STOCKMARKET investors are experiencing how quickly inflation and policy responses can hit share prices.
So how should an ASX investor approach the stockmarket right now? Which sectors look promising and which should be reconsidered?
“The challenge is that all the sector outlooks are being challenged by the macro outlook at the moment — and whether central banks can engineer a soft landing, or maybe a mild recession as they get inflation under control,” says Anthony Moran, an investment analyst in Pendal’s Australian equities team.
“The uncertainty means investors need to be positioned across defensive and cyclical stocks right now.
“If we get a soft landing then cyclicals will do well and the defensives will underperform, and vice versa.”
Some sectors may be better to avoid, says Moran. For example, the building materials sector is difficult to support given the macro outlook.
“We’ve been enjoying boom conditions globally for residential construction.
“Now we are seeing rates rise at different paces in different markets and Australia is behind the curve.
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“We are going to see faster rate rises here, and we are still a long way from the bottom of the cycle, so building materials is an easy avoid.”
Still, every sector — including building materials — will feature stocks that are more likely to outperform.
James Hardie, which earns a large chunk of its revenue in the United States, is an example. It has more exposure to renovations than new buildings, and demand in that part of the sector is more resilient.
“It’s kind of perverse. You can’t afford a new home so you renovate instead,” Moran says. James Hardie also operates in the US economy which is further through its housing cycle than Australia.
Steel is probably a sector to broadly avoid, Moran says.
The sector did well last year, but now it is normalising down. Moran said the industrial warehouse market has now peaked, and that has been a material driver of steel demand.
Another sector to reconsider given the macro-economic climate is gaming, Moran says.
“There was tremendous industry growth through the COVID years due to stimulus packages and a lack of alternative forms of entertainment.
“People were basically stuck at home playing mobile games or betting on the races and other sports.”
As those tailwinds subside, along with the drop in discretionary income thanks to higher cost-of-living expenses, gaming could be a sector to stay away from.
Though the newly demerged Lottery Corporation – which is the lotteries business of Tabcorp – may go against the trend.
“Essentially, it’s an infrastructure business with long dated concessions, very strong free cash flows, extremely resilient demand and some specific growth opportunities from increased digital penetration.
“It’s as much an infrastructure stock as a gaming stock and due to corporate activity there aren’t many of them left.”
What about sectors to invest in, given the macro-economic outlook?
“Paper and packaging is really interesting right now,” Moran says. “Some of the stocks in the sector have shown a tremendous ability to pass through inflationary cost pressures.
“In the case of Orora, it’s actually a tailwind because they’ve been able to pass on more than the price increases.
“Demand for their products is inelastic and it’s quite a defensive sector. There are also stock-specific factors that will help them.”
Anthony Moran is an Australian equities investment analyst with more than 15 years of experience in a range of local and international sectors. His sector coverage includes Australian Industrials and Energy, including Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure. Anthony is a CFA Charterholder and holds bachelor degrees in Commerce and Law from the University of Sydney.
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