Where Wilson Asset Management sees value in the current market

In the last few weeks, we’ve seen the Australian inflation print surprise on the upside. The probability of an interest rate rise in November suddenly shot up – and correspondingly, markets responded.

Of course, higher interest rates are not all bad news.

As Matthew Haupt, lead portfolio manager of WAM Leaders (ASX: WLE) and Wilson Asset Management Leaders Fund puts it: “For the first time in 30 years, you’ve got a viable alternative to equities. People are starting to put money in fixed interest.”

Or, if you are a contrarian investor, then perhaps equities are looking more attractive – though veteran investor Geoff Wilson AO, chairman and chief investment officer at Wilson Asset Management, thinks we’re not quite at the panic point yet. He believes that will come when we finally hit a recession and he’s looking forward to deploying cash.

That’s not to say that there aren’t good opportunities emerging. In fact, John Ayoub, portfolio manager for Wilson Asset Management Leaders Fund, noted a few oversold and out-of-favour companies that he believes have a more promising future.

In a recent presentation to announce the Wilson Asset Management Leaders Fund, an unlisted managed fund version of the existing listed investment company WAM Leaders (ASX: WLE), the team discussed their views on the market, the outlook, and some of the holdings they view as undervalued. And in a bonus, Wilson shared some of his key lessons from investing through market cycles.

Uncertainty spells market volatility

It’s been a time of caution in equities markets. Companies have tightened their belts and investors are nervy. We are still not in a recession, but there have been clear patterns of slowing retail spending – emphasised as consumer staples companies, particularly grocery chains Coles and Woolworths – highlighting increased ‘shrinkage’ (aka theft) as a sign of the tough climate.

Ayoub notes that the concerns expressed in the media are starting to hit company earnings and a range of sectors and industries are feeling the pinch. For example, luxury brands in Europe are starting to slow down.

Haupt and Ayoub expect volatility to continue in the next three to six months but tip rate cuts in 2024 to time with a recession – after all, the decision to cut usually comes off the back of economic struggles. And falling rates should act as a buffer to the falling earnings for companies.

The uncertainty is also being noticed in quantitative and hedge funds, Haupt pointing to these moving the market at this stage. It’s creating opportunities.

How Wilsons is investing for the market

The WAM Leaders portfolio is currently underweight Australian banks, viewing it as a more difficult environment for them. That said, the team is not entirely bearish on the market, even if it still expects a recession to hit. They are boosting capital preservers such as defensive infrastructure and consumer staples and are ready to hold cash.

Ayoub notes that gold investments are a lever the team use in periods of high uncertainty, and they typically hold 3-5% of the portfolio in cash across the cycle. Of course, this reached as high as 14% in March 2020 before WAM Leaders became fully invested into the market.

While the market has become increasingly concerned about China, particularly in relation to its property market, Wilson Asset Management is somewhat less bearish. While 60% of Chinese wealth is in property, Haupt doesn’t believe it is in a bubble.

You can expect the team to be closely watching for the timing of a first rate cut and recession next year.

“Stocks start running from the day we go into a recession. Homebuilders from day zero and about 40% of the way through, consumer discretionary starts running,” says Wilson. 

He likes to see some level of market panic before he goes all in.

Opportunities for undervalued gems

In the past few weeks, Haupt and Ayoub have noted a range of opportunities from a flighty marketplace.

“Any negative news will be factored in with a 100% probability of it hitting,” says Haupt.

Some high-quality examples of this – which Wilson Asset Management believes will turn around its fortunes – include CSL (ASX: CSL) and ResMed (ASX: RMD).

Both companies have been smashed in the wake of news of the GLP1 weight loss drug, but Haupt believes the market has overestimated the impact. He argues that the ResMed suite of products may see some impact but will still be required. The business is focused on growing earnings and should start to recover in the coming year. 

CSL, on the other hand, could potentially benefit from GLP1, the team having increased their holdings to overweight off the back of favourable valuations.

The tough market conditions are also throwing up more favourable valuations in the beleaguered property development and construction space, Haupt pointing to Lendlease (ASX: LLC) and Dexus (ASX: DXS) as companies he believes are priced at substantial discounts. The portfolio has reduced weightings in Dexus but the team still believe in its potential.

They are also expecting positions in Treasury Wines (ASX: TWE) to pay off in the coming year, having bought into the company at a point of material uncertainty over China. Since then, the company has not only successfully broadened its customer and export base, but is also set to benefit from the gradual unwinding of Chinese tariffs.

An unlikely holding in the portfolio is Star Entertainment Group (ASX: SGR).

“We like owning things people don’t like, such as Star Casino. 95% of people would say that’s a dud,” says Haupt. But he believes the market is missing some of the future drivers of performance.

“Inbound Chinese tourism is expected to be 100% of pre-covid levels by Christmas. It’s a strong driver for the Australian economy – and Star is a company that traditionally sees strong revenues from this audience.”

It’s not the only stock where the team thinks understanding broader drivers is useful.

Ayoub points to the data theme as being something that will be a boon for Goodman Group (ASX: GMG). After all, data centres need land to exist – and it’s not always easy to find real estate close to city centres.

“We like them for their ability to pivot and capture new markets. Goodman have an existing land bank and partners they can leverage to move in this direction,” says Ayoub.

He believes it is under-priced not just in terms of the existing business, but with regard to its future options.

And, to finish, lessons from more than 40 years of investing

“Investing is not an easy game and there are no free kicks,” Wilson says – but there are things you can do to make your life easier.

He’s not sure we’ve seen a complete reset from the years of excess market liquidity – or if we have, it’s not been as painful as he feared.

He suggests investors “hold some cash and accept that you’ll miss the best day” and notes that sometimes you’ll think the market is expensive, and it will continue to go up.

His biggest learning though is this: “You make your money in your second bull market”.

That is, you’ll make money in the first, lose it in the following bear market and come to the second bull market wiser and more experienced in how and where to place your money. Or to put it simply, it’s time in the market, not timing the market. And that’s a good reminder of why you should think long-term – after all, investing is about your future.