By Cliona O’Dowd
Consumer staples, telecoms and real estate investment trusts will be the best bets over the coming six to 12 months, even as we near the end of the rate rise cycle – and the Reserve Bank is “too scared” to aggressively tackle inflation, says fund manager Wilson Asset Management.
Meanwhile, a significant earnings decline is on the horizon and the risk of a major recession looming due to the central bank’s action, Wilson portfolio manager Matthew Haupt warned on Wednesday.
“We‘re in a position of incredible financial tightening. And what that means is the environment is incredibly tough, for stocks in particular as an asset class, but also the operating environment for companies is getting tougher and tougher,” Mr Haupt said.
“And what that means is we’re going to see earnings growth decline over the next 12 months in quite a significant manner. There is also a chance of potential risk here that we push too hard and the consequences turn into a fairly big recession.”
The prospect of a major recession is not his base case, though. The portfolio manager, who heads up the investment team for Wilson’s WAM Leaders Fund, expects rate increases to pause in the coming months, providing an element of relief following eight painful rises.
“That (pause) will still make the environment pretty tight for companies, so we have to be cautious over the next 12 months,” Mr Haupt said.
“We think that financial tightness is stressing the system and we’re starting to see that in pockets all over the world. So the backdrop is tough, and I think earnings growth will be quite a negative surprise over the next six to 12 months.”
For the first time in a number of years, there is a divergence of policy between central banks that is affecting the Australian sharemarket, fellow WAM Leaders portfolio manager John Ayoub said.
“In the US, they’re steadfastly trying to keep inflation down, that’s the primary focus of policymakers over there,” Mr Ayoub said.
“In Australia … Phil Lowe is too scared to aggressively tackle inflation. He’s very conscious of the property sector, ensuring that we don’t have a property demise in Australia. And lastly, in China they’re trying to stimulate, they’re doing the opposite of everyone else.
“So the central banks that control the Australian stock market and the outcomes of the Australian stock market have taken three very diverse paths.”
Consumer were under increasing pressure and sectors to invest in over the coming year would need to have defensive characteristics, Mr Haupt said.
“We’re looking at (consumer) staples, which obviously did well through Covid, but should also do well over the next 12 months,” he said.
“You’ve also got to look at telecommunication companies, things like Telstra, which have very defensive characteristics.”
Mr Haupt flagged REITs as interesting, even with higher rates and debt markets tightening up.
“We still think there’s value there (in REITS). They have some defensive characteristics too. So I think those three sectors are probably your best bets over the next six to 12 months,” he said.
After an extended period during which companies survived on hope and free money, the era of speculation had ended, replaced with a return to the real, old world, Mr Ayoub noted.
“We expect now a return to the old economy, the real economy of sorts, where cashflow is king (and) the ability to control your bottom line costs, as inflation runs rampant,” he said.
“Which management teams have the ability to crimp that cost line as the top line slows?
“Really, it’s (back to) the old-world economy. We continue to like oil stocks, we continue to like insurance; they have the ability to pass on inflation to their end customer.
“It’s really about the old world versus the new world and our preference is the old world.”
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