Stock Picking Over Forecasting: How Our Selections Drove Returns in a Volatile ASX

As we approach the final weeks of 2025, the ASX 200 is trading just below 8,700 points, having delivered a mid-single-digit gain for the year despite one of the most volatile global market backdrops of the past decade. This outcome is notable. Global equities have been buffeted by persistent inflation concerns, shifting interest-rate expectations and geopolitical uncertainty, yet Australian equities have continued to demonstrate a degree of resilience that we believe reflects both structural strengths and increasingly attractive valuations. Source: ASX 200, daily chart (2025) The path has not been smooth. Intra-year drawdowns have been sharp, sector rotations frequent and sentiment fragile at times. However, the ASX has continued to reward selectivity, discipline and a willingness to look through short-term noise. From our perspective, the market’s ability to grind higher in this environment reinforces the case that much of the macro risk is now well understood and, in many areas, already priced in. Importantly, performance in 2025 has not been driven by a broad market surge. Instead, returns have been shaped by clear leadership from resources, selective financials and defensive income names, while weaker balance sheets and low-quality cyclicals have been left behind. This dispersion has played directly into our strategy of building portfolios around conviction rather than index weightings. The Key Forces That Have Driven ASX 200 Performance Over the Past Year The most influential macro force remains monetary policy. Inflation has moderated from its peaks, but progress has been uneven, prompting central banks to move cautiously. In Australia, the Reserve Bank has maintained a restrictive stance longer than many expected, keeping financial conditions tight and reinforcing a premium on earnings certainty. While this has capped valuation expansion in parts of the market, it has also helped anchor inflation expectations and preserve real returns for equity investors. Source: Morning Star (2025) Against this backdrop, resources have once again played a central role. Gold prices have moved to multi-year highs, driven by persistent geopolitical risk and central bank demand, while selected base metals and battery materials have stabilised after a difficult 2024. Australian miners with scale, low operating costs and balance-sheet flexibility have been able to generate strong cash flows even without a broad commodity boom. This has translated into meaningful shareholder returns and renewed investor confidence. Source: Gold, daily chart (2025) Financials have also been a stabilising force. While higher rates have raised concerns about credit quality and mortgage stress, Australian banks have entered this period with strong capital ratios and conservative underwriting standards. Net interest margins have proven more resilient than feared, and dividend yields remain attractive in a global context. This has allowed the sector to act as both an income anchor and a volatility dampener within the index. Elsewhere, the picture has been more nuanced. Property and consumer-facing stocks have faced genuine pressure from higher borrowing costs and subdued discretionary spending. Yet even within these challenged sectors, the market has increasingly differentiated between businesses with structural advantages and those reliant on leverage or cyclical tailwinds. This differentiation has been central to our stock selection decisions. How We Have Captured Solid Performance Through Selectivity Rather Than Market Timing In a year defined by sharp factor rotations, we have deliberately avoided chasing short-term momentum. Instead, we have focused on selecting businesses that can perform across a range of economic outcomes, rather than relying on a single macro scenario to play out. This has meant accepting temporary underperformance in some holdings, while allowing stronger positions to compound. Volatility has been a feature rather than a bug of the 2025 market. Growth stocks have rallied aggressively on any hint of rate relief, only to retrace when inflation data surprised. Cyclicals have moved with each shift in expectations around China and global growth. In this environment, we believe the most reliable source of returns has been bottom-up analysis, focusing on balance-sheet strength, pricing power and management discipline. Crucially, dividends have continued to contribute meaningfully to total returns. Many ASX 200 companies still offer yields well above global peers, providing an income buffer while markets reassess valuations. This has allowed portfolios to remain productive even during periods of muted capital growth. Why We Are Increasingly Constructive as We Look Ahead to 2026 Looking into 2026, we are cautiously optimistic. Inflation is expected to continue trending lower, albeit gradually, and this should eventually provide scope for monetary policy to ease. Even a modest reduction in rates would materially improve sentiment toward interest-rate-sensitive sectors and support valuation multiples, particularly where earnings growth remains intact. Australian economic growth is likely to remain moderate rather than strong, but we see several supportive offsets. Investment linked to energy transition infrastructure, defence and critical minerals remains robust, while corporate balance sheets outside a handful of stressed areas are generally healthy. This creates room for capital expenditure, mergers and acquisitions and continued shareholder returns. We also expect market leadership to broaden. While resources and financials have carried much of the load, we see increasing opportunity in industrials, infrastructure-linked businesses and select technology platforms that provide essential services rather than discretionary growth. As uncertainty around rates and policy gradually recedes, we expect investors to become more willing to look