Australian equities have been resilient this calendar year amidst a challenging macro backdrop. The focus in 2022 has been on equity valuations rather than earnings, however we think there will be a shift in focus towards earnings instead of valuations over 2023.

There is a very plausible scenario that we are approaching the peak of the global inflation cycle. Central banks will start to turn progressively less hawkish and bond yields will continue to compress further. This should be a key part of Australian equity strategy, as we enter the 2023 calendar year.

The growth outlook of rare earths and other EV minerals is positive in contrast to the outlook for the traditional ASX miners, such as iron ore, where we expect earnings to fall over the next 2-3 years. Therefore, after a successful second bid for OZ Minerals (OZL) at $28.25/share, we have decided to remove OZL (-2%) from the Focus Portfolio in order to lock in profits. We have used the proceeds from OZL to add Lynas Rare Earths (LYC) to the portfolio at 2%.

After the bank’s reporting season, we have become more cautious on the banks. As a result, we have taken our neutral position into underweight, trimming our positions in all 3 of our bank exposures. We have used the proceeds to add Mineral Resources (MIN) to the Focus Portfolio at a 3% weighting, as we continue to increase our exposure to battery minerals, which we believe has significant upside potential over the next few years.

Historically, healthcare has been an all-weather sector, with stocks that can compound earnings over the cycle. The pandemic reversed this trend for the ASX 200 healthcare sector. Since April 2020, the ASX 200 is up 49%; the healthcare sector is flat. We think the next 12 months will be very different from the last, with vital signs improving for the sector.

The general insurance industry has been under pressure in recent years. However, we have a favourable outlook towards the sector at this point of the cycle as general insurers are poised to benefit from ongoing growth in premiums and a significant improvement in investment earnings. In this report, we detail our sector outlook and our key picks.

Dividends are a significant driver of returns for most Australian equity investors. We look for dividend-paying companies that can deliver growth year over year, continuously compounding cash flows each year. This is the template for companies we consider when thinking about income investing.

In the Focus Portfolio, we are exposed to a few thematics at present, including the one we will discuss in this note: the Global Reopening. Even though the ASX 200 hit its COVID trough more than 2 years ago, many post-COVID recovery stocks have yet to reach their full potential. We think this creates a significant opportunity that is still not fully appreciated by the market.