In this week’s video with Tim Binsted, InvestSense Head of Australian Equities, we discuss recent market performance as well as some highlights from the first day of the Macquarie Equities Conference. The month of April provided a stark reminder of the frequent disconnect between market prices and economic fundamentals. While global markets ended the month roughly flat after a volatile round trip, the Australian market surged nearly 4%, with a third of those gains attributable to a single company - Commonwealth Bank (CBA).

CBA shares rallied 10% in April, reaching valuations that appear increasingly difficult to justify based on underlying fundamentals. This mirrors the trend seen in international markets last year, where price momentum in certain market segments became detached from the reality of their earnings profiles and reasonable growth expectations. In the U.S., this was most apparent in the technology sector. In Australia, it is playing out through the bid up of "expensive defensives" like CBA and consumer staples companies such as Woolworths and Coles as well as Wesfarmers. In all of these cases, it is now very difficult to construct a scenario where they can deliver decent returns.

So what else is the market looking for in the short-term and what is driving this dislocation between prices and intrinsic value? In a word - flows. Just as retail inflows fueled the late stage melt-up in the U.S. in 2021, there are signs that price-insensitive buying is now propelling Australian markets. Investors are crowding into perceived "safe havens" given uncertainties around inflation, interest rates and geopolitical tensions. While this dynamic can persist for some time, history shows that eventually fundamentals reassert themselves, often painfully for those who overstay their welcome in overheated shares.

Our process aims to look through shorter-term gyrations and focus on long-term valuations and company fundamentals. This is the same methodology we employ when assessing relative value across countries and asset classes. By grounding our decisions in rigorous scenario analysis rather than herd sentiment, we aim to position portfolios for long-term success while minimising the risk of permanent capital impairment.

Make no mistake, there are serious risks to monitor - an inflation shock, central bank policy error, or an escalation in Ukraine could all trigger a major sell-off. But in a world still awash with liquidity, the greater risk for long-term investors may be overpaying for false comfort. By keeping our focus on fundamentals and long-term value, we aim to chart a steady course through the turbulence.