Quarterly Investment Update


The index returns quoted below are for the period ended 30 September 2023.


Markets jumped out of the blocks in July, which had investors cruising into ASX reporting season second guessing if earnings expectations had become too pessimistic. Over the course of August, ASX-listed companies reported their results for the financial year ended June 30th. Reporting season was a mixed bag with some company-specific surprises and disappointments, but the market collectively travelled sideways during the month. In September, markets sold off on the prospect of higher-for-longer interest rates and recession fears which are coming to the fore once again. All in all, the benchmarks for Australian Shares and International Shares both etched slightly negative returns for the quarter, though are sitting on strong positive returns over a 12-month period.

As we recently discussed on our website (link here), reporting season was a mixed bag and one of the more polarising in recent memory. A larger than usual number of companies saw their share price up or down by 10% or more on reporting day. One of the interesting anecdotes more broadly was soaring interest costs. Companies that took on too much debt when interest rates were low are now seeing their repayment costs multiply and could find themselves in financial stress if their balance sheet is not managed appropriately. We are continuing to watch this as an area of caution and we are predominantly favouring companies with low or no debt in this environment.

The US 10-year government bond yield recently eclipsed levels not seen since the eve of the global financial crisis in 2007. Inflation is hanging around like a bad smell (thanks in part to low unemployment and higher energy prices), which means that central banks are unlikely to be cutting interest rates any time soon and could even have to hike further before rates finally peak for the cycle.

Why does this matter for investors? Because interest rates are our north star for traditional valuation metrics. The basic risk/return principles of investing suggest that any risky investment such as shares or property should theoretically generate a higher rate of return to compensate for the higher risk. The US 10-year government bond yield is generally viewed as the universal “risk-free rate” which is the starting point for valuation. In 2020, the US 10-year government bond yield reached an all-time low of 0.5%, meaning the hurdle rate for a prospective investment to clear was quite low. Last week the US 10-year government bond yield climbed to a 16-year high of 4.8% meaning there is now a significantly higher hurdle rate for a prospective investment to clear. Cash and term deposits are providing a genuine alternative to risk assets, which has not been the case for a number of years now.

The soothing news for share market investors is that while interest rates can cause short-term hype and countless media headlines, they generally don’t impact share market returns over the long-term. A company’s ability to solve problems through innovative solutions and compounding profits will far outweigh the impact of any short-term interest rate fluctuations. Short-term speculation on interest rates is not our core focus, rather we aim to find high quality investments that can benefit from the meaningful effect of compounding over years and decades.


One of the most interesting developments on the ASX over the course of the September quarter was the decline in the healthcare sector which fell by 9.3% collectively, underperforming the broader market by 8.5%. We thought it would be interesting to dive in, pick out a few notable stocks and provide some colour on the underlying reasons behind the broad-based sell-off that we’ve seen in the healthcare sector.

CSL (ASX: CSL) is a global biotechnology leader that researches, designs and manufactures treatments for a range of medical conditions. CSL’s share price fell by 9.6% over the quarter.

Sonic Healthcare (ASX: SHL) provides radiology, pathology and laboratory services around Australia. SHL’s share price fell by 16.2% over the quarter.

ResMed (ASX: RMD) makes continuous positive airway pressure (CPAP) machines to treat sleep apnoea and other respiratory conditions. RMD’s share price fell by 28.1% over the quarter.

A key issue behind ResMed’s sell-off is the rapid rise in the popularity of glucagon-like peptide 1 (GLP-1) drugs. These drugs have historically been used to treat type 2 diabetes but have been found to be highly effective for weight loss. The two leaders in the GLP-1 race are Novo Nordisk (listed in Denmark) with their Ozempic product, and Eli Lilly (listed in the US) with their Mounjaro product. Novo Nordisk and Eli Lilly saw their share prices rise by 17.1% and 14.5% respectively over the quarter.

From humble beginnings, ResMed has displayed an innate ability to grow their revenue and profits over a long period, supported by the general thematic around our ageing population, a growing propensity for sleep apnoea patients to get diagnosed and treated, and rising obesity. The National Center for Biotechnology Information reports that 3 to 7% of males and 2 to 5% of females have sleep apnoea, yet the prevalence of sleep apnoea in bariatric surgery patients is around 77%. Despite this high correlation between obesity and sleep apnoea, obese patients are not the entirety of ResMed’s business and there remains a sizeable portion of the overall sleep apnoea market with no obesity linkage.

Within the ResMed sell off, the market has drawn the conclusion that GLP-1’s will completely revolutionise the global obesity landscape, and ultimately eat into ResMed’s total addressable market. Our view is that in reality, the sleep apnoea market remains massive, incredibly underpenetrated and there is no hard evidence yet to suggest that the two are mutually exclusive – even if a ResMed customer goes on GLP-1’s and loses weight, will they all of a sudden not have sleep apnoea anymore? That question is yet to be answered. In addition, these drugs are incredibly expensive (reports around $1,000 USD per week and not yet covered by insurance companies), there have been many reports of drastic side effects, and they are not incredibly accessible (predominantly in injectable format, though oral tablet versions are in the works).

We are not writing off the potential application of GLP-1’s and how life-changing they could be for some patients, but we believe that a subsequent ~30% drop in ResMed’s share price is an overreaction when considering the currently available information.

The positive sentiment towards Novo Nordisk & Eli Lilly has taken the investment world by storm and any company with an observable competitive linkage (ie. ResMed, albeit a long bow to draw) has been negatively impacted. The sell-off has spilled into other healthcare companies (such as CSL and Sonic Healthcare) due to general sentiment. Such has been the magnitude of this wave across the investment landscape, we have even seen companies like McDonalds and PepsiCo sell off in recent weeks due to concerns that GLP-1 users will be leading healthier lifestyles which could negatively impact sales. It is still early days in this journey but certainly an interesting one to watch unfold. We will be continuing to watch this development closely and evaluate our position as more information becomes available.