6 stocks for a full portfolio reset in 2023
There's something to be said about starting from scratch. How many of us have dived headfirst into university degrees, careers and relationships before realising, sometimes later than we would have liked, that perhaps it wasn't the right fit?
The same could be said of our investment portfolios. It's far better to review your holdings, have an honest conversation about what worked and what didn't over the calendar year, and set out practical steps so you can stick to your strategy over the months ahead.
Well, it's that ... Or you can buy a shovel, dig a decent hole and bury your head in the sand.
In this thematic episode of Buy Hold Sell, Livewire's Ally Selby was joined by Medallion Financial's Michael Wayne and Marcus Today's Henry Jennings for a full portfolio reset.
They outline the headwinds they are watching as we move into the second month of 2023, the sectors that currently look promising, as well as the stocks they would want as their top three holdings if they could start completely from scratch.
And because I know you love it when we dish the dirt on portfolio duds, they also share some of their most painful positions from the year just past.
Note: This episode was filmed on Wednesday 24 January 2023. You can watch the video, listen to the podcast, or read an edited transcript below.
Ally Selby: Hello and welcome to Livewire's Buy Hold Sell, I'm Ally Selby, and unless you were on the right side of the oil and gas, coal and lithium trade last year, I'm guessing you had a pretty rough time of it in 2022. So if you could, would you start completely from scratch? Today, we're joined by Michael Wayne from Medallion Financial, and Henry Jennings from Marcus Today for a full portfolio reset.
Okay, let's dive straight in, I'm going to start with you, Henry. Do you think what worked over the last six to 12 months will work over the year ahead or is now the right time for a full portfolio reset?
Is now the time for a portfolio reset?
Henry Jennings: I think it's always good to stress test your portfolio at any time and the beginning of the year is always good. What worked in 2022 was based on the Black Swan event, which we saw when Putin went into Ukraine. Will that happen again? Well, he's already there... So, what will work this year? I don't think it'll be the same things that worked last year.
Ally Selby: So a good time for a reset?
Henry Jennings: I think it's a good time for a reset. I think it's a good time just to, as I said, stress test your portfolio, and think about what stocks you've got in there... The biggest event this year is going to be China. China's reopening is the game changer of all game changers. It's the second-biggest economy coming back online after three years in the wilderness. That is huge.
Ally Selby: Over to you Michael. We talked about some of the sectors that really outperformed last year in the intro there - lithium, oil and gas, and coal. Do you feel like those same sectors are going to outperform this year or is now the right time for a portfolio reset?
Michael Wayne: When it comes to portfolio resets, I think the way we view the market anyway is it's always good to have some core positions which you can hold throughout the cycles, but there are going to be positions around the edges of your portfolio which are definitely worth revising for the year ahead.
As to whether the same sectors that did well last year will do well again this year, it's always difficult to say. Often the sectors and the businesses that perform poorly the previous year bounce back. In fact, I saw a Livewire article recently highlighting that fact. But I do think the dynamics are set up pretty well for many of the themes that played out last year, in terms of commodities doing well and energy and gas doing well. Particularly if inflation remains fairly high and interest rates continue to move higher. If we get the China reopening theme, obviously, that's quite buoyant as well for the commodity space. So I do still think that there is some momentum to be had in those sectors that did well last year.
The macro headwinds to have on your radar for 2023
Ally Selby: You touched on it a little bit there. Last year was all about the macro. It seemed like fundamentals were completely chucked out of the window. Which macro headwinds do you still have on your radar for 2023?
Michael Wayne: It's hard always to forecast the macro, but many in the market, including us as well, feel as though inflation will peak and interest rates will peak in 2023... You might also get a situation where earnings for companies bottom, so they're definitely the things that we're watching, as well as any factor that affects interest rates or affects inflation unexpectedly, which could really set the markets one way or the other... There's obviously the China reopening theme, there's the Japanese central bank looking to control bond yields at the moment, should they be forced to do away with their policy... And that could see the Japanese Yen really take off, and that could put pressure on various parts of the bond market and then in turn the equity markets. So there are always issues to worry about and be concerned about, but it's always impossible to pick which of those issues will cause the biggest gyrations in markets.
Ally Selby: Okay. Over to you Henry. Do you feel like 2023 is going to be about the macro or is it more about earnings in 2023?
Henry Jennings: It's always about the macro! Let's face it, it's always about the macro. The macro infects and informs us of so many things. Don't fight the Fed, it's the biggest macro in the world. The danger is the Fed overtightens and puts the US into some kind of recession. I think the other danger we also could see is that inflation peaking was a 2022 story, I think inflation could reappear in 2023. We're talking about commodity prices going higher, we're talking about oil going higher because of China's opening... These are all factors that came off in 2022 that helped the inflation story. So the danger is, I think, that as we head into 2023 we get lulled into a false sense of security with inflation, and then it comes back to bite us again and the Fed has to go a little bit harder and that puts the US into recession.
Promising sectors for the year ahead
Ally Selby: Okay. There are a few headwinds there. Let's talk about some of the opportunities that we're finding in the market right now. Which sectors are looking particularly attractive?
Henry Jennings: Well, 2022 was lithium, and electric vehicles are still the big place to be, let's face it. And we're going to see a lot more electric vehicles coming through in 2023. The big European car manufacturers are playing that game. But I think it's going to spread out, not just in the lithium space, but to rare earths, copper, and nickel... BHP announced recently they're going into Serbia to look for projects there, RIO was already in Serbia... So I think it's still going to be very much commodity-focused, the greenification of the global economy, and the resource stocks in our market, of course, are the big winners there.
