Large cap portfolio update – December quarter 2024

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After a strong year for share markets in 2024 things ended with a whimper as the ASX 300 dropped during December. IML Senior Portfolio Manager and Head of Research, Hugh Giddy, discusses how IML’s funds performed during the final quarter of 2024 and looks ahead to what he thinks 2025 might bring.

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Lightly edited transcript – recorded on 3 January

Jason Guthrie: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I’m your host, Jason Guthrie, and today I’m joined by Hugh Giddy for a recap of the last quarter in 2024 and to hear his expectations for the year ahead. Now, Hugh is a regular on these podcasts; he’s got over 30 years of experience in the markets. He’s currently a Senior Portfolio Manager for IML’s Large Cap team, and he is also the Head of Research at IML. Welcome back, Hugh, and Happy New Year! I hope you had a chance to enjoy some quality time off and are excited for the big year ahead.

Hugh: Thank you, Jason. Yes, absolutely.

Jason: Getting right into the quarter for 2024, we didn’t seem to get that usual Santa rally this time, with markets taking a bit of a dip in December. I think the ASX was slightly negative for the final quarter, but overall, it was a very strong year for equities. What are the main things you think our investors should take away from 2024?

Hugh: I think in 2024 it was interesting to see the dominance of banks, which are a very big sector in the Australian market. The interesting thing is that the banks’ earnings are virtually flat, so it was all a re-rating. There are many reasons that we can come up with as to why the banks went up. I think chiefly they went up because overseas the banks were doing well; both their profits were up and their share prices were up a lot. Our banks went up, but only in terms of share price, not in terms of profits.

This shows the globalisation of markets. People tend to invest a bit sectorally; there are a lot of big pools of global money, of passive money that chase momentum. When that momentum is going, as it was in 2024, it’s like standing in front of a freight train trying tobe different to that momentum. But that doesn’t mean there’s always going to be strong momentum in markets. We started to see a bit of a wobble in December and January, where there was an understanding that all may not be as exciting as people were hoping. As the momentum goes away, then you can find stocks that had gone up strongly coming down.

It’s not like we’re going to try and hug the benchmark more because of that momentum. It’s just something that can happen, and it is painful to watch because it tends to mean that stocks that don’t really deserve to go up, keep going up. The last time we really saw this was before some market weakness in 2000 and 2008. Those were times where, after a period of pain, IML outperformed quite handsomely.

Jason: Yes, so certainly reflecting on the year in funds management, it’s no doubt it was a pretty difficult year for many active large-cap managers here in Australia, many holding underweight positions to those big banks, the four big banks. So how did the actual IML large-cap funds perform over the quarter and across the broader 12-month period?

Hugh: Well, the IML funds were down for the year on a relative basis but up in absolute terms with quite strong markets. In the final quarter, we outperformed by 1%.

Jason: Hopefully a sign of things to come. Turning now to some of the more specific companies, were there any that were real standouts for the team last year or in the final quarter?

Hugh: For the year, we had some large key holdings up handsomely, with both Brambles and Suncorp up almost 45%. With Brambles, I think this is an idea we’ve monitored and followed for a while. We thought the company was transforming itself by focusing more on being more efficient and being better stewards of capital and working capital, and so forth. They did both in terms of earnings and cash flow in the past year.

They believe, and we think they are right, that they can continue to generate good cash flow in the coming years, and we were rewarded with a stock price going up. Although, you know, unlike the banks, the earnings were there to back that big move up in the share price. We like the management and we like the chairman of that business.

Now, Suncorp’s story is a little more cyclical, where insurance has been doing quite well as prices have risen; premiums have risen a lot. Anyone owning a car or home getting insurance would have seen their premiums going up and up, and that is leading to higher profits for Suncorp and IAG with their brands. Suncorp has the brands AAMI, Suncorp Insurance, and so forth.

Another thing that people liked with Suncorp is that the ACCC backed the sale of Suncorp’s bank to ANZ, so that leaves Suncorp as a pure-play insurance company. We have been trimming because of that strong share price appreciation.

The standout, though, perhaps in terms of performance, was Sigma, which is now going to be Chemist Warehouse. Earlier in the year, the merger was announced but was subject to ACCC approval. With the ACCC approval, the shares leapt in the final quarter; they were up 80% in the quarter and over 100% for the year. Now, unfortunately, it wasn’t a huge holding for us. Without the Chemist Warehouse addition, Sigma itself was a relatively small business. It will be a company close to $10 billion, but as a small-cap stock, we weren’t able to buy a very large position. However, we did benefit from the position we held, which more than doubled for the year.

