Quarterly Update - June 2026 with Rob Tucker
- 2 days ago
- 6 min read
The following video summarises key themes from the quarterly update. To read the full quarterly report, click here.
Video view time: 8:32
0:05 What are the major themes running through equity markets in 2026?
3:09 How does Chester combat this as an Australian equity investor?
4:28 How is the portfolio positioned?
Transcript
Q1. What are the major themes running through equity markets in 2026?
We think there's been four major themes that have impacted markets in the first six months of 2026. Clearly, the semiconductor trade for hardware associated with AI computing has been the major driver of global market returns. We would think we're in a bubble. That doesn't mean it's going to pop tomorrow because EPS momentum is still very strong, but we're increasingly nervous that the development of far cheaper Chinese models offering similar outcomes at a fraction of the cost is going to really lead to the risk of overdevelopment in the US models. And I think there's a very strong chance these large language models, OpenAI, Anthropic, never generate an acceptable return.
So that's been the first theme. The second theme clearly has been geopolitical conflict with Iran that's now ongoing again, new strikes in the last week or so, and Russia and Ukraine, where there's still supply chain risk. There's Russian refineries being knocked out last week. We're all very concerned with the Strait of Hormuz in March and April, and I think we should still be concerned with that remaining shut going forward.
So we don't, we think the energy complex is underpricing the risk of those ongoing geopolitical conflicts. So we think that's the other theme that's driven through markets, which I think the market's probably been too sanguine on, to be honest, over the first six months.
The other thing which has been around for four or five years now is really the permeation of passive investing and a lot of the trend of industry funds to lower the tracking error of their overall portfolios by investing in the top 20 names. So we've seen this huge dispersion between the top 20 names and the rest of the market in Australia. And so we think fundamentally it's very difficult for us to pay 26 times earnings for CBA or 33 times earnings for Wesfarmers. And that's created this dislocation, we think, in markets, and we can see it every day.
I reverse that and say, well, I think the good news is from this point into July 2026 as a starting point, that dispersion is unlikely to continue because I do think that deterioration of fundamentals for that part of the market is occurring in real time. It's really driven by the fourth trend which has emerged in May, which is the changes to the Australian government, or the budget changes that were implemented in May around negative gearing and capital gains tax.
And I think that's led to a real slowdown in investor lending, which has led to a slowdown in auction clearance rates and clearly a slowdown in house prices. So when you think about CBA and Wesfarmers, very in tune with those trends, I think they're now facing headwinds for the first time.
So we do think the starting point from July 2026 for the top 20 to continue that form is far harder. So they're kind of the four major themes we've witnessed over the last six months.
Q2. How does Chester combat this as an Australian equity investor?
We've been grappling with this sort of rise of passive investing and some of these themes for a little while. And so we strip back to what we do, we think, well, which is patience. So we think the best way for a long-term fundamental investor to outperform over the medium to long term is demonstrate that patience and invest fundamentally on cash flow-based outcomes.
So we do tend to think with contrarian mindsets. A lot of our ideas come from unlocked, underappreciated or undiscovered assets. And we think we've got a really strong portfolio full of those names over the next two to three years.
Over the last 12 years, some of the best ideas have taken three to four years to play out. So we are still quite confident that some of the names in the portfolio are far better priced and there's far more asymmetry to the trades than we can witness in the top 20 names right now.
I think, given the geopolitical turmoil and some of the uncertainty around the AI CapEx spend, the quote we used from the quarterly was Ray Dalio, who said you should have a strategic asset allocation mix that assumes you don't know what the future is going to hold.
I mean, I think that's never been more apparent than right now. So we think having a diverse portfolio across different sectors is the best way to combat some of the uncertainty that we'll see in 2026.
Q3. How is the portfolio positioned?
What we try and do, obviously with that diversification in mind, is find asymmetry of trades across different sectors.
So we've mentioned a few names, and one of the biggest ones at the moment is Nufarm. We see Nufarm as trading at 50 cents in the dollar of book value, well diversified across crop protection, which is cyclical, but the seeds portfolio we think is dramatically undervalued in this conglomerate structure, the way Nufarm is trading now. We think the seeds business has really strong organic growth over the next two to three years that isn't being yet rewarded by the market.
Light & Wonder is another one of our holdings. It's the number two player in the gaming software space to Aristocrat. It's trading on nine times PE one year forward. Aristocrat's trading at 21 times. That dispersion, we think, for the certainty of cash flows and the reliability and predictability of those cash flows for Light & Wonder, we think is materially mispriced and undervalued. So if they actually generate their returns, and they reiterated guidance last week, we can see Light & Wonder putting on 40 to 50% from this point over the next 12 or 18 months.
Ampol is one that we've held for almost a year and clearly it's been in a strong upgrade cycle because of refining margins being far stronger in 2026 than last year. The market's been trying to look through that and reprice refining margins back to $10 a barrel. They're currently $40 a barrel.
Each $1 a barrel above $10 is about 2% earnings. So we think there's still material upgrades to come with Ampol, and it is critical infrastructure having refining assets onshore in Australia. So we still think that is probably, arguably, underpriced in today's environment.
Another one we've held for a little while, which has been a bit frustrating this year, is AUB Group, an insurance broker. And it sort of sold off in the first quarter on fears around AI disruption to the insurance broking industry, as many other insurance brokers globally did.
But we would lean into that, thinking insurance broking is a very relationship-driven, human-to-human business, writing bespoke commercial lines for individual businesses. So we think AUB is still really well set up to deliver double-digit earnings into the future, all for a discount of about 25% of what it's historically traded on. So we think, again, the asymmetry of owning AUB here is really quite compelling on a two to three-year view.
And the other one I'll mention is Lendlease. It's been actually quite frustrating for us. It's been the worst-performing stock in the portfolio over the last 12 months.
Lendlease, three years ago, decided to separate their Australian business, investments, developments and construction, from the international assets, which they decided to divest, and bucket all these international assets into what they call the CRU, the Capital Release Unit. They've taken a long time to divest those assets, but they're now about 70% of the way through that divestment process. And because they've taken so long, they've had an inflated cost base as they've carried incremental costs to release those assets. It's led to some downgrades in 2026.
It was a trough year of earnings anyway. At $3, our adjusted book value is $5.50, so we still think we're buying assets at a really big discount to the book value. There's a new CEO, Nick O'Neill, who I think will add stability and rigour to the process of Lendlease's operating business. And I think we'll see a far better Lendlease operating business over the next two years than we have seen for the last three years. So I think from this point, the asymmetry of owning Lendlease here is really quite compelling.
A couple of names that are really quite contrarian and unloved, but we think, and over the last 12 years, that's what we've done, is find these ideas. And the alpha we've generated has come from this approach over the last 12 years.
So we're optimistic that we can continue to find these ideas that deliver really strong risk-adjusted returns over the next two to three years.
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