Quality should anchor portfolios as market risks build

After years in which market performance has been heavily influenced by liquidity, momentum and a narrow group of market leaders, Neiron says that investors should refocus on the fundamentals that underpin long-term returns.

“Markets have rewarded growth and momentum. We believe the next phase will increasingly reward durability, profitability and discipline. As volatility in markets persists and financial conditions tighten, we believe investors will need to focus less on what they hold and instead focus on the quality of what they own.

“We are entering a market environment where quality will increasingly distinguish the winners from the rest, across Australian and international equities, credit and broader investment markets.

“Quality is not simply a defensive position. It is an investment discipline. In Australian and global equities, it means resilient earnings, strong balance sheets, sustainable competitive advantages and disciplined capital allocation. In credit, it means robust underwriting, financial strength and being adequately compensated for risk,” he said.

Neiron believes quality should be considered not as a narrow investment style, but as a fundamental principle of portfolio construction across asset classes.

“Right now market conditions are favourable for quality. The cost of funding is increasing as investors are demanding a higher premium and tightening financial conditions are also making it more difficult for companies to access funding.

“Historically, when looking at the S&P 500 VIX Index, an estimate of market volatility compared to MSCI World ex Australia Quality Index, the more volatile markets are, the better quality performs,” said Neiron.

Chart 1: Global quality equites versus equity market volatility

Source: Bloomberg, VanEck. As at 30 October 2026. Past performance is not indicative of future performance. You cannot invest directly into an index.

Quality is also shown to outperform in the Australian market. The MSCI Australia IMI Quality Plus Index (AQTY Index) was able to outperform the S&P/ASX 200 during several periods of heightened volatility over the last five years.

Chart 2: Australian quality equites versus equity market volatility

Source: Bloomberg, VanEck. As at 16 October 2026. Past performance is not indicative of future performance. You cannot invest directly into an index.

“Whether investing in Australian companies, global businesses or fixed income, the principle is the same. Financial resilience matters, particularly when valuations leave little room for disappointment,” said Neiron.

In October, VanEck’s International Quality ETF (QUAL) outperformed the MSCI World ex Australia Index supported by an overweight position in the healthcare sector.

“QUAL’s exposure to major healthcare companies demonstrates quality in practice. These companies demonstrate both strong cash flows and defensive characteristics, which investors lately have sought, after rotating out of AI names.

“Pharma and biotech companies have in particular been outperforming. Pharmaceutical company, Eli Lilly (NYSE: LLY) reported revenue growth of 39 per cent to $24.4 billion, driven by its GLP-1 medications, Mounjaro and Zepbound, which were added to US Medicare mid-year. During reporting season Eli Lilly also provided forward guidance for the year ahead, expecting revenue to reach around $91 to $92 billion in 2027, showing continued revenue growth, despite other parts of the market slowing,” he said.

“The opportunity for investors is to identify businesses with the financial strength and earnings resilience to deliver through changing market conditions. That is why we believe quality deserves a central role in the construction of resilient and diversified portfolios,” said Neiron.