggle throughout 2023. US housing coming off, Australian housing coming off. I was totally wrong. I think the stocks are up at the end of the day with about 80% for the year, absolute stellar performers. So, totally got that wrong, far too conservative.

On the side of what I wish I did and wish I didn't have. We did own Lendlease (ASX: LLC) in the portfolio. We thought that 2023 would be a bit of a turnaround. That turnaround has been pushed out to 2024. And it's been a relatively weak couple of years for Lendlease, and I think that's something I regret that was in the portfolio. But thankfully, FY24 looks a little bit brighter for that dog.

Ally Selby: Over to you, David. What stocks really gave you FOMO in 2023, and what do you wish, "Oh, I really wish I didn't back that stock"?

David Wilson: My big, big regret for the year, Ally, was Carsales [now CAR Group] (ASX: CAR). That's a stock that went up 40%. For me, it always looked a bit too expensive for what it is, but it really has probably one of the best management teams in the country. They did a fantastic job in the acquisition in the US, the Trader Interactive business. The Brazilian business and the Korean business continue to travel well, and their Australian business never misses a beat. So this is a stock that I'm really sorry that we missed out on because it fits our style and you've got really a very strong management team there.

Ally Selby: And what about something that you did back that you regret backing?

David Wilson: My regret, I would have to say would be Endeavour Group (ASX: EDV), and it's nothing to do with the huff and puff on the share register at the moment. It's really the fact that we thought it would be a bit more defensive throughout the year. But earnings, have not fallen apart, but they've always disappointed a little bit through the year, whether it's a higher interest bill, a higher Capex bill, or a higher debt number. Dan Murphy's sales not doing quite as well as we would have hoped. And so, yeah, that's probably our regret for the year.

What did investors get wrong in 2023? What will they get wrong in 2024?

Ally Selby: David, what do you feel like investors got wrong in 2023, and what could they get wrong in 2024?

David Wilson: It's a little bit related to what Hugh said. The fact that you had through 2022, you had 300 basis points of rate rises by the RBA, then you've had through 2023 another 125 points, and really, house prices are up 10%. No one expected that. That's just an amazing thing. Now, in retrospect, you can point to immigration and you can talk to the resilience in the economy, but the fact is that house prices rose by 10% through a period where most people were expecting a decline.

And then in terms of where the market will get things wrong next year, I mean a good place to start, because invariably the market does get it wrong, is the currency (AUD). It's now 66 cents. You're probably going to have the Fed cutting rates before the RBA. You've got a very elevated iron ore price, you've got strong immigration, and the RBA could well be disappointed by the amount of productivity growth that Australia's getting at the moment. So there's a good chance, in either direction, that the market's going to get the currency wrong.

Hugh Dive: I totally agree. Anyone who picks the short-term currency is either a fool or an idiot, because it's so extremely hard. We had people calling currency of Australia about 50 cents about a couple of months ago, and now look at where it is now.

Ally Selby: Okay. What's your thing that you think investors got wrong in 2023, and what could they get wrong over the year ahead?

Hugh Dive: I think the key thing that investors got wrong in '22 is the consumer discretionary sector. This was expected to be an absolute horror show. David talked about the immense rises in interest rates. Retail sales were expected to be absolutely in the toilet. I think so far in '23, the consumer discretionary sector is up 16%. So there's a fair bit of variation. Some stocks say Collins Foods (ASX: CKF) is up some 60%, and JB Hi-Fi (ASX: JBH) up 20%. However, other things, for example, Tabcorp (ASX: TAH) are down. So obviously people like KFC chicken and electrical goods, less so gambling. So that's what I think people have got wrong, being a bit too negative.

And I think, looking forward ahead, the market's quite negative on healthcare. And these magnificent weight-loss drugs are going to transform our economy, impacting every part of the health sector. And whilst there may be something there for ResMed (ASX: RMD), for a range of the healthcare stocks, for example, CSL (ASX: CSL) or Sonic Healthcare (SHL), the market, the whole sector's been re-rated in this weight-loss drug, slimming drugs is going to change everything. But it's not really, if you sit back, it's not really going to change the demand for, say, pathology. Look at Sonic Healthcare's test for cancer or fertility. It doesn't matter if you're thin for that. Similarly, CSL's biotherapies. We need them to live. Weight doesn't really manifest with that. So I think the pessimism towards healthcare, it has been one of the worst-performing sectors in '23. We could see a bit of a reversal in '24.

What’s the word for 2024?

Ally Selby: We started off the episode with one word to describe 2023. Yours was resilience. What's one word for 2024?

