Stirred, not shaken

A 3% fall in the ASX during November was interesting for many reasons. Firstly, the market is still close to all time highs, and remains up more than 5% year to date. From a base featuring high multiples, we would describe this year’s returns as a more than acceptable outcome, rather than paltry and challenging. Within that headline decline, however, there was significant rotation, with some of the favoured themes of recent times – IT and financials in particular – being sold and investment flowing towards the lower multiple but more cashflow generative sectors such as health care and materials. The market was more stirred, than shaken, in our opinion; and the extent of the stirring is still modest given the dispersion between high and low multiple stocks remains close to the widest levels ever seen until this year. 

Much is made of value traps; growth traps may now be the bigger risk.

As to what prompted this change, we can only guess. As we have often observed, catalysts are hard to discern, even with the benefit of hindsight. It is clear, however, that with fiscal ill discipline proving entrenched globally, taking productivity with it, especially locally, inflation remains at higher levels than many would have anticipated and hence interest rates remain higher than many may have anticipated as well. With a new Fed chair due to be announced within weeks, the US interest rate command is clear; lower, baby, lower. In Australia, however, thankfully RBA independence seems more enshrined, and cash rates are currently priced with a 95% chance of an increase within 12 months, and bonds are persistently closer to 5% than 4%.

Higher rates and sticky bond yields, together with high multiples and low earnings growth for listed equities, isn’t the bag of presents many investors would be asking of Santa. It suggests that the shake in equity markets may still be in front of us, and the rotation we have seen in recent months may still be nascent.

November is always when the major banks come out to play wit their full year results (ex CBA; which produces a quarterly). There were three notable features of the results to our eyes;

• Revenue growth for the sector (4%) was again less than cost growth (6%).
• Within cost growth, IT expenses are now a large and aggressively growing part of the overall cost base for the sector. Whilst that might sound somewhat obvious, we were shocked when we thought of this cost on a per FTE basis. One major bank disclosed IT costs of $3.1b, almost exactly half of their labour costs, on a base of 35,000 FTE. That is, IT cost per FTE is close to $90,000, growing at 13% per annum in F25 and, to quote the CFO, “… that number is not going down …”.
• Thirdly, for the first time in many years, a major bank is looking to materially drop its costs. In reducing FTE by 3,500, and contractor roles by another 1,000, ANZ is reducing those numbers to be more in line with two of its major bank peers, which as it claims have very similar revenues to ANZ.

Home loans for the banking sector has been the (volume) gift that keeps on giving for many years now, and after a siesta around the Royal Commission period recently volumes have flared again, with investor lending prompting APRA to introduce macroprudential regulation from February next year limiting banks from issuing more than 20% of new loans to borrowers with a debt to income ratio over six times. The Most Significant Financial Institutions proposal by APRA will also see increased capital requirements on the four majors and Macquarie (ASX: MQG). The aggressive volume growth for the sector is being met with a regulatory response; as a return driver, volume growth has ceased being the gift for the sector and that is not returning. To the extent Macquarie continue to set the price in the market for deposits and loans, only productivity can lead to increased returns for the sector.

For those worried that APRA throttling aggressive lending may have the inadvertent impact of stymieing activity in the housing market; don’t be. Per capita, Australia has consistently built more houses per annum than all of our economic peers; and is still doing so. It is abundantly clear that the growth in the value of the housing market through many years bears little relationship to bank lending for mortgages, even if it has been a boon for bank volume growth.

For context, David Harrison of Charter Hall (ASX: CHC) put it very well at a recent industry event, where the Federal government Minister for Housing was lecturing an audience about the role they had to play in providing housing finance in Australia. In response, several major property company ceo’s gave their context to the Minister. Mr Harrison’s response highlighted, courteously, that the value of Australian housing stock is A$12tn; and against that there is mortgage debt outstanding of A$2.5tn. In contrast, there is A$4.3tn in superannuation, A$1tn of which is in SMSFs. Mr Harrison reflected that throughout his entire career, spanning three decades, households have been prepared to buy housing at a cash return less than the cash rate. As an investor in affordable housing, that paradigm creates a difficult hurdle for a Super Fund bound by the best interests test to leap, unless they expect significant further capital appreciation. Mr Harrison spoke with knowledge, logic and conviction; whilst our underweight position in several property stocks (especially Goodman Group) significantly aided relative returns during the month, not owning Charter Hall hurt performance.

