Navigating the noise: Finding opportunity in an uncertain market

Long-term active managers sometimes face the conundrum that a market rich in opportunities for them is a market that is volatile and skittish. It’s often a case of ‘don’t wish too hard for what you might want.’

That challenge looms large in the wake of a turbulent March and April, with Australia hit by a severe “triple whammy”: a Middle East-driven energy spike, rising interest rates and deteriorating consumer sentiment.

Households were already absorbing rate hikes when they were blindsided by a fuel shock. Soaring petrol prices – and their inflationary flow-on effects – have compounded mortgage stress, placing acute pressure on discretionary spending. The impact is now feeding-through to company revenues and margins.

For Joel Fleming (pictured), who heads the team managing the UBS Microcap Fund at Yarra Capital Management, the environment is undeniably complex. But beneath the surface, he says, the picture is more nuanced.

“There’s no doubt these are big macro shocks,” says Fleming. “If you can’t get fuel, and the cost of that fuel is going up, that inflation pulse spreads through the economy. It doesn’t matter who you are.”

And yet, despite the scale of these pressures, the impact on corporate Australia has so far been less severe than expected.

Resilience without immunity

While the global narrative has centred on supply chain disruption and margin compression, companies have not broadly signalled distress. Costs are rising – fuel most visibly – but widespread operational strain has yet to materialise.

That does not imply immunity. Rather, it highlights the lag between macro shocks and corporate outcomes.“ There definitely is an emerging picture of resilience, selectively,” Fleming says. “Operating in your home market can help. But we haven’t really seen companies come out and say margins are about to get crunched.”

Instead, the market’s focus has shifted to forward-looking uncertainty. Earnings guidance from the February reporting season is already stale, and expectations are building for downgrades – particularly in energy-intensive and consumer-facing sectors.

The consumer as the pressure point

If there is a central transmission mechanism for current risks, it is the consumer. Rising rates, higher fuel costs and elevated prices are beginning to shift behaviour. And it is this change – rather than immediate cost pressures – that may ultimately shape earnings outcomes.

“People put their hands in their pockets and do less,” Fleming notes. “That’s from corporates on the capex side through to individual consumers.”

The risk is less a sharp contraction than a gradual slowdown – an “air pocket” where activity softens before stabilising. But the longer it persists, the greater the risk of second-order effects, including rising unemployment and reduced investment.

For portfolio managers, this requires more granular analysis.

“It’s about understanding what a company does, how reliant it is on the consumer, and what’s happening in its cost base,” he says. “We’re having more frequent conversations than we usually would.”

Diversification as defence

In this environment, portfolio construction is as important as stock selection. Rather than attempting to predict macro outcomes, Fleming emphasises diversification across sectors, business models and growth stages. This provides a natural hedge against shocks. “We run a balanced portfolio,” he says. “You’re not making an all-in bet on anything.”

That approach has proved valuable in the current cycle. Without heavy exposure to any single theme, the portfolio has avoided the need for wholesale repositioning.“ We haven’t made massive changes,” he says. “Because we don’t think the outlook for our companies has been impaired at this point.”

Opportunity in dislocation

While uncertainty creates risk, it also creates opportunity. Market pullbacks – particularly in small caps – are bringing higher‑quality companies back into focus, reinforcing the importance of diversification. “In times of sell-offs, the quality of companies coming back into our universe improves,” Fleming says. “We’re able to put a new lens on them.”

Importantly, the recent downturn has been relatively orderly. There has been no widespread capitulation or indiscriminate selling. “We’re not seeing things down 60 per cent in a month,” Fleming notes. “That matters.” That may limit short-term opportunity, but it also reflects a market that is adjusting rather than panicking.

Separating signal from noise

Perhaps the greatest challenge for investors is distinguishing between short-term noise and long-term signal.

Markets remain fixated on immediate data points – oil prices, rate decisions, inflation prints – which drive sentiment and amplify volatility. But for long-term investors, the focus is on the years ahead.

“We’re trying to exploit the silliness that goes on over the very short term, to deliver medium-term returns,” Fleming says.

That requires a disciplined focus on fundamentals: cash flow, reinvestment potential and the durability of competitive advantage. It also requires understanding what is already priced-in.

“Our job is to work out what the future looks like, and how much is being discounted today,” he says. “That’s where the risk-reward becomes attractive.”

The enduring power of themes

Amid the uncertainty, long-term themes remain a constant. Decarbonisation, electrification, artificial intelligence and infrastructure development continue to shape opportunity sets.

The challenge is not simply identifying these trends, but finding companies positioned to execute. “If a theme is enduring, and you can find a company that’s well exposed to it, with the funding to execute – that’s a good place to invest,” Fleming says.

This stands in contrast to more cyclical strategies, such as chasing commodity price movements. “We’re not looking to pile into coal and gas because prices are going up,” he adds.

A market of extremes

The current market is increasingly defined by extremes. Sectors can quickly shift from “must-own” to “uninvestable” with little change in fundamentals.

Lithium is a recent example, moving from exuberance to pessimism within months. “It’s flavour of the month, or it’s dead and buried,” Fleming says. “That’s where opportunities lie.”

For diversified portfolios, this volatility can be harnessed. Maintaining exposure to a range of themes – including those temporarily out of favour – positions investors for eventual recoveries. “You’ve got that foothold there,” he says. “So when things pick up, you’re not wondering if you’ve missed it.”

Playing the long game

Navigating today’s market ultimately requires patience. Uncertainty will persist, and sentiment will continue to shift. But for investors willing to look beyond the noise, the environment is fertile.

“This is precisely the kind of environment that creates more opportunities,” Fleming says. “You can see more negative views that are often overdone, and in our universe, that can mean more stocks at better prices.”

The task is not to predict the future with precision, but to build portfolios resilient through diversification – strong enough to withstand it – and flexible enough to capitalise when opportunities emerge. Because, while markets may change quickly, the principles of investing rarely do.