Ally Selby: What do you think, Michael?
Michael Wayne: I tend to agree with a lot of that. I still think the green theme has a lot to play out, potentially, over the next 12 months. But we are seeing some value in some more unloved sectors from last year, things like the healthcare sector, for example. We think companies like CSL (ASX: CSL) and ResMed (ASX: RMD) and Fisher & Paykel (ASX: FPH), didn't really partake in much of the rally from last year that was seen in the resources side of the market... In fact, a lot of those companies fell away a long way, so we do think that they're good quality businesses, on the long-term horizon, and some of the higher PE names that have quality earnings. Also, we still see some value in some of the reopening airports, for instance, such as Auckland International Airport (ASX: AIA), Webjet (ASX: WEB), the travel related stocks... So we still think it's good to have a bit of a blend in your portfolio. Obviously, you want to have some resources in there, but you don't want to completely disregard the sectors that struggled last year, such as healthcare and tech and some certain high PE names as well.
Top three holdings if Henry and Michael could start from scratch
Ally Selby: Okay. I'm really excited for this. We asked our experts to bring along their top three stocks in their dream portfolio, if they had to start from scratch today. Michael, what have you brought along for us?
Michael Wayne: So looking at it long-term time horizon, three companies that are amongst our top five at the moment, but I'll pick as my top three if I was starting from scratch:
These three businesses have very good long-term prospects, that's our belief anyway. They've got very good balance sheets and they've got a consistent track record of delivering. So, we feel that the long-term outlook for those businesses remains very attractive and if we were starting from scratch today, those three would be on the list.
Ally Selby: Okay. Over to you Henry, your time in the hot seat. If you had to start from scratch, what would be your top three holdings?
Henry Jennings: I was trying really hard to think of three stocks beginning with the same letter, and they were triple M, and I've failed miserably. But I have got two Ms and one J.
Macquarie boasts fantastic exposure to the market apart from anything else. Clean and green theme. Very diversified business internationally as well. Mineral Resources has exposure to iron ore and lithium, two great commodities for Australia. And the third one I thought of was a bit left field and is James Hardie. And everybody hates James Hardie-
Ally Selby: Particularly at the moment.
Henry Jennings: Particularly at the moment, and US housing is such a dog of a place, but you know what? These guys have made a pretty good fist of a pretty bad situation. When you look at the numbers, they're actually not doing too badly, and they've got massive leverage. If the US doesn't go into recession and we do see rates come off (and we are seeing that coming off in 30-year bond rates) and we do see housing activity pick up... James Hardie is going to be lean, mean, and hungry, and out there, and the stock is under a cloud. So, for me, under a cloud is good. Macquarie, Mineral Resources, and James Hardie.
Michael and Henry's portfolio duds
Ally Selby: Okay. Last one for today. What were some of the duds in your portfolio in 2022? What have you done with them? Have you sold out of them? Have you held onto them? What's the plan for 2023 with those stocks?
Henry Jennings: Good idea, yes. What's the plan? People ask me that a lot. Some of the duds that I've bought have been Bubs Australia (ASX: BUB). I got very carried away when Biden started signing up Bubs to take formula to the US to solve their formula crisis... Still got that, we are seeing a little bit of a renaissance there. ZIP Co (ASX: ZIP) was another one of my duds, to some extent, but I've just actually exited it, they've had a good rally. Some of the other duds have been some of the smaller lithium plays, and I know I talk lithium a lot, and Pilbara (ASX: PLS) has been fantastic, and Core Lithium (ASX: CXO)... Lots of these names have been great, but some of the little ones are really struggling. And I was way too enthusiastic about them.
Ally Selby: Okay. Over to you Michael. What were some of the duds in your portfolio in 2022, and what have you done with them? Are you still holding onto them? What's happening in 2023 with those stocks?
Michael Wayne: So there were a few duds in 2022, despite the index itself holding up relatively okay in Australia. So three of the worst performers were Aeris Resources (ASX: AIS), a small copper producer. Another one was a MedTech, again a small cap, Alcidion (ASX: ALC). And then finally, Pointsbet (ASX: PBH). So, they were three. We still like Aeris a lot, it's a copper producer but wasn't profitable. The Milner family of Soul Patts has recently taken a big position in that business... That's off to a good start for the year, by the way, it's up 50% or so. It's still a fair way to get back to where it was, but it's off to a decent start, at least. Alcidion, again, they've had very good headline numbers but are not expected to turn profitable for another year or so... They've been delivering as they said they would, but valuations came into it, and then the market that we had last year wasn't the place to be. Pointsbet, this is the more difficult one, it's come back a long way, it peaked at around $17 and it's now down to around $2. It'll be interesting to see how their upcoming results are in February, as to whether they're continuing to lose market share or whether they're able to keep a bit of a toehold. But we still hold all three. Lessons learned? Probably cut them earlier, in a scenario where there's a lot of rotation out of those smaller cap, no earnings names.
Ally Selby: Okay, well, that's all we have time for today. I hope you enjoyed that portfolio special of Buy Hold Sell, if you did, why not give it a like. Remember to subscribe to our YouTube channel, we're adding so much great content every week.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
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