Amid the economic uncertainty, our Blue Chip Value Portfolio continues to deliver positive returns. Why? Because that is the way it is designed. While we won’t be the best performer in go-go markets, we will be keeping up with the pack. So when investors put the brakes on and fundamentals like cashflow and the balance sheet become important, the Blue Chip Portfolio’s performance is well ahead of the market.

Why has our Blue Chip Portfolio outperformed?

Over the past two years our Blue Chip Value Portfolio has returned close to 15% a year. Compare that to the benchmark S&P/ASX 200 Index’s 3% a year. Value stocks have only increased in outperformance in 2023.

Its outperformance is due to strong analysis of stock specific fundamentals, but also because we have a good handle on the economics, which drives much of the performance of Blue Chips, whose businesses are more leveraged to the global and domestic economies than Small Caps.

Actions We're Taking

We have acted pre-emptively and have lightened our exposure to the big banks suh as NAB (ASX:NAB), ANZ (ASX:ANZ) and Westpac Banking (ASX:WBC), but we are happy holders. They have strong balance sheets; the loan to value ratio of 80% means declining house prices won’t affect them too heavily.

We continue to support mining companies, particularly the big diversifieds BHP (ASX:BHP) & Rio Tinto (ASX:RIO). These companies have proven their ability to show discipline around capital management, which like the banks, means dividends. The iron ore price has rebounded, which gives us confidence that the Chinese economic engine room continues to deliver.

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On the economic front,

There is a great deal of uncertainty as the market grapples with the inflation genie, which is well and truly out of the bottle. Just ask our own RBA Governor, Philip Lowe!

The key point to note is that because inflation is running at almost 8% here, while in the US its come off its peak and is 6.4%, further interest rates increases are required. Simply put, aggregate demand measured by nominal GDP growth is running at 13% a year, which is much higher than the economy can cope with and which causes prices to rise.

Last week’s 25 basis point hike in official interest rates puts the domestic cash rate at 3.35%, its highest level in over a decade, while our risk free rate, the Australian 10 year bond yield is 3.8%. Three more interest rate rises are projected for this year, putting us on track for a cash rate of over 4% in the next 12 months. The US has been more aggressive and is in front of the curve, so to speak, with official cash rates sitting at 4.33% and predicted to go to 5.25- 5.50% by July.

What does the ASX's future hold?

Uncertainty exists in Australia and not just about Dr Lowe’s job. Most of the growth in nominal GDP occurred in the first three quarters of the 12 months to 30 September. Slower growth was evident in the September quarter against the prior quarter.

The RBA will be looking very closely at the next data point, which is the December Quarter nominal GDP, due out in the first week of March. There are only four numbers a year, so this is extremely important for working out the actual inflation rate. If the number is strong, the RBA’s hand will be forced and more aggressive rate rises will occur. If the trend of softness continues, then the RBA can exercise more patience in raising rates.

The sting in the tail is that if the number is softer, then it signifies that demand is weak, which isn’t good for domestic earnings. The goldilocks scenario, or “soft landing” as CBA CEO Matt Comyn referred to, is when a modest slowdown in spending leads to a substantial decline in inflation, or disinflation (declining prices). This is unlikely to occur and nobody I’ve spoken to can point to an occasion when it has.