Investment Committee Overview

The Cadre Capital Partners Investment Committee recently met to assess the changing global investment environment, with particular attention given to geopolitical tensions, energy security, inflation, bond markets and the implications for client portfolios.

The Committee’s central conclusion was that the current environment does not require a significant change in portfolio strategy. However, the risks surrounding inflation, energy prices and market volatility have increased.

Our focus remains on maintaining diversified portfolios, investing in businesses with sustainable earnings and strong balance sheets, and retaining sufficient flexibility to take advantage of opportunities as market volatility increases.

Energy Security Is Becoming a Market Risk

A major topic considered by the Committee was the potential for continued conflict in the Middle East to disrupt global energy markets.

Oil prices have so far remained more contained than many investors initially expected. One reason may be that major economies accumulated large strategic petroleum reserves before the current disruptions intensified. China, in particular, appears to have built substantial reserves while also continuing to access energy supplies from Russia and accelerating the electrification of its transport network.

However, strategic reserves are finite. If the disruption continues for several months, countries with limited reserve capacity may experience rising fuel costs, restricted supply or some form of energy rationing.

The Committee believes the greatest vulnerability may initially be seen in smaller and emerging economies that have limited financial capacity to compete for scarce energy supplies. Larger developed economies are more likely to secure the energy they require, although potentially at materially higher prices.

This creates a risk that energy prices do not simply spike temporarily but establish a higher long-term floor. Under this scenario, governments and industries may increasingly substitute oil with coal, natural gas and other available energy sources.

From an investment perspective, this supports maintaining exposure to selected energy and resources businesses. These companies may benefit from stronger commodity prices, increased demand for energy security and the development of alternative supply routes.

Inflation Could Remain Higher for Longer

The Committee continues to view inflation as one of the most important risks facing markets.

Energy is a fundamental input into transportation, manufacturing, agriculture and construction. Higher oil and diesel prices can therefore flow through to almost every part of the economy.

Agricultural inflation may also become more significant. Drought conditions, fertiliser supply constraints and elevated transportation costs could increase the cost of producing and distributing food.

This creates a difficult environment for central banks. Although economic growth may slow, persistent inflation could prevent interest rates from being reduced as quickly as investors would ordinarily expect.

Government responses may further complicate the outlook. Fiscal support designed to protect households and businesses from higher living costs could sustain demand and place additional pressure on inflation.

The Committee considers a period of “stagflation-light” to be a credible scenario. This would involve subdued economic growth occurring alongside persistent inflation and elevated interest rates.

Bond Yields Remain an Important Signal

Government bond yields continue to indicate that investors expect inflation and borrowing costs to remain elevated.

Long-term yields in Australia, the United States, the United Kingdom and parts of Europe remain relatively high. This affects the valuation of shares, property and other long-duration investments because future earnings are worth less when discounted at a higher interest rate.

While fixed-interest investments now offer more attractive income than they did several years ago, the Committee remains cautious about taking excessive exposure to long-duration bonds. Longer-term bonds can remain volatile when inflation expectations are unsettled.

The preferred approach is to remain selective, balancing the income available from fixed-interest investments against the possibility that yields could rise further.

Australia: Inflation and Productivity Remain Concerns

The Australian economy faces a challenging combination of persistent inflation, weak productivity growth and relatively high market valuations.

Recent wage increases may support household spending in the near term, but they may also increase business operating costs. Labour-intensive sectors such as hospitality, retail and personal services may respond by reducing staff numbers, increasing prices or accelerating automation.

The Committee also discussed the possibility that Australian interest rates may remain elevated or rise further if inflation proves difficult to control.

Housing conditions in Melbourne and Sydney have softened, although auction clearance rates and demand remain uneven. Flat house prices can reduce the household wealth effect, while higher mortgage repayments continue to restrict discretionary spending.

The Australian share market also appears expensive in aggregate, particularly when measured against expected earnings. This reinforces the importance of being selective rather than relying on broad market appreciation.

Opportunities Within Australian Equities

Despite the challenging economic backdrop, the Committee identified potential opportunities in selected Australian companies.

The focus is not on buying entire sectors indiscriminately. Instead, the Committee is looking for high-quality businesses that have already experienced substantial valuation declines but retain strong competitive positions, dependable cash flows and the ability to maintain dividends.

Consumer discretionary

Although consumer conditions remain difficult, some of the negative outlook may already be reflected in share prices.

The Committee believes selected market-leading retailers may be better positioned than lower-quality competitors. Consumers may reduce overall spending but continue to purchase from trusted businesses offering strong value, essential technology, home products or everyday services.

This supports a selective approach to consumer discretionary companies rather than a broad overweight position.

Healthcare

Australian healthcare shares have experienced a difficult period, but lower valuations are beginning to create opportunities.

The Committee remains cautious because several major healthcare businesses continue to face operational, regulatory or earnings-growth challenges. Rather than assuming the entire sector will recover, the preference is to focus on businesses with strong intellectual property, leading technology, recurring demand and a credible pathway to improved management or earnings.

Global healthcare exposure may also provide broader diversification than relying solely on the relatively concentrated Australian healthcare market.

Resources and energy

Resources and energy remain strategically important within portfolios.

Persistent geopolitical uncertainty, infrastructure spending, energy security and continued demand from Asia may support selected coal, gas, metals and energy producers.

