Joseph Taylor: Hey, Locky. Another year in the bag, pretty much. What were the main things that drove markets this year and what's coming next year?

Lochlan Halloway: If we're talking about 2024, we really can't not mention AI, right? That was one of the big investing themes globally. It lit a fire under those picks and shovel type plays like NVIDIA, for example, and the chip makers. They led to a significant portion of U.S. equity market gains. And here, our tech companies ran really hard too, perhaps in sympathy with the U.S. But it was a big theme here. Tech ran really hard. We also have to talk about the U.S. election. That was obviously a big sort of market moving event, both abroad and here. Since U.S. election, our markets performed strongly, as has the U.S. And it's run more or less in lockstep. I suppose an interesting question though from investors is, look, we can sort of understand, we can rationalize why the U.S. might have done well after the elections. U.S. market looks expensive, but granted Trump, he's deregulation, he's corporate tax cut. So we can see where that comes from. It's a bit harder perhaps to see how our market does really well under the agenda that Trump's laid out as it is currently. It's America first. It's anti-China. So we need to have sort of ask the question, well, what role do we play there? And is it really as good a news perhaps as the market is pricing in right now?

And then the third thing of 2024 is probably going to be what it was, China. So China is obviously very important for our market as well as the second largest economy. So very important for the global story. It's economy is lagging. It's been really weak for some time. There have been measures this year to support the China's economy, fiscal monetary measures, but enthusiasm has kind of waned since then. It probably fizzled a little bit perhaps, but we're going in now. There's been an additional pledge from China's authorities to keep stimulating next year. It's going to be important to see how that shakes out.

Taylor: So if we go from macro to fundamentals, What are the key most interesting things there?

Halloway: Yeah, so something for our market that really stands out going into next year is the premium to fair value of our large cap stocks here. So the ASX 20 on our estimates trades at a premium of about 20%. That's abnormally high. If I look back across the past decade, the last time we saw valuations for that part of the market at these levels was in late 2020, early 2021 in the sort of post-COVID frothy market. These 20 companies account for about 60% of the ASX 200. So really important both for our market and our sort of general economic performance. So how they hold up next year, I think, is a really live question. We think about a couple of stocks there. They're sort of bell weather economic stocks like CBA, for example, has run really hard this year. Can valuations at the moment be defended and maintained? That's a really good question. So if I think, all right, well, that's part of the market, the large caps have run very hard and they look on our numbers quite expensive, for the most part, not all of them, but most of them well where is the value. The ASX at the moment, the sector that really stands out to us is the energy sector. So Woodside and Santos, they're trading at significant discounts to our assessment of fair value. So if investors are still willing to be in that space. That looks like it offers a lot of value right now on fairly conservative assumptions in our view on oil prices and production.

That's one part. And then also talk would be about the small caps because those large caps ran really hard, but the small caps largely were left behind and they've missed out on a lot of that. There are exceptions, but that's generally speaking been the case. So you have to be a bit judicious playing down that end of the market. Not all the small cap companies have the same quality as the large caps. Partly that's the reason I'm here in the small because they haven't dug a moat, a durable competitive advantage. It's allowed them to grow, but there are some nice and up and coming companies in there that we think look really attractive.

Taylor: But there are pockets of value in energy and smaller companies perhaps.

Halloway: Generally speaking, that's true and there are other sectors too. That're screening close to the fair value. I mean, consumer defensives companies like Endeavour, for example. Look close to the value Endeavour, in its case, it's really, really cheap. So there are, again, pockets of our coverage and look whilst we generally see the market as trading at a premium of around 6% or 7% right now in general under our coverage. There's plenty of opportunities in that four or five star section of the market. I think about 30% of our total coverage trades in four or five territory, which is undervalued, and that's actually higher than history. So plenty of opportunities, despite the fact the market in general is overvalued.

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