A market rotation is coming: Here’s how WAM’s Matt Haupt is positioned for it

WAM Leaders is all about focusing on leading macro indicators and finding market leading stocks, says Portfolio Manager Matt Haupt.
Chris Conway

Livewire Markets

As Matthew Haupt tells it, following the George Soros' and Stanley Druckenmiller's of the world sharpened his interest in financial markets and investment. 

Both of those titans of finance, who at one stage worked together and famously broke the Bank of England, employed a top-down approach. That is, they focused on the big macro and political picture first, before moving to more targeted opportunities. 

It is no wonder, then, that Haupt and his team at Wilson Asset Management, in managing WAM Leaders (ASX: WLE), employ a similar, top-down approach. Haupt believes that understanding the macro environment and positioning is 'instrumental' in shaping a portfolio and driving investment returns. 

"We spend a lot of time thinking about how the economic environment will look over the next six to 12 months, and we use a combination of leading indicators, coincident indicators and the like to try and build a picture", says Haupt. 

Once the current and projected macro environment is established, the process then moves to sector analysis and, ultimately, stock selection. It's a tried and true investment process based on traditional beliefs, but it is very effective when executed with discipline. 

In the following interview, we delve deeper into the process that Haupt employs at Wilson Asset Management, unpack how he sees the current macro environment, talk about winning and losing sectors, and pinpoint some of the stocks that make it into the WAM Leaders portfolio and why.  


  • 0:26 - Why do you invest the way that you do?

  • 1:11 – What is the WAM Leaders investment process?
  • 2:20 – The macro picture right now
  • 3:30 – Sectors: where to play and not play right now
  • 5:16 – What other opportunities stand out at the moment?
  • 6:34 – Largest positions in the fund and why they deserve to stay into 2023
  • 8:18 – How has the portfolio positioning changed over the past 3-5 years?
  • 9:00 – Last year’s losers: do they stay or go?
  • 10:55 – 2022 was tough. What is in store for 2023?
  • 13:30 – Advice for investors for the rest of the year

Please note that this interview took place on Monday 30 January, 2023. To access the interview please click on the player or read an edited transcript below.

Edited Transcript

Please note the transcript below has been heavily edited for brevity. For the full experience, please watch the video. 

Chris Conway: 

Hello and welcome to Livewire Markets. My name is Chris Conway. Today I'm joined by Matt Haupt from Wilson Asset Management. Matt has more than 15 years experience in the industry and is currently the Lead Portfolio Manager responsible for WAM Leaders. Matt, welcome.

Matt, talk to us briefly please about your journey and how you came to look at markets the way that you do.

Matt Haupt:

The biggest impact for me personally was around some of the big global macro traders. They sparked my interest way back in the day, and it was around the events of the George Soros' and Druckenmiller's of the world, which were market-related, but also politically related. For me, that was a really big driver of how I looked at markets and I've always found that really interesting, and it's something I've pursued ever since. Following those guys through a couple of great books, the Market Wizard books. They were instrumental in how I view markets.

What is the WAM Leaders investment process and how do you identify opportunities?

I'll touch on two things here. I think the macro positioning is instrumental. We spend a lot of time thinking about how the economic environment will look over the next six to 12 months. And we use a combination of leading indicators, coincident indicators and the like, to try and build a picture and work out business cycle positioning using seasonal positioning adjustments as well. We are trying to get a holistic approach. The other one is positioning. We get daily data positioning around CTA funds, risk arbitrage funds, volatility targeting funds, seeing how they're positioning across equities and also bonds and commodities, which gives us insight into how the market will react to certain data points. You can sort of work out if the market is crowded and you get a counter data point you're going to be in for a pain trade. We try and avoid those situations. We've always got that little bit of a contrarian bias to us.

You've just talked a little bit about the process and that you do take into account the macro picture. How are you seeing things right now, Matt?

The great thing is the stock market isn't the economy. And we're seeing that right now because we're getting a big easing financial conditions, which is driving the stock market up. 

The macro picture is terrible. You look at the leading indicators, they're all back at 2000, 2001 levels, '07, '08, '09 levels, the COVID levels, the leading indicators are really, really bad. That makes us very cautious. 

The rally you're seeing early in 2023 is just financial conditions easing. And it is really a trade unwinding process, too, of everyone's long rates. You're seeing that unwind now. You're seeing an unwind of short positions and all this is seeing the market go up, but the economy, hey, it's not good. 

We remain cautious, but still optimistic for this year at the back end of this year. 

But I think there's a bit of a hurdle we have to overcome yet. That financial condition easing will not drive us much higher from here.

Taking that macro, that broad macro picture that you've just outlined, how do you then translate that into the sectors that you do want to play in and don't want to play in? And can you give us some examples of where you'd like to be at the moment?

Where we look around the sectors at the moment, we're obviously trying to position in more defensive sectors. So not linked to discretionary spending because we think the consumer will eventually come under pressure because of the large transfer payments that have happened over the last 2-3 years. That has ended and you're seeing the excess savings dwindle, and of course, someone's spending and someone's income. When incomes are falling and spending will fall, you'll get into this circular reference, which will create a negative environment. 

But how we're positioning the portfolio right now is around interest rate sensitive sectors that do not have a high discretionary spend, and that's in the utility sector.

Companies like APA Group (ASX: APA), Transurban (ASX: TCL), Atlas Arteria (ASX: ALX), a few of those stocks we like because if the economic conditions worsen, sure they'll get hit but not hit to the extent some other sectors will get hit. 