The Committee recognises that commodity businesses can be volatile and highly sensitive to global growth. Exposure should therefore remain diversified and concentrated in businesses with competitive production costs and strong balance sheets.

United States: Strong Markets but a More Difficult Outlook

The United States has delivered strong market returns, particularly within technology and artificial intelligence-related companies. However, the Committee believes the investment environment over the coming year may be more difficult than the previous year.

US consumer confidence has weakened, employment conditions appear less secure and inflation risks could re-emerge if fuel prices rise.

Technology shares may continue to benefit from structural demand for semiconductors, cloud computing and artificial intelligence. However, valuations remain elevated and market leadership has become concentrated in a relatively small number of companies.

The Committee therefore supports retaining exposure to long-term growth themes while avoiding excessive dependence on a narrow group of technology companies.

Active management may become increasingly valuable if the market begins to differentiate more clearly between businesses with genuine earnings growth and those relying predominantly on investor enthusiasm.

Europe: Improving Fiscal Support

The Committee’s view of continental Europe is comparatively constructive.

European inflation has moderated, sentiment has improved and substantial government spending programs are expected to support infrastructure, defence and economic resilience over the coming decade.

These spending commitments may benefit industrial companies, defence contractors, infrastructure providers, construction businesses and selected financial institutions.

The outlook is not uniform across the region. France faces specific fiscal and political challenges, while construction remains affected by elevated raw material costs. Nevertheless, Europe may offer attractive diversification where valuations remain below comparable US companies.

United Kingdom: Stagflation Risks Remain

The Committee remains cautious on the United Kingdom.

High inflation, weak business investment, elevated government borrowing costs and deteriorating employment conditions create a difficult operating environment.

Without a meaningful improvement in productivity, policy certainty and private-sector investment, the UK may continue to experience weak growth alongside persistent inflation.

Investments in the region should therefore be highly selective and focused on globally diversified businesses rather than companies that rely heavily on domestic economic conditions.

China: Strong Exports but Weak Domestic Demand

China continues to operate as a two-speed economy.

Its export and manufacturing sectors remain competitive, supported by advanced automation, electric vehicles, renewable-energy technology and high-tech production. China may also be better placed than many economies to manage energy disruption due to its strategic reserves, domestic coal supply and investment in electrification.

However, domestic consumption remains weak. Property-market problems and low household confidence continue to restrict internal demand.

The Committee is waiting for clearer evidence of government measures that can sustainably improve household consumption and economic confidence before moving to a more positive position on the broader Chinese market.

China nevertheless remains strategically important, and selected export-oriented, technology, automation and clean-energy businesses may continue to perform strongly.

Japan: Rising Yields Create New Risks

Japan has produced strong investment returns in recent years, supported by improved corporate governance, a weaker yen and increased international investor interest.

The outlook has become more complicated as inflation and government spending place upward pressure on Japanese bond yields.

Higher yields could increase financing costs and create valuation pressure for Japanese shares. They may also force the Bank of Japan to balance inflation control against the need to maintain stability in the government bond market.

The Committee is therefore more cautious toward Japan following its strong market performance.

Gold and Defensive Assets

The Committee remains constructive on gold over the medium term.

Gold has faced short-term pressure from a strong US dollar and elevated bond yields. However, central-bank purchasing, geopolitical uncertainty, currency diversification and persistent inflation may provide longer-term support.

Central banks continue to diversify portions of their reserves away from the US dollar. This process is gradual, but it provides a structural source of demand for gold.

The Committee does not view gold as a substitute for a diversified portfolio. Rather, it can operate as a defensive allocation during periods of inflation, currency weakness or geopolitical stress.

Portfolio Positioning

The Committee determined that portfolios remain appropriately positioned and that wholesale changes are not currently warranted.

The key principles guiding portfolio construction remain:

• maintain broad diversification across regions, sectors and asset classes;
• favour businesses with sustainable earnings, strong balance sheets and pricing power;
• retain exposure to energy, resources and real assets as protection against inflation;
• balance growth exposure with income-producing investments;
• avoid excessive concentration in highly valued technology companies;
• remain cautious toward long-duration bonds;
• use active managers where security selection can add value; and
• retain sufficient liquidity to invest during periods of market weakness.

The Committee expects market volatility to increase as investors assess energy prices, inflation, interest rates and the durability of corporate earnings.

Rather than viewing volatility solely as a risk, it can also provide opportunities to acquire high-quality investments at more attractive prices.

Investment Committee Conclusion

The global economy is moving through a period of heightened uncertainty. Geopolitical disruption, energy security, persistent inflation and elevated government borrowing are likely to remain important influences on investment markets.

While the environment is more challenging, it does not warrant abandoning a disciplined long-term strategy.

Cadre Capital Partners continues to favour diversified portfolios containing high-quality businesses, sustainable income, selected commodity exposure and investments capable of protecting capital through different economic conditions.

The next 12 months may be more volatile than the previous period. However, periods of uncertainty frequently create attractive opportunities for patient investors.

Our objective is to manage the risks without losing sight of those opportunities.

This report reflects the views discussed by the Cadre Capital Partners Investment Committee and is based on information available at the time of the meeting. It contains general information only and does not consider any individual investor’s objectives, financial situation or needs. Committee forecasts and market views are opinions rather than guarantees of future performance.