Positioning Djerriwarrh as opportunities emerge

Quick read: Market conditions have become more uneven despite the index reaching record levels, with outcomes increasingly driven by company-specific factors and shifts in sentiment.

Geopolitical developments and the continued evolution of artificial intelligence are contributing to market volatility, creating a more active opportunity set for investors. Djerriwarrh has deployed capital into selected opportunities, including in JB Hi-Fi and Car Group, where recent valuations have become more attractive. Brett McNeill, Djerriwarrh Portfolio Manager, outlines his thoughts below.

Returns over the year to February varied significantly despite the index reaching record levels. Some large resource companies delivered strong gains while others in the technology and healthcare sectors declined during the same period.

This dispersion reflects a market where outcomes are being driven less by broad market direction and more by company-specific factors and changes in sentiment. This can provide a more constructive environment to deploy capital selectively.

Two forces shaping outlook

Two developments have had a strong influence on recent market conditions.

Firstly, the Iran war contributed to a sharp increase in oil prices and renewed uncertainty around global energy supply. Higher petrol and diesel costs have significant, wide-ranging implications for inflation, input costs and overall economic activity.

Even with a ceasefire energy prices could stay elevated for some time, weighing on global economic growth and equity markets. Even under a more constructive scenario, the International Energy Agency has cautioned that Middle Eastern oil production is unlikely to return close to pre-conflict levels until late 2026.¹

Within the portfolio, Woodside Energy Group (ASX: WDS) and Santos (ASX: STO) are relevant in this context. Both have established production assets, with Woodside particularly well positioned to supply to Asian markets where the impact of current supply constraints has been most pronounced. Higher oil prices can support earnings for producers of this type and both companies have performed accordingly. Whilst we would never buy or own these stocks in the expectation or hope that war will break out in any part of the world, we think that it highlights the benefit of owning quality companies in a diversified portfolio.

Secondly, artificial intelligence is moving from curiosity to implementation, prompting a reassessment of business models across a range of sectors. This has contributed to periods of broad-based selling in sectors perceived to be exposed, even where the long-term impact remains uncertain.

From an investment perspective, the key consideration is how AI may affect business models and the competitive positioning of companies. Periods of technological change have historically created both winners and losers, and the market has been quick to reassess companies where technological disruption is perceived as a risk.

We have been approaching this area with an open mind and continue to assess companies through the lens of their underlying strengths. This includes considering the durability of their competitive advantages, such as access to proprietary data, strong market positions and structural barriers that make it difficult for competitors to replicate their offering.

A low-yield market

Against this backdrop, a key structural feature of the broader market emerges for income-focused investors. The ASX is offering its lowest grossed-up dividend yield in 20 years. Elevated valuations and moderating dividend growth expectations have combined to reduce the available income from simply holding the Index.

This makes Djerriwarrh's portfolio increasingly relevant. Through a combination of direct equity holdings and an option-writing strategy, the portfolio is delivering a grossed-up dividend yield of 7.8% based on share price - nearly double the 4.1% of the S&P/ASX 200 Index, and above the 5.0% available from a 12-month term deposit.

Meanwhile, the option income has been consistent and growing. Over the five financial years to the first half of FY26, option income has ranged between $12.5 million and $16.7 million per year, providing a recurring supplement to the dividend income earned from underlying holdings.

Valuation divergence presents opportunities

We view the current environment as one that creates a more active opportunity set.

We have seen instances where share prices have adjusted in response to macro or thematic concerns rather than changes in company fundamentals. This has allowed us to selectively deploy capital into businesses we have followed for some time.

Over recent months, we have invested more into such opportunities. This includes increasing our position in JB Hi-FI and Car Group. Both companies are established businesses with strong competitive positions and have demonstrated consistent earnings and the capacity to grow dividends over time.

At the same time, we have remained cautious in areas where valuations appear stretched. The major banks are a clear example. While operational performance remains sound, current pricing limits prospective returns.

Looking ahead, our view is that market income remains below historical levels, reflecting elevated valuations and moderating dividend growth. Our portfolio construction remains focused on quality companies at attractive valuations, with an appropriate balance between income and capital growth.