Hugh Dive: Optimistic. I mean, David's talked about the impact of immigration. We'll track on close to 600,000 newer immigrants coming to Australia, and that provides a lift to retail sales, housing prices, all parts of the economy. Also, thinking back, whilst we've had a lot of geopolitical tensions, for a lot of Australian companies, a war in the Middle East or increasing conflict in Europe doesn't impact the sales of CSL's biotherapies, Transurban's (ASX: TCL) trips on their toll road, or Amcor's (ASX: AMC) packaged goods. So yeah, cautious and optimistic.

Ally Selby: Over to you, David. What's your one word to describe your outlook for 2024?

David Wilson: My word, Ally, would be actually a reawakening. I think what you're going to see is with rates starting to move lower, then you're actually going to see a little bit more M&A activity. You're probably going to see a slightly stronger underlying economy. In the last quarter, we've actually started to see a pickup in M&A activity and capital raisings, and you may even see the IPO market actually start to develop as well. So I'd be expecting, after a couple of quiet years, I think we can look forward to a little bit more activity in that side of things through 2024.

What are you betting the house on? What are you avoiding?

Ally Selby: I want you to tell us what stock you're betting the house on. So if you had to, you had to put all your eggs in one basket, what stock would you bet the house on in 2024?

Resmed (RMD)

David Wilson: Well, Ally, I think Hugh's already touched on it. It would actually be ResMed. I think the market has actually overreacted to the risk of the GLP-1 drugs. It's actually a really interesting dynamic in the market. You actually have seen heavy selling by US investors, and you've actually seen Australian investors actually increase their percentage holding in ResMed by about 10% over the past two or three months as you've had this selling because of the apparent fears, in America in particular, about the impact of GLP-1 drugs on ResMed's products. We think that's been way overdone. ResMed's going to get double-digit earnings growth, the PEs in the low 20s. So yes, I would put the house on it.

Ally Selby: Okay. And on the other side of that, what stock would you be avoiding like the plague in 2024?

Bank of Queensland (ASX: BOQ)

David Wilson: That's a pretty harsh term there, Ally, but I think what I would do is I'd keep away from regional banks. I think what you're seeing is margins under pressure, and you're seeing their cost structures under pressure as well and their IST spends having to rise. So I think it's actually becoming quite competitive for them as well, particularly Macquarie (ASX: MQG) having disrupted the market. CBA (CBA) probably likely to come back into the market as having lost market share over the last little while. So given the market dynamics, I think it's actually going to be quite tough for the regional banks.

And the other point I'd also raise is around, I'll be wary, even though I just said that you're going to have a reawakening of the market, you have to be a little bit wary of some of the M&A deals that may come out. I'd have to say that whilst in the last quarter they have reappeared, the market has actually reacted quite disappointingly to them. So if you look at the Evolution deal, the APA deal, the Aurora deal, and the Treasury deal. In all four circumstances, the market has not liked those deals. And so I'd be wary of when companies are undertaking M&A.

Ally Selby: Okay. I'm going to push you for a regional bank, just to name one that you wouldn't be touching in 2024.

David Wilson: I would say then, Bank of Queensland.

Ally Selby:Okay. Over to you, Hugh. What is your stock that you'd be putting all your eggs in one basket, if you had to, the stock that you'd bet the house on in 2024?

Transurban (ASX: TCL)

Hugh Dive: I'm much more conservative than David. Our mandates are a bit different, but I'd put it on Transurban. I may be a little bit coloured because I've got a daughter that's taken up rowing, so I'm doing a lot of site visits on their WestConnex and M4 multiple times on a weekend, so using their roads' corridor. But ultimately, we have long-life monopoly assets, and no one's going to build a road next to them. You've got revenues increasing with inflation, long-term fixed price debt. They've already confirmed their dividend for next year. It was confirmed this morning. So 5% yield. Very stable, a company that's going absolutely nowhere. There's no problem about weight-loss drugs for toll roads. But yes, they have a very solid company and ultimately have a very good 2024.

David Wilson: I like the irony of it, putting my house on a toll road. But anyway.

Ally Selby: Yeah. Okay. On the other side of that, what's one stock that you would be avoiding in 2024? What do you think could be a dud in 2024?

Harvey Norman (ASX: HVN)

Hugh Dive: Well, whilst consumer discretion did very well in '23, there's a bit of a mix through there. So we would be avoiding Harvey Norman. It checks a lot of range of boxes, high levels of debt, opaque accounting, some questionable management decisions. For example, they're conducting a buyback where they're borrowing money, which seems a very heroic option in a rising interest rate environment. And they're clearly losing market share to JB Hi-Fi. Their quarterly sales numbers, they were down 14%, versus JB Hi-Fi effectively flat. In that environment, and they're a much more inefficient retail in terms of cost of doing business, I think we'd be avoiding that.

Ally Selby: I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.