Vinay Ranjan from Airlie Funds Management says investors should ignore industry predictions for where ASX 200 shares might go in the new financial year and instead simply focus on buying quality companies.
Ranjan says attempting to profit from the market's short-term ups and downs "is likely to detract from returns rather than add to them".
He points out that despite all the challenges for the S&P/ASX 200 Index (ASX: XJO) over the past five years, the market has had an upward trajectory, albeit not in a straight line.
First came the pandemic, then the war in Ukraine, then a surge in worldwide inflation, the fastest interest rate hiking cycle in Australia's history, and now the Middle East conflict.
Through all of that, global equity markets have risen, Ranjan says.
The S&P/ASX 200 Accumulation Index (which includes dividends) has delivered a total return of 47%, or 8% per annum over the five years to 3 May.
Indeed, some ASX 200 shares have shot the lights out over the past five years.
They include Boss Energy Ltd (ASX: BOE), up 8,180% and Neuren Pharmaceuticals Ltd (ASX: NEU), up 1,581%.
There's also Pro Medicus Limited (ASX: PME), up 450%, and Pilbara Minerals Ltd (ASX: PLS), up 391%.
Several ASX 200 stalwarts have done well, too. Fortescue Ltd (ASX: FMG) shares are up by 164%, and Macquarie Group Ltd (ASX: MQG) and Commonwealth Bank of Australia (ASX: CBA) are up by 56% and 57%, respectively.
In the United States, the S&P 500 Index (SP: .INX) has risen by more than 88% over five years. The stand-out stocks include Nvidia Corp at 3,480%, Tesla Inc at 1,173%, and Apple Inc at 345%.
In a blog published on asx.com.au, Ranjan says:
In Airlie's view, the past five years have shown that buying and selling stocks based on a view of the market's impending movements is a fool's game.
… we believe investing in companies with strong balance sheets, and that are market leaders with pricing power, may help drive returns over the long term.
So, instead of offering predictions as to how many points the ASX 200 may gain or lose next year, Ranjan offers three reasons to be bullish and three reasons to be bearish on ASX 200 shares in FY25.
Bull case for ASX 200 shares in FY25
Corporate balance sheets in good shape
Airlie's view is that the balance sheets of ASX 200 shares generally look "healthy".
Ranjan says the leverage ratio of industrial companies today vs. previous economic cycles is less than 1.0x Net Debt/EBITDA.
He comments:
Airlie considers this suggests that Australia's largest companies could be well placed to handle any adverse bumps the economic cycle, competitors or internal issues may throw at them.
Oligopolies among ASX 200 shares
Several industry oligopolies with substantial barriers to entry are among the ASX 200 shares. Australia's smaller population means industry profit pools often cannot support a third or fourth entrant.
Examples include Woolworths Group Ltd (ASX: WOW), Coles Group Ltd (ASX: COL), Qantas Airways Limited (ASX: QAN), and the big four ASX 200 bank shares.
Ranjan commented: "Historically these businesses tend to have a track record of stable returns and market-share gains versus their smaller rivals."
Australia's place in the world is only getting better
Ranjan says Australia continues to attract people and capital, both of which provide long-term tailwinds for the economy.
Bearish factors for ASX 200 shares in FY25
Valuations have re-rated higher
In Airlie's view, higher company valuations reduce the prospect of near-term upside for investors.
Ranjan says ASX 200 shares are unlikely to go much higher until it's clear that interest rates have peaked.
ASX 200 shares are currently trading at a price-to-earnings (P/E) ratio of 16.7x. This is well above the median long-term average of 14.6x.
High cost of living is gaining political attention
Airlie views the recent inquiries into supermarket grocery prices as potentially just the start of things to come for the oligopolies among ASX 200 shares.
Ranjan says:
Airlie would not be surprised if the government turned its attention to other concentrated sectors, so as to be seen to be tackling the cost-of-living crisis.
Even if there is no immediate change to regulation of these sectors, Airlie has seen this kind of political pressure hurt returns as companies respond by pulling back on pricing power.
Sticky inflation
Airlie thinks the optimism embedded in the valuations of ASX 200 shares assumes we're at the peak with interest rates.
If inflation proves stickier than expected, this "may lead investors to reprice securities lower to reflect a higher cost of capital", Ranjan said.
To date, the Australian economy has been strong with elevated migration and record-low unemployment supporting demand. And on the supply side, the cost of the energy transition and the restructuring of global trade (away from China) could continue to act as inflationary forces that may well be structural.
