Recent global events and the current geopolitical and economic environment have brought a heightened level of uncertainty to investors and market sentiment has been highly reactive. Short-term reactions and activity have led to temporary shifts in market valuations that do not always reflect individual businesses' strengths and long-term potential.
However, while macroeconomic news can sway markets in the short term, it is the resilience of earnings that drives long-term returns. It's what businesses do that will affect the markets in the longer term because no one knows what impact Trump’s potential tariffs or China’s stimulus will have on the market, for example.
Ultimately, markets will be driven by earnings. We're investing in businesses, the prospects of those businesses, and the valuations as we see them at the moment. In different forms of leadership and economic times, companies adjust, and they get on and change their business and look for opportunities.
Our investment team at Djerriwarrh remains focused on the things we can control: selecting quality companies with proven track records, strong management, sound financials, and the ability to adapt to change.
Our focus on income generation through dividends and franking credits is a key part of total returns. At the same time, we aim to achieve long-term capital growth by investing in companies with strong earnings potential. This balanced approach ensures we continue to deliver value, even during periods of volatility in the markets.
Current market conditions do, however, present challenges. High valuations and slowing earnings growth highlight the importance of discipline. Boards are approaching decisions cautiously, balancing inflationary pressures, interest rates, and broader economic trends. Through these periods of increased volatility and uncertainty though, there are always buying opportunities.
Periods of market turbulence often lead to mispricing, where quality companies temporarily trade below their value. These moments allow us to capture the opportunity to add to our holdings in businesses we believe will deliver long-term returns.
An example of this is CSL. CSL is a quality business with multiple growth drivers and is set to deliver strong earnings growth; however, the stock was aggressively sold off in response to Robert F. Kennedy Jr.’s (who has somewhat controversial views about the benefit of vaccines) appointment to lead the US Health Department. Given vaccines are a part of CSL’s business, many investors fled the stock. It’s now trading below its medium-term average valuation. It is a stock we have added to more recently.
History has shown that markets recover and patience and discipline are rewarded—and this is what Djerriwarrh has demonstrated over the years. By maintaining our bottom-up investment strategy, we are confident in the portfolio’s ability to navigate the current environment. Our focus on long-term earnings growth and quality companies ensures that Djerriwarrh is well-placed to deliver an enhanced dividend yield and capital growth, even in uncertain times.