Standing back and looking at FY25 hides a multitude of sins, or noise, as we often call it. However, ignoring the panic selling around “Liberation Day,” the polarisation on the stock and sector level has been remarkable. As we said, even with the index up 10% for the year, more than 35% of the main board closed lower. As the table below illustrates, four sectors advanced by over 20% while 5 of the main 11 sectors closed lower, led by the embattled energy and materials sectors. One of the standouts of FY25 has been the market’s comfort in driving valuations in certain pockets to rich and in many cases unprecedented levels, as the “Certainty Trade” as we call it, kept powering ahead.
- The “Certainty Trade” has been where fund managers have been more comfortable buying quality stocks that don’t disappoint with little or no regard to historical/traditional valuation metrics.
Moving forward, while we wouldn’t be so bold as to suggest selling the likes of CBA, JB Hi-Fi, or Wesfarmers, we don’t believe the crowded space will add alpha (value) through FY26. While MM has no interest in “fighting the tape”, we believe investors will add value into Christmas by investing on a more granular level, probably with a slightly more active approach as the bull market advances and potentially matures on the good news of rate cuts, a firm economy and solid corporate performance – in most cases.
CBA is the easy stock to consider when we look at the “Certainty Trade” but there are others, including Medibank Private (MPL), touched on earlier. Fund managers don’t want to get caught holding a lemon; it’s easier to explain CBA at a high price than why you’re Pilbara (PLS) or IDP Education (IEL) that halved in FY25. JB Hi-Fi also sums up how much investors have been comfortable chasing the valuations ever higher in quality names – JBH is MM’s favourite Australian retailer, but not above $110.