Then as rates come off, as we think they will later this year, the cash flows of those companies will attract a higher valuation. We like those sectors. 

Also in the REIT sector,there's quite a few companies that we like because again, as rates fall, things will get better and the valuation is already taking to account a severe downturn. We think the risk/reward is good in that sector as well.

You've just touched on it a little bit there, so forgive me if we're we're backing over it, but 'defensive quality' - I've heard you use this term before. What are some of the other characteristics that you're looking for? You talked about those names that have defensive cash flows. What else is it in the mix that really interests you?

The ones that stand out for us are consumer staples. You've got the Woolworths (ASX: WOW) and (Coles ASX: COL) of the world. Inflation has gone through as we've all experienced going through in the shopping centre, huge inflation coming through. And what we experience with these companies is in downturns, their earnings don't really fall a huge amount. And what you've experienced is high inflation, but costs will be coming down within the business too. All the extra COVID costs are coming out of the business. 

Consumer staples is another sector, which as the name suggests, should be fairly defensive. I think that's an area you can really hunt into. 

The extreme valuations we saw for Woolworths and Coles have come out of the market. I'd say they're a little bit ignored at the moment. I think they are two good companies, Coles and Woolworths, that should do well over the next period.

Could you talk through some of the largest positions that you've got in the fund at the moment and why they continue to deserve a position as we head deeper into 2023?

I'll touch on the largest positions, which are Dexus (ASX: DXS) and Lendlease (ASX: LLC). We'll start with Dexus, Dexus office towers. People would be like, "Why would you invest in office?" We had COVID, work from home, interest rates are going up. It's trading around 40% discount to its net tangible assets. We're seeing transactions in the market around 10% discount to the net tangible assets. For us, the share price has overreacted already. These A-grade office towers cannot be replicated. The location is fantastic. The overseas capital we think will likely come into this sector as these valuations are extreme to the downside. We think some of the big sovereign funds will be looking at these assets and we're quite happy to hold this asset at such a discounted valuation. You'll also get the funds management business for free based on the valuation with Dexus at the moment.

The second one is Lendlease, a little bit riskier because they're a developer largely. They do need capital externally, but the environment for external capital has not frozen yet. Lendlease is trading at 12, 13 year lows. It's extreme. Again, we think if we come out of this downturn, which we think will be quite on the softest side, we think the Lendlease share price is factored in an extremely negative situation and we think they can come out of this quite well as they pull the cost lever as they're doing now. We think Lendlease is another standout at the moment.

You've talked a little bit there about the biggest positions in the portfolio currently. Does that differ greatly from what the portfolio has held over the last three to five years?

Oh, hugely. We look back when interest rates were zero, we took the position interest rates were going to go up. We were heavy in insurers, we were heavy in financials like banks and the like, because as interest rates rise, their incomes go up the net interest margin or for the insurance companies, the interest rate they get on their reserves go up. We were positioned for the increasing interest rate environment. What we've done now is positioned for a decreasing rate environment, which we think it will be the narrative to follow later this year.

Which positions worked against you last year, Matt? Not everyone has winners all the time. And what have you done about those? Have you kept them or have you turfed them out of the portfolio?

The one that keeps giving us pain is Santos (ASX: STO). We're very constructive on energy, but we back Santos in a heavy way and Woodside has absolutely outperformed Santos, and it continues to this day. I think it's not due to the company's fault, but a lot of offshore money now goes to Woodside and we miss that. I mean, that's hurt us on performance last year. But this year, this valuation gap has to close and how it closes, I think the Santos will do a very large buyback when they get the cash from the PNG sale.

2022 was difficult for many investors as we know. Do you think 2023 will deliver a different result, and if so, why or why not?

Well, 2023 at the moment looks like a absolute bull market, raging bull market, which is just incredible. I mean, who would've thought that? But as we discussed, the financial conditions have been a big driver of that as we got extremely tight last year and now they've unwound themselves. 

Is it going to be a great year for equity investors? It's going to be a solid year, but it's going to be very volatile. 

The slowdown in the global economy hasn't really worked its way through the corporate earnings yet. And we're starting to see that now just with layoffs and the like. And that will accelerate, so the labour market will get softer, earnings will get softer. The backdrop should get easier though, on financial conditions, unless we go full-blown recession. Then financial conditions will tighten, which will be the worst combination when you get PE falling and then earnings falling at the same time.

At the moment, we've got PEs rising because of financial conditions and earnings slightly falling. We think earnings will fall a lot more over the rest of the year. I think as investors, people should be cautious for the first six months, but then the back half of this year, if everything plays out, we think will be a pretty good time for equities. It always pays to be optimistic equities because the draw-downs are short, and if you're picking good companies, they'll be around out of the cycle. You just have to not play the speculative end because they don't end well in bear markets.

Matt, what is the one piece you of advice you'd like to leave investors with for the rest of the year?

I think it's really just focusing on that earnings piece, trying to pick the sentiment change because the market normally rallies off a sentiment change of the leading indicators. Looking at the ISMs and the PMIs are generally a good bottoming indicator and also generally rate cuts. The first few are normally bad for the market, but then the third, fourth, fifth, that's when the equity market starts rallying. 

It's really trying to just focus on being in good companies, being slightly defensive, waiting for that bottoming event of the leading indicators. And that's probably the key thing to watch this year.

Learn more

WAM Leaders provides investors with exposure to an active investment process focused on identifying large-cap companies with compelling fundamentals, a robust macroeconomic thematic and a catalyst. You can also visit the Wilson Asset Management website for further information.

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Chris Conway
Managing Editor
Livewire Markets

My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...

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