Rudi’s View: Regrets, 2022 Delivered A Few

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Dec 01 2022

In this week's Weekly Insights:

-Final Weekly Insights For 2022
-Regrets, 2022 Delivered A Few
-Conviction Calls


By Rudi Filapek-Vandyck, Editor

Final Weekly Insights For 2022

Weekly Insights is taking a break until January next year, when we start preparing for the February reporting season.

I hope you all enjoyed reading my weekly writings as much as I enjoyed preparing and sharing them.

Merry Festive Season to you all!

Regrets, 2022 Delivered A Few

You just know 2022 has been an eventful, but certainly unusual year when you look back over your shoulder and conclude moving into Overweight cash early has been the best decision made in the year.

As the Federal Reserve in the US, and many central banks around the globe, abruptly reversed course and embarked on probably the steepest tightening path ever witnessed, it seemed appropriate to lift the portfolio percentage in cash to 30%-40%, where it has been until last month.

Cash makes up less than 20% in November, but serious considerations will be made whether it should be higher ahead of what promises to be another volatile reporting season in January-February (US and locally).

A decision to convert part of the portfolio into cash always meets with emotive resistance and fierce rejections among investors. Is it possible to "time" the market (including when to get back in)? Shouldn't investors simply take a long term view and resist the urge to respond negatively during times of extreme volatility?

Certainly, there is a class of investors who holds a strong belief that share markets always recover and post gains in the long run. Those investors have been busy buying more stock upon volatility and weakness this year. Judging from some of the data available, there has been a lot of such buying at lower prices this year.

Contrary to what many might expect, including experienced veteran market commentators, bear markets are never quite the same. 2022 certainly has not been one-on-one comparable with late 2018, 2015-16 or that dreadful 2007-09.

This year, the FNArena/Vested Equities All-Weather Model Portfolio found itself quickly on the wrong side of share market momentum. As an investor in long-duration, high quality and growth companies, owning shares in Goodman Group ((GMG)), Hub24 ((HUB)), REA Group ((REA)), Xero ((XRO)) and the likes was never the ideal starting point in early January.

While the pressure from rising bond yields was relentless and inescapable, we take comfort from the fact the portfolio sold shares and substantially lifted the allocation to cash.

But there's another observation that equally deserves to be highlighted: in my research I try to distinguish the higher quality companies from the rest. Not that high or low quality makes a lot of difference during the run-away bull market that preceded this year, but when times got tough, it most definitely did.

Whereas many a prior high-flyer got smashed to pulp in the first half of 2022, personal favourites such as Pro Medicus ((PME)), TechnologyOne ((TNE)) and WiseTech Global ((WTC)) stoically stood their ground, and not simply in a relative sense (though they did fall a lot less than most High PE peers); as we approach the end of the calendar year these stocks are sitting on a net positive return.

Yes, you read that correctly. 2022 has not all been about fossil fuels and large cap financials. One of the regrets for the year is the All-Weather Portfolio went cautious and conservative early, and this included selling out of Pro Medicus, Xero, Breville Group ((BRG)), Charter Hall ((CHC)), Seek ((SEK)) and Hub24.

We did not get back in. With perfect hindsight, there are no silver bullets when it comes to protecting one's capital. In light of next year's plausible ramifications from the international 2022 tightening frenzy, there are reasons to remain cautious on immediate prospects for Xero, Breville and Seek, maybe for Charter Hall too, but this year's regrets definitely include Pro Medicus, WiseTech Global and Hub24 no longer being part of the All-Weather Portfolio.

We will bide our time. Today's eerily calm is unlikely to be representative of what next year will look like for the share market. Opportunities will present themselves, exact timing unknown.

Moving a large percentage of the portfolio into cash is not a panacea for all conditions and circumstances, but my personal contribution to the public debate is that local fund managers saw their return slump to -20% or more, sometimes a lot more, and the All-Weather Portfolio has kept losses this year in the single digits.

Raising the level of cash was specifically aimed at exactly such outcome. Or as I like to respond when receiving questions about it: it's never an attempt to "time" the market; it's aimed at reducing risk. There's a difference between the two.
 


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