Investing in 2025: beyond the laws of reality
Why this year the market felt untethered from probability or profit.
In Tom Stoppard's play Rosencrantz and Guildenstern are Dead, the titular characters become disquieted when a coin they are tossing between them lands on 'heads' seventy-six times in a row. Since the law of probability is clearly not working, they conclude they must be operating beyond the laws of reality.
As an active fund manager, I have felt a similar sense of foreboding this year. Unprofitable companies are flying (up 40 per cent in the last six months), low returning businesses are dramatically outperforming high returning businesses, and companies with the highest leverage are outperforming companies with the lowest leverage.
For evidence that we're in broken coin territory, we need look no further than the rise and rise of Australian banks. If you added together the underlying cash earnings per share produced by the Big Four in financial 2023, it amounted to $13. In FY25, that figure is $12.43, a four per cent decline.
Yet if you add together the share prices of the Big Four, you'd have paid $178 for those earnings two years ago versus $264 today, a whopping 48 per cent increase. Rising interest rates? Heads, good for banks. Falling interest rates? Heads, good for banks. Declining earnings? Heads, good for banks. Matt Comyn himself said it best at a recent parliamentary hearing: "When you have, as we do today, many banks earning below the cost of capital in the most benign credit cycle any of us have seen in our lifetimes, I'm not sure that augurs well".
