Portfolio Manager, Simon Conn discusses the market’s performance during December and the performance of the QVE portfolio.

Subtitles for QVE investment update December 2022

So for the month of December, we saw broad weakness across the global markets.
In the US, we saw the Dow down about 4%. The broader S&P down 6% and the Nasdaq down over 8% weighed down by the technology sector, which was particularly weak.
Locally the market here did much better. It was only down 3.3% for the month. To end the year only down 2%, which is a significant outperformance of a lot of the global peer set. And the main news, globally was the reversal of China’s zero-COVID policy. They’ve signalled they are going to reopen to the world and rapidly reverse their lockdown policies, which led to strength in the iron ore price. It was up 14% for the month, really in anticipation that they would stimulate their economy to try and rebuild the economy after the significant impacts of lockdowns they’ve had there.

Yeah, so the QVE portfolio for the month was down 1.6% which was ahead of the benchmark, which fell 3.6%. And for the year, the QVE portfolio is down about 6%, again ahead of the benchmark, which was down about 8.8%. So a more resilient outcome than the market, which is pleasing, but obviously it’s been a pretty volatile and difficult environment.
In stock news, the main things to occur during the month were Aurizon announcing the sale of their East Coast Rail business for just under a billion dollars, which is in line with previous expectations. And really significant because that sees a de-gearing in the business, which gives the balance sheet capacity to fund the growth for the east coast rail operations, but also to hopefully return their dividend to the higher payout ratio, which should see the dividend step up in the yield on that stock increase significantly, which we hope will lead to a bit of a rerating of Aurizon.
The other news for the month, Orica at their AGM confirmed that recent trading has been strong, which is pleasing but not really surprising given the strength we are seeing with their customer base. SkyCity was impacted by news that AUSTRAC was taking civil action against them
for anti-money laundering, which saw the stock weaken slightly. But we think at that current price levels, that news is really more than baked in to the price particularly given the strong trading update they gave at their AGM only a couple months ago, which is, you know, as they said, trading up about 10%. So we think that’s more than priced in to the stock.
In other news, Bega rallied quite a bit, on the back of, I think confirmation at their AGM that the price increases they’d signaled would take place had been implemented. So that should see their earnings recover to the previous run rate at the time they bought Lion Dairy and Drinks.

And in terms of activity, we used the weakness in a couple of share prices, namely Sonic, Australian Clinical Labs, to top up on those stocks. We think the pathology operators represent interesting and good value opportunities at the current levels. Obviously, COVID volumes are declining, but their business as usual volumes are recovering and they’re strong cash generating businesses. At those valuations, we think they’re quite attractive and so topped up on those two stocks. So obviously interest rates have increased quite rapidly over this calendar year
which portends a very uncertain and slowing environment and a slowing economy into this calendar year. Obviously, that means it’s going to lead to volatility in the market. And it’s that volatility we look for to take advantage of weakness in good quality companies. Where we can,
we will continue to accumulate good quality companies where they present reasonable opportunities. And with the ultimate aim of trying to generate capital growth over time, but also, significantly, accumulating good dividend paying companies so we can continue to grow the dividend that QVE pays in time.

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