beyond the largest and most liquid names. Why We Are Gradually Increasing Exposure to Small and Medium Capitalisation Stocks One of the most compelling features of the current market is the valuation gap between large caps and the rest of the market. Many high-quality small and mid-cap companies are trading at discounts that we believe overstate near-term risks and understate long-term earnings potential. This reflects a prolonged preference for liquidity and perceived safety rather than fundamentals. We are therefore preparing to increase exposure to select small and mid-cap names as we move into 2026. This is not a wholesale shift, but a targeted allocation toward businesses with clear competitive advantages, manageable balance sheets and identifiable catalysts. In our view, this segment offers some of the most attractive risk-adjusted opportunities over the next cycle. Selectivity will remain critical. Smaller companies are more exposed to execution risk and funding conditions, and we are mindful of avoiding businesses that rely on favourable macro-outcomes to justify their valuations. Our focus remains on quality first, with valuation acting as a secondary but increasingly supportive factor. Underperforming Month-to-Date Holdings Where Conviction Remains Intact Metcash Ltd ASX: MTS, –16.62% (1-month) Metcash has been adjusting after an exceptionally strong trading period. Its wholesale model and entrenched retailer relationships continue to provide defensive characteristics. We believe the market is underestimating its ability to stabilise margins and generate consistent cash flow. Novonix Ltd ASX: NVX, –14.29% (1-month) Short-term disappointment around timelines has weighed on sentiment. However, the strategic importance of Novonix’s technology remains intact as battery supply chains localise. Progress on customer qualification could materially improve market perception. Hub24 Ltd ASX: HUB, –13.85% (1-month) The stock has been caught in a broader derating of platform businesses. Underlying adviser growth and platform inflows remain robust. We see this as a valuation adjustment rather than a deterioration in fundamentals. Aussie Broadband Ltd ASX: ABB, –11.93% (1-month) Competitive intensity has weighed on near-term earnings expectations. The company’s strong customer metrics and expanding enterprise segment support a more constructive medium-term view. Scale benefits should increasingly flow through to margins. Codan Ltd ASX: CDA, –10.59% (1-month) Codan has faced a cyclical lull in demand. Its exposure to defence and security markets provides longer-term support. We expect order momentum to improve as budget cycles turn. Trigg Minerals Ltd ASX: TMG, –7.69% (1-month) The market has been unforgiving toward early-stage explorers. Trigg’s asset quality and exploration upside remain compelling. Progress on project milestones could unlock significant value. Stockland Corporation Ltd ASX: SGP, –7.15% (1-month) Higher bond yields have pressured property valuations. Stockland’s diversified portfolio and development pipeline provide resilience. Any easing in rates would be a clear positive catalyst. New Hope Corporation Ltd ASX: NHC, –7.13% (1-month) Coal price volatility has driven recent weakness. The company’s low-cost operations and strong cash generation remain intact. We continue to see attractive shareholder return potential. Bisalloy Steel Group Ltd ASX: BIS, –6.81% (1-month) Soft industrial demand has weighed on sentiment. Bisalloy’s specialised products and defence exposure underpin longer-term prospects. A recovery in orders would likely drive a reassessment. Stocks That Have Outperformed Month-to-Date Through Our Sector-Focused, Selective Strategy Pilbara Minerals Ltd ASX: PLS, +28.13% (1-month) Pilbara has benefited from improving lithium sentiment and disciplined supply responses. Its scale and balance-sheet strength differentiate it from peers. We see it as a core exposure within the energy transition theme. Develop Global Ltd ASX: DVP, +25.07% (1-month) Strong execution and rising earnings visibility have underpinned performance. Exposure to sustained mining investment has been key. Operational leverage has worked decisively in shareholders’ favour. National Storage REIT ASX: NSR, +22.47% (1-month) The stock’s outperformance reflects both operational strength and strategic value. Defensive cash flows and inflation-linked revenue have attracted interest. It highlights the appeal of high-quality real assets. GQG Partners Inc ASX: GQG, +20.41% (1-month) GQG has delivered strong funds growth and resilient earnings. Its differentiated investment approach has resonated amid volatility. The business continues to compound despite market uncertainty. Evolution Mining Ltd ASX: EVN, +15.16% (1-month) Rising gold prices and disciplined capital allocation have driven gains. Evolution’s operational improvements have enhanced margins. Gold’s role as a portfolio hedge has reinforced demand. Capral Ltd ASX: CAA, +14.64% (1-month) Capral has benefited from improved pricing and internal efficiencies. Exposure to infrastructure demand has supported earnings. The market has increasingly recognised this stability. VanEck Gold Miners AUD ETF ASX: GDX, +14.40% (1-month) The ETF has effectively captured sector-wide gold strength. It has provided diversification and downside protection. Gold’s macro relevance remains strong. Kingsgate Consolidated Ltd ASX: KCN, +13.75% (1-month) Operational delivery and balance-sheet repair have driven outperformance. Gold exposure has amplified returns. Execution has been a key differentiator. South32 Ltd ASX: S32, +11.60% (1-month) Diversified commodity exposure and cost discipline have underpinned gains. Strong cash flows provide flexibility. The portfolio offers meaningful optionality. Perenti Ltd ASX: PRN, +8.75% (1-month) Improved margins and project execution have supported recovery. Demand for contract mining remains solid. The turnaround reflects careful capital allocation.