Our primary focus at the moment is not outguessing the market on where inflation is heading or when (if) a US or Australian recession is likely to occur. No-one really knows. Instead it is on portfolio resilience and investing in areas where, with a few years hindsight, it shouldn’t matter too much what happened win the interim. The holy grail in this situation are assets that will still be around after a recession that have both decent growth prospects and a ‘margin of safety’. The latter concept is much beloved of Warren Buffet but as his late and great partner Charlie Munger said "A great business at a fair price is superior to a fair business at a great price”. The problem is that in Australia the faintest whiff of growth has led a congested local universe of fund managers to bid  local growth  stocks  far beyond what Mr Buffet would accept as a reasonable ‘margin of safety’ (what are you left with if the business hits a wall and/or investment sentiment falls of a cliff). We would have liked to ask if out of  favour local national champions like CSL might at long last get on to the Buffet/Munger radar but unfortunately he died this week at the age of 99 and we doubt Warren would take our call. Instead we spoke to local investor Marcus Bogden  of Blackmore Capital who is well versed in the Jedi arts of quality, value investing Bogden notes CSL which has faced challenges recently but have attributes like improving cost structures, recovering volumes, and new potential products that provide earnings growth potential. Additionally, these stocks are trading at valuations in the low 20s, far below historical mid-30s levels. Earnings growth estimates for these healthcare names are 13-18% over the next 3 years. That doesn’t sound all that cheap but if you value the company on recovered earnings (something  which analysts seem to overwhelmingly agree is likely to happen) you het to a mid-teens P/E  multiple.   Munger also said “The idea of excessive diversification is madness. Wide diversification, per se, is not a good idea. My first thought is to reject the idea of diversification. Sure, some diversification is acceptable, but over-diversification is hell.” We wonder this may be particularly poignant in the context for Australia where index ‘diversification’ also entail stock and industry concentration and vert binary bet on the lucky country’s luck holding out.   Bogden also  emphasizes the energy transition theme through miners like BHP and energy companies like Santos that Bogden argues are supply constrained but still in high demand. A third area is financing green infrastructure through Macquarie. Put these themes together and you end up with  strong balance sheets and potential upside potential of 20%. We think this is a case that is more difficult to make for the wider index and makes us wonder whether index diversification and fundamental resilience might be at odds with each other.

We also caught up with Langdon Equity Partners about global small caps and were again reassured this is an area where managers can still find companies with quality balance sheets and strong growth prospects at reasonable valuations, partly due to the extent to which small company share price performance has lagged in recent years.  Given how well small companies, generally, have performed the market also seems to see some upside. The other area which few would like to add to our ‘resilience’ theme is emerging markets but geopolitically it is a much more complex and diverse universe and this week we have been taking stock of the divergence in performance within emerging markets. In China the MSCI Index which is biased towards teh tech stocks like Alibaba and Tencent has been hugely volatile while local stocks that trade on the Shanghai 300 index have had entirely different experiences. Latin American stocks have effectively decoupled with the China theme and even Andrew Hunt talks of strong Latin American currencies, robust economies and sensible central banking policy. There there is Eastern Europe where earnings seem robust but valuations have been depressed by the conflict in Europe. Much as we would like to clear the decks before Christmas this is an area that requires a lot more work and we will talking to a few emerging market managers about opportunities but most of all resilience in the next few weeks.