Greater regulation of the banking sector may or may not be warranted; but what is clear is that it will do little in practice in itself to alter the number of new houses being built. 

The ultimate reform needs to be on loan to income ratios, along with curbing demand as most other western world countries have done through imposing immigration limits and citizenship requirements for ownership. The fact that housing prices are now out of the reach of a generation of young Australians on a median income has great social consequences, as was highlighted in an important paper released during the month by Lee and You . The paper highlighted the linkage between unaffordable housing and economic behaviour in the form of reduced work effort, increased leisure spending and investment in financial assets across the risk spectrum, which are disproportionately common characteristics among the younger cohorts that cannot realistically aspire to own a house. And the contrary; those that have a more realistic prospect of home ownership exhibit different behaviours. As the always thoughtful Matt Comyn remarked to us and some of our clients during the month, these findings gave him pause for thought.

At a stock level, CBA (ASX: CBA) peaked at $192 mid year. An early Christmas present for those prescient enough to sell, given the price has since dropped 20%. A rival bank CEO marvelled to us how exceptionally well managed CBA was, even in a global context. We concurred, but notwithstanding this wondered how he could justify the market valuation of CBA, even after the moderation in its world’s most expensive bank status. He, wryly, suggested that if he may be so impertinent, it is not for investors to ask anyone else as to why crazy valuations are established or allowed to persist. Management looks after the e; investors determine the p. Suitably chastened, we moved onto our next question. 

The banking sector remains our largest sectoral underweight as we head into 2026, and within that position CBA and Macquarie remain our dominant active positions. 

After causing pain earlier in the year, those positions have benefited performance in more recent times as the market has entered the stirred, not shaken phase. CBA continues to generate good revenue growth but has cost growth to match, leaving a paucity of underlying profit growth. It is tempting to believe that the costs, especially to the extent they are invested into AI tools may be creating a material asset which allows future competitive delineation from the peers, and yet to date there is little financial evidence of this. We are also cognisant that even CBA are aware of the countervailing power big tech has on not just the earnings of banks, but also their very franchise; one only has to review the Epic Games judgements in August 2025 to clearly see the commercial implications of big tech using their market power.

A recent divisional executive recently highlighted to us that the return mantra in ANZ is now well established as the communal hymn of choice. In order of priority when assessing the relative attractiveness of the business units within his segment, he spoke to ROE, NPAT and revenue as the critical factors, in descending order of importance; and highlighted this was a change from previous norms. We have little doubt that ANZ (ASX: ANZ) will meet their cost ambitions, for reasons we highlighted above. The bigger concern is the (back ended) revenue ambition, which is obviously warranted given the hierarchy articulated by the ANZ executive. We accept that this ambition will take longer to gain traction, but are prepared to be patient so long as the cost objectives remain on track to be met and the capability continues to be put in place to ultimately meet the revenue objectives. The goal is brave and honourable, the prize material, and yet the task is large, not least because the identified areas for outperformance are already subject to strong (retail) and increasing (commercial) competition.

Material stocks were another source of strength for performance, and we continue to see upside for many of them. 

Outside of the miners, our exposures in Orica (ASX: ORI) and Dyno (ASX: DNL) both reported through the month and the market rewarded solid results. A new chair at Orica, and management which have been in place for two years now at Dyno and have almost completed disposing of the fertiliser assets, means that the market here has exposure to the largest global players in what should not be an unduly cyclical market with strong structural and cyclical underpinnings. As the Dyno CEO highlighted to us, the replacement cost of their asset base is close to book value (which at the moment is dominated by intangibles), and yet the returns are still only mid single digit. Neither company wishes to add much to their asset base, and the market in Australia is now short AN after being long for much of the past decade, which should assist more rationality in pricing.

Within the miners, the commodity exposure itself has had a massive impact upon portfolio returns. Overweight positions in IGO (ASX: IGO) and Alcoa (ASX: AAI) contributed to returns and being underweight the gold sector again hurt performance. As Mr Conlon enunciated last month, the role of gold stocks in the portfolio causes much debate within our team. We continue to not hold it, partly because there is no credible cost curve support for the current price. As we started this commentary, however, we are more than aware of the impact of fiscal debasement and its three ugly step sisters (inflation, bond yields and commodities), and how this readily plays into the precious metals narrative. It less readily tells us the right long run gold price as a consequence of these risks.

