Australian share market faces more challenging period in second half, IML says

Strong performances by Australian shares may be about to stall, creating more of a stock picker’s market, IML senior portfolio manager predicts.

Hugh Giddy expects the share market to face more challenging times in the second half of 2023. Picture: Ryan Osland

The recent strong performance by Australian shares may be about to stall, creating more of a stock picker’s market, Investors Mutual’s senior portfolio manager predicts.

Hugh Giddy said the second half of 2023 could be “quite tough” for the share market as consumers further tighten their belts, particularly if companies are more cautious about the outlook this reporting season.

Mr Giddy said the Australian market had enjoyed a fairly strong and steady rise since last October, when global markets hit their lows.

“I think the second half of the year is going to be a bit more challenging,” he told The Australian.

“There is a likelihood that there will be more belt tightening required by many consumers.

“It could be a little bit more of a challenging environment for companies, and if companies are a little bit more cautious in their outlooks when they report in the coming weeks, I think then it’s very conceivable the market will struggle to make much progress above where it is now.

“That could make it more of a stock picker’s market than the market we’ve had since October, where it’s been quite strongly trending in both resources and more recently the banks.”

Unlike the market and index exchange-traded funds (ETFs), IML’s unlisted Concentrated Australian Share Fund currently has little exposure to banking and resources.

The quoted managed fund is now directly available to investors after listing as an ETF on the ASX on Tuesday.

The ETF and the 13-year-old unlisted fund invest in 20 to 30 high-quality, undervalued companies on the ASX that typically have a market capitalisation of more than $500m.

Unlike benchmark ETFs, the quoted managed fund does not track the market.

“Because the fund performs quite differently to the benchmark, it offers diversification benefits for investors while still investing in Australian equities,” Mr Giddy said.

Mr Giddy said the stocks in the consolidated fund and ETF were large companies, but most were not top 20 companies, and the returns were generated from a broader base of companies and exposures.

“The quality of the stocks has meant the fund tends to drop less than the benchmark in tough times, only falling half as much as the benchmark on average,” Mr Giddy said.

According to IML, the unlisted concentrated fund performed 1.1 per cent better than the ASX 300 accumulation index since its inception, after fees, with lower volatility.

“I do believe that last year, 2022, showed that active management can do well,” Mr Giddy said.

“We outperformed quite strongly in 2022 when the market fell fairly modestly, because a lot of the expensive things that were a large part of the index fell more than high-quality, defensive businesses that were in our portfolio.”

IML chief executive Damon Hambly said Australian equity fund manager decided to list the ETF due to client demand for choice.

“We are offering the concentrated fund as an active ETF to suit our financial adviser clients that like to invest this way, as well as retail investors who manage their own portfolios,” Mr Hambly said.

“As passive investing continues to rise in popularity, we are seeing an increasing demand for funds like the concentrated fund that offer something significantly different to passive index investing.”