Hugh Dive’s Best-in-Class Strategy for Thriving in Turbulent Markets – Livewire Exclusive
The sell-off in Australian large-cap stocks is overdone, investors are anticipating a bigger-than-expected rise in interest rates, says Hugh Dive of Atlas Fund Management.
The ASX 200 is currently down around 11% for the year so far, a broad decline based on a view that the cash rate could hit 3.75% by Christmas. But Dive is more optimistic in its outlook, expecting the rate to peak at 2.5% by the end of the year.
“With unemployment at its lowest since 1974, inflation at 5% and house prices up 30% since January 2020, it is difficult to say that we are in an emergency situation. A normalization of interest rate is to be expected, but it is causing a lot of anxiety in the markets” – Hugh Dive, Atlas Funds Management
Many Livewire readers know Hugh Dive, author of the well-followed and widely read articles on Dogs of the ASX. With the latest edition about to be released, we took the opportunity to learn more about how he invests and get more details on how he navigates the current investment landscape.
Rising inflation is not uniformly negative for stocks
Even if the local cash rate is higher than expected – given the ongoing volatility and uncertain macro and geopolitical environment – Dive points out that the fundamental effects are far less uniform than market behavior suggests.
Rising inflation and subsequent rate hikes have caused discretionary spending to decline, which is clearly negative for restaurants, cafes and retailers of higher priced goods and services such as Harvey Norman (ASX: HVN) and Flight Center (ASX: FLT).
But on the other hand, this rising inflation environment is potentially very positive for supermarkets.
“When we’ve seen the tightening policies in the past, people tend to eat at home. They will buy at Woolworth and Colesand at Dan Murphy for their bottle of Shiraz, but they don’t eat out as much,” Dive said.
Regulated infrastructure companies such as Transurban (ASX: TCL) also benefit from the rise in inflation, with its motorway toll rates increasing accordingly.
“Companies like this with long-term fixed debt and profits can move. Inflation is pretty positive, but the markets haven’t quite gotten there,” Dive said, suggesting the penny is unlikely to drop until the next corporate reporting season in August.
Along with parts of the energy sector, he named another highway operator as one of the few other places investors can hide in June, referring to Atlas Arteria (ASX:ALX) in large party as a result of its upcoming takeover.
“But that’s what we often see in these corrections, similar to what we saw in March 2020, when everything went down regardless of its fundamentals, and then things normalized when companies exited,” said Dive.
“It’s actually quite positive for us and it’s part of the job of being an equity investor, managing emotion which can often see everything fold at once and then create opportunities.”
This environment finally brings good news to general insurers, which have recorded record payments following claims for fires, floods and business continuity coverage. The rise in the cash rate means that insurers’ floats – the income they earn on the premiums they collect from policyholders – can finally earn interest. QBE Insurance Group (ASX: QBE) alone sits on a pool of around $30 billion earning less than 1% interest over the past few years.
The role of dividends and franking
Dive also remains bullish on the dividend outlook, despite a more recent downturn in iron ore prices that has supported mining company stock prices and payout ratios for so long. He noted that many lower-cost commodity producers maintained fiscal discipline during the boom, avoiding making “dumb acquisitions at the top of the market.”
“And many other big blue chip institutions, including banks, are in much better shape than in previous downturns,” Dive said.
In the following interview, Dive discussed some of the signals his team uses to assess the quality and sustainability of company earnings – including dividend payout – and named several ASX 200 companies his team considers as likely winners.
He also provided an overview of how his “Dogs of the ASX” performed in fiscal year 2021-22 and some inclusions for fiscal year 2022-23. It is a portfolio of 10 equally weighted stocks of the worst ASX 100 companies, which are bought and held for an entire year and then sold.
“The strike rate has been very good, having won seven of the last 10 years (compared to the performance of the index). But in each of those years some companies look absolutely awful on June 30 and end up being great the following year,” Dive said.
“I’m looking forward to doing it this year because my picks from last year look pretty good and are ahead of what they were before. With only nine days to go, that’s 9% ahead of the ASX 200.
Hugh Dive’s upcoming Dogs of the ASX feed will be featured here on Livewire Markets later this week. Click on their name in the line above and select “follow” to be notified when they are posted.
You can watch the full interview by clicking on the player below.
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