At a stock level, BHP (ASX: BHP) caused a stir during the month as it announced that it’s A$50b+ bid for Anglo American had been rebuffed. BHP had unsuccessfully bid for Anglo three times last year as well. That’s either capital discipline at work; or poor commercial judgement. In any event, the pursuit of Anglo American by BHP has now come to an end, given the Anglo merger with Teck looks assured.

The issues of interest for us now with BHP are three-fold. 

• Firstly, the portfolio looks unbalanced, with iron ore and copper completely overwhelming the value of coal and potash. As ongoing segments, they don’t appear material to BHP which is always a dangerous position in that the operational performance of the smaller segment/s is rarely optimized in that context. We have also observed this at RIO (ASX: RIO) and indeed some other major companies where the same imbalance is observable, such as Wesfarmers (ASX: WES)). 
• Secondly, and related to the first issue, from a portfolio perspective there seems little value in BHP maintaining these positions. They clearly cannot move the dial in terms of value even if they were ultimately to be run better than pure play peers. 
• Finally, it is clear that there is a large discount implicit in the BHP valuation when valuing the two major divisions, copper and iron ore, when placing their earnings against two obvious peer benchmarks, namely the FMG multiple for the iron ore segment and the implied copper value per ton derived from the BHP bid for Anglo, remembering that this was an offer which was rejected. It is arguable whether this US$60b discount – for context this is the market cap of ANZ - is because of trepidation as to the efficacy of large capex about to be undertaken in copper and potash; or potential M&A. If it’s the former, BHP will join a conga line of resource sector developments suffering cost blow outs as inflation bites into development cost budgets. Given their large existing reserves of long life and low cost assets, any steepening of the cost curve as a consequence of industry wide capex inflation is to BHP’s commercial advantage.

BHP is the largest mining company in the world by market capitalization; its challenge is to also be recognized as the best. 

RIO has recently reverted to focusing on returns over size and complexity; should RIO execute successfully, we suspect the valuation disconnect evident with BHP will see investor attention turn to it and pressure to rationalise the portfolio emerge.

On the US market, November was the best month for healthcare since September 2021. And on the Australian market, Ramsay (ASX: RHC) and Sonic (ASX: SHL), two long held names in the portfolio which have operationally disappointed through recent years and underperformed to the point they both now sit on low multiples, reversed course and performed well through November. As my learned colleague Mr Conlon often says, duration is an often overlooked element of value, and as a sector the ASX healthcare names, albeit covering disparate cadres of activity and geography, share significant duration.

The challenge for both Ramsay and Sonic is to convert that duration into value. 

In recent years, malinvestment in each case has presaged under performance, with small incremental returns generated from large investment spend . Natalie Davis started as Ramsay’s CEO in October 2024, and since that time a focus on improving returns has started to bear fruit. We remain hopeful that the long held, problematic French asset will by realised without any further investment by Ramsay shareholders this year. Dr Jim Newcombe has assumed the role as CEO at Sonic this month after the retirement of Dr Colin Goldschmidt, after 32 years in the role. Dr Goldschmidt and his colleagues took a small Australian pathology operator and turned it into a global business during his tenure as CEO; always from a position of clinical excellence. Sonic started with a corporate mantra of being good, but somehow morphed into recent years into being more focused on size. The opportunity to Dr Newcombe is the same as that which was presented to Ms Davis; to take a strong franchise which has been built through decades, but which through most recent years has been burdened by malinvestment, and look to improve returns without compromising service. Should that be achieved, in each case we believe significant outperformance from current levels is possible.

Market Outlook

As we have detailed, we continue to believe assets are broadly fully priced, and those with the most optimistic growth forecasts on the ASX continue to be the most fully priced, even after the stirring seen through modest index weakness in recent weeks. As global inflationary pressures continue to mount, and the days of free money fade from view in the rear-view mirror, we are starting to see a rotation into those stocks offering more certain, nearer term cashflows. Whilst on the one hand this should not be surprising given this has been the long run historical pattern when asset prices falter, on the other hand recent years had started to stir that belief as “buy the dip” was the prevailing and rewarded wisdom, at a market and stock level. November gave us visibility of the consequences of a stirring of the stretched parts of the market; a shaking may yet await.

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