Jason: I see another big compounder that IML’s always been a fan of is Amcor. They’ve also just recently made—or are about to make—an acquisition of another global competitor. Is it Berry? What are the views on Amcor going through 2025?

Hugh: Well, Amcor is one of the ones that has been a bit disappointing. They’ve announced a merger with Berry. It’s a scrip bid, which means that there’s no debt being raised; they just merge the two companies. The shareholders of Berry and Amcor will get shares in the merged company on an agreed ratio, and it’s an agreed deal. I don’t believe there’s a lot of overlap, so the deal should go through in terms of getting approval from the competition authorities.

There should be a lot of cost savings, particularly on the raw material procurement side. Amcor had previously been stuck in a holding pattern a little bit pre-GFC. During the GFC, they bought Alcan’s packaging business, and that was really transformational for Amcor. That purchase allowed them a lot of synergies, and they also got a very good price. You saw the share price move up significantly.

We believe this is not as accretive a deal, but it’s still a very accretive deal because of the synergies and the cost savings. We were somewhat perplexed that the Amcor share price has fallen; it’s not trading on a very high multiple at all. It’s in the low double digits now. Packaging is a fairly slow-growth industry, but this should be a step change in the earnings of Amcor. We do believe that in the next few years you should see some strong earnings growth being delivered.

The other disappointing stock has been Metcash, which is a wholesaler. They supply grocery, liquor, and hardware. Hardware has been a bit tough because not so much DIY hardware — people doing their own gardening or pottering around fixing things — but tradespeople who are building new homes have experienced a downturn. There’s been a small drop in sales in the hardware division, and that flows through to profits in that division. The other divisions are performing well.

Again, it’s a cheap stock; it’s not on a very high multiple of earnings. They are quite cash generative, and we like what management’s doing with the business, but it is going through a bit of a cyclical tough patch. That doesn’t mean that we can time when the upturn will happen, but we know the upturn will happen in due course. We haven’t added to our position, but we’re confident that things will get better in the medium term for that stock.

Jason: Fantastic. Thanks, Hugh. In rounding things out, we’re now in week three of 2025—hard to believe! The start of the year is often a time when our clients and investors do re-evaluate things, not just their New Year’s resolutions, but also their portfolios and how they should be positioned going forward. What do you think they should bear in mind as they are thinking about their portfolios, their equity positions, and their risk positions starting out in 2025?

Hugh: I think after 2024, it’s very tempting for people to say, “Oh gee, active management’s not working,” and you know, it’s just easier to buy an index fund. That’s always a low-cost way of investing, and I do understand the appeal of low-cost investing. However, after a year where the index has been dominated by momentum rather than what we would term fundamentals—ultimately, share prices follow profits.

In a very large part of the market, profits have been weak, not growing at all, while the share price has been strong. You can see there’s a disconnect. What goes up, that will normalise; it may not normalise this week or next week, but in the coming year, it’s likely that the banks will not deliver very strong share price performance because they have become so expensive.

You could say, “But you were saying that in July,” or something, and they kept going up. Well, it doesn’t change the fact that if the banks don’t increase their earnings, the share prices will struggle to go up over time. I think the time for active management is close, or it might be already upon us, where you want to be holding companies that can deliver strong earnings performance in a variety of economic scenarios that are not expensively priced.

You know the banks? I don’t think you’re going to get much earnings growth. Resources are going to be tough because the Chinese economy is still going through a readjustment—from an over-dependence on property and infrastructure to a more consumer-based economy. While that’s happening, you’re unlikely to see very strong demand for resources in general.

That means that if you can find industrial companies that are growing their earnings, where management is doing a good job and they’re not extravagantly priced, that should outperform in 2025.

It’ll be swings and roundabouts, but I think it will be a year where active management will do a lot better, and momentum investing and passive type investing—just following the benchmark—is unlikely to look after you in 2025 the way it did in 2024 and 2023.

Jason: Well, thanks, Hugh. We might wrap it up there. I appreciate you joining us so early in the new year. I hope it’s a great year for you and the team at IML, and thank you to all of our listeners. We hope to provide you with plenty of timely and valuable insights from our managers throughout 2025 via this podcast. If you did enjoy the episode today, please click follow on your favourite platform to be notified of future episodes. Also, click on the bell icon on your screen and tune in again very soon to hear more from our global collective of experts.

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