CI Australian Equities Fund

As always, there are a number of global themes and factors to consider in constructing a portfolio. It does, however, feel at the moment that there are more overlapping and complex issues than is normally the case, including:

• The Middle East/Iran “war”
• Russia/Ukraine turmoil
• Globally debt heavy government balance sheets and budget deficits
• New technology and AI
• Data centre fervor everywhere
• Energy demand and security
• The USA shift from globalism to a more nationalistic stance
• USA equity markets, which appear expensive/at risk on a number of measures

The last quarter has seen the focus on AI and data centres really come to the fore. This topic is now the centre of attention; not least because of the trillions of dollars scheduled to be spent globally on the building of data centres and associated infrastructure to enable the widespread use of AI. It remains unclear to us whether adequate returns will be made on this investment, and if so, then by whom. As with the advent of the internet 30 years ago, the real long-term winners will be those who are able to harness and use AI to their advantage – whether to reduce cost and increase efficiency (banks may be a candidate here) or as an aid to growing revenue.

In Australia, in addition to three interest rate rises this year, government measures have produced headwinds for some investors via:

• Changes to superannuation tax concessions for balances above $3m
• Changes to negative gearing, capital gains tax, private health insurance and trusts in the 2026 Federal Budget
• an uncertain policy and energy landscape.

Particularly since the May 2026 budget, the residential property market has seen a slow down with both lower transaction volumes and prices stalling, and on the evidence to date, falling slightly. This poses risks to loan growth for the bank sector and potentially some credit risk (at the very least, likely to ensure no further improvements in banks provision levels).

The Australian electricity market is entering the next phase of the energy transition, with the operating environment becoming more balanced following several years of elevated wholesale electricity prices and extreme market volatility. A combination of improved generation availability, favourable weather conditions, softer domestic gas prices and continued rapid adoption of residential solar and battery systems has created a more subdued wholesale electricity price environment. At the same time, the accelerated deployment of grid-scale battery storage has improved system reliability and reduced-price volatility across the National Electricity market. For integrated utilities, such as Origin Energy and AGL Energy (AGL), these developments (in addition to the next Direct Market Offer mandatory setting to come in this year) are expected to weigh on near-term wholesale electricity and gas margins.

Battery investment has accelerated ahead of earlier expectations, supported by both government policy and private capital, while milder weather conditions and subdued gas fired generation have further reduced-price volatility. The proposed Australian Domestic Gas Reservation Scheme represents another important development. While the policy framework remains subject to further industry consultation, its clear objective is to reduce Australia’s exposure to international LNG pricing by requiring LNG exporters to supply a greater proportion of production into the domestic market thereby reducing process paid by domestic users. In so doing, the policy runs the real risk of actually reducing gas supply (as domestic suppliers find it tougher to make an adequate return at lower prices and reduce production) to the domestic market in the medium term.

Concurrently, Australia will continue to require substantial investment in generation, storage and transmission infrastructure, as electricity demand is expected to increase through greater electrification of the economy and the rapid expansion of data centres.

Through all the above, we have endeavoured to run a balanced portfolio with multiple sources of value latency and not overly dependent on any one capital pool or individual stock – overweight materials (BHP, Bluescope, Orica) as these stocks are beneficiaries of the abovementioned trends, underweight the banking sector, and an overweight position in healthcare (predominantly via our holding in Ramsay Healthcare (RHC).

During the quarter, we initiated a position in the Lottery Corp (TLC). Our belief revolves around value latency arising from:

• New energised and experienced management for the first time in many years
• The Victorian licence renewal providing certainty (albeit we note the Victorian Liberal party taking issue with the process by which the licence was issued)
• Opportunities to improve efficiency with the use of AI and otherwise
• Increasing online sales, which should improve margins over time
• Opportunities to grow into new geographies

As mentioned above, RHC is one of our healthcare exposures. The Australian private hospital sector appears to be approaching an important inflection point after several years of post-pandemic headwinds. Since the pandemic, operators have faced persistent wage and input cost inflation, lower hospital utilisation and a structural shift towards shorter-stay procedures, reducing exposure to traditionally higher-margin services such as obstetrics, rehabilitation, psychiatry and overnight surgical care. At the same time, health fund reimbursement increases largely failed to offset the permanent increase in labour costs, thereby compressing profitability. While these structural pressures have not disappeared, operating conditions are now stabilising. The industry is benefitting from improving theatre utilisation, stronger productivity, more disciplined cost control and a gradual recovery in activity, providing the first tangible signs that operating margins have reached an inflection point.

Importantly, the relationship between the health insurers and private hospital operators has become more balanced after several years of the insurers capturing a disproportionate share of the economic benefit. Governments have increasingly recognised the critical role of private hospitals in alleviating the pressures on the public healthcare system, resulting in greater support for mid-single-digit private health insurance increases and a more constructive approach to funding negotiations. The April 2026 premium increase provides an important buffer against ongoing wage inflation, while contract negotiations recognise the need for a more sustainable sharing of cost pressures across the healthcare system.

Moreover, the historical overbuild of hospital capacity is being addressed through tighter capital discipline, with RHC reducing development capital expenditure in favour of improving utilisation of existing facilities. Financially challenged operators, most notably, Healthscope, have rationalised capacity through hospital closures and service reductions. This moderation in industry supply, together with market share gains by Ramsay, is contributing to improving operational momentum.

The recovery is nevertheless expected to be gradual. Affordability remains a key challenge as ongoing cost-of-living pressures encourage policyholders to downgrade their healthcare cover to lower-tier products. While cost inflationary pressures remain, a more constructive industry backdrop and improved asset utilisation provide the foundations for a measured recovery in profitability.

Andrew Swan

Portfolio Manager