This hall of famer returned 15% over the past year without tech and lithium. This is how he did it

Markets have weathered the storm, but not for much longer

"Contrary to conventional wisdom, and confounding all the pessimists, markets have actually performed pretty well," says Kourtis. 

"If you'd asked me nine months ago, I would've expected a worse outcome for equity markets. We've had unprecedented rate rises by all the central banks, and in many ways the real economy has been totally out of sync with global equity markets."

Markets can only weather the pain in the real economy for so long, however. Kourtis expects to see stocks sell off right across the market cap spectrum in the back half of 2023. 

"Monetary policy will have an effect with a lag, and it's no secret out there to your listeners that the RBA has aggressively tightened. Yeah, we've had a pause for the time being, but there will be more rate rises globally by central banks, and global growth has slowed." 

"And the second half is going to be a really tough half economically, which then sort of flows into earnings expectations."

Consumer discretionary, in Kourtis' view, will lead the sell-off.  

"A lot of the retail stocks that have reported recently, they've hit a brick wall."

16% over 12 months

Generating 16% in any market is impressive. Doing it in today's market without tech is all the more so. 

It's a level of volatility and, dare it be said, speculation that Kourtis (a self proclaimed "bricks and mortar guy") is happy to avoid. 

"The WiseTech (ASX: WTC)'s of the world, stocks that really ripped... I mean, that stock was up over 100% last financial year."

"It's just not me, and it's not what my investors expect of me. I've always been a bricks and mortar sort of guy."

So what stocks drove the result? Kourtis offers three out-performers. And he's already taken profits from some of them.  

Northern Star Resources (ASX: NST), for one. 

"The stock was 7.50 [last year], it rallied to $14, it's now come back closer to $12."

James Hardie (ASX: JHX) was another. 

"At the start of this calendar year we piled into James Hardie, it had been absolutely smoked. It fell back to sort of 26.50, we've piled into it, it's $40 or thereabouts. Now we're out of the name, see you next cycle, we're gone. We've locked in the alpha, move on. You can't just buy and hold things forever, those days are gone. I can talk about that later if you want me to.

Finally, there's United Malt (ASX: UMG). 

"It was bid for by the French, as it turned out the souffle did rise twice, so we're out of that name as well. I'm not going to wait for the 11th hour and 59th minute for the $5 cash to hit my bank account, I've come and gone."

Avoiding retail and crowded longs

Kourtis has steered clear of the supermarkets (with the notable exception of Metcash (ASX: MTS), the banks, crowded longs and expensive defensives."  

"I'm not in ResMed (ASX: RMD), I'm not in Aristocrat (ASX: ALL), I'm not in CSL Limited (ASX: CSL). Well, that was supposedly a safe bet six months ago. And again, we had sell-side analysts ramming it down my throat with a 300 handle in front of it."

The dog days are over for this energy company

Ever the contrarian, Kourtis likes Santos (ASX: STO), partly because the bulls don't. 

Still bearish on the banks

Earlier this year, Kourtis made waves on this website arguing that the Big Four are the "last place you want to be." He argued at the time that consensus forecasts assumed that NIMs would stay high and that the fixed rate rolloff would be more benign than expected. In his view, that simply didn't stack up.

Is he still bearish?

"Yeah, I am. That said, banks have performed broadly in line with the market last financial year, with a return of around 14% or whatever the number was," Kourtis told me. 

But he now adds they're not walking in lockstep. 

"Bank of Queensland (ASX: BOQ) got smoked, that was the clear under performer, National Australia Bank's (ASX: NAB) underperformed, BOQ underperformed the market by nearly 30%, that's a big margin. NAB was the majors the worst performer and underperformed. And then you had Westpac (ASX: WBC) , ANZ Group (ASX: ANZ), and Commonwealth Bank (ASX: CBA) pretty much performing sort of 15-odd percent for the year, in line with the market. Now what has surprised me is just how resilient they've been. And I think I said earlier, monetary policy will have an impact but with a lag. And we're going into that period now where I think there's something... And I think I talked about it last time, there's $230 to $240 billion of loans that are moving from fixed to variable in the current half we're in. The supposed mortgage cliff."

Kourtis also points out that the share prices of the banks haven't done much in a decade or two. 

"ANZ's share price is the same it was 15 years ago. The only one that's added value, real shareholder wealth, has been CommBank, which has delivered over the longer term." 

Crunch time for the banks will be when rates bite and bad and doubtful debts come to the fore, if they even do. 

"The cycle's just starting to play out now. And I suspect what you'll see is BDD charges, write-offs will kick up to about probably 25 basis points. 

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Ellerston Australian Share Fund

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