By Alex Gluyas
Wilson Asset Management’s largest listed investment company is getting ready for a huge rotation in Australia’s sharemarket – they are buying up unloved mining and “battleground” stocks whilst continuing to steer clear of the banking giants.
The bold bet follows a rough year for the $1.9 billion WAM Leaders portfolio, which returned just 2.8 per cent in the 2024 financial year versus a 12.1 per cent rally by the S&P/ASX 200 Accumulation Index.
Lead portfolio manager Matthew Haupt blamed the underperformance on positions in troubled glass bottles and cans maker Orora and casino operator Star Entertainment. They also missed out on the dazzling rally in bank stocks.
But WAM Leaders is sticking to its defensively positioned portfolio, betting that the sharemarket is too confident about a soft economic landing and the magnitude of interest rate cuts priced in by traders.
“The valuations of stocks that have perceived certainty and quality has gone beyond any fundamental basis that we have seen for a considerable period of time,” portfolio manager John Ayoub told a webinar.
“On the other side of the spectrum, we’re seeing more and more stocks hit 12-month lows, pre-COVID lows, and unsustainably low valuations which is forcing boards to rectify the valuation disparity.”
Mr Ayoub pointed to the big four banks, Wesfarmers and JB Hi-Fi as examples of companies that don’t have the growth characteristics to justify their lofty valuations.
The warning comes as Commonwealth Bank and Macquarie forged fresh record highs on Tuesday, while National Australia Bank hit a 17-year high, Westpac a seven-year high and ANZ came within 1¢ of a seven-year high.
Mr Ayoub attributed the “crowding” in the large cap stocks to quantitative funds, the superannuation giants and global players which follow the momentum in equity markets and are enticed by the perceived safety of Australia’s blue-chip companies.
But WAM is betting that markets are approaching an “inflection” point where there will be a rapid transition out of the banking sector and into the beaten-down mining giants that have tumbled 20 per cent this year.
Mr Ayoub is hoping that as an early mover in this transition, it will fuel a recovery in WAM Leader’s performance.
“The easy trade has been sell resources and buy banks, but when that unwinds, there’s going to be a rapid snapback,” Mr Ayoub said. “So we need to get ahead of that and start building positions, which we’re doing now.”
WAM Leaders sees opportunities in Sandfire, BHP, Rio Tinto and is even looking at backing Mineral Resources despite short-sellers holding a record position in the stock.
The trade is based on growing evidence that economic activity in China is improving and could gather pace as soon as the fourth quarter.
That is despite warnings from broker UBS this week, which advised clients to stick with bank stocks over the miners due to bearish sentiment in China.
Ahead of the pack
WAM Leaders is also ready to pull the trigger and buy up so-called “battleground” stocks which Mr Ayoub said would begin to outperform as risk appetite returns to the sharemarket.
This had led to the portfolio manager building up “little incubator positions” in companies like Ramsey Healthcare, Ampol, Domino’s, Atlas Arteria, Fortescue, Spark Infrastructure and Sonic Healthcare.
“In the past, we’ve had names like CSL, RedMed, Orora, Qantas, Brambles and Lendlease where they’ve been battlegrounds at times, but they eventually graduate to market darlings,” Mr Ayoub said.
WAM Leaders is also enticed by the opportunity for income in the real estate sector, specifically pointing to one of the country’s largest office tower owners Dexus.
“A lot of people have lost faith in the REITs’ defensive characteristics, but we think Dexus and some of the others look good,” Mr Haupt said.
Licensed by Copyright Agency. You must not copy this work without permission.
