Which shares will thrive and which shares will dive?
Strong consumer and business confidence, global monetary stimulus, low unemployment, supply chain disruption, input cost pressures and inflation were some of the key themes discussed at our Sydney Summit last month.
AIA's first-ever hybrid event featured a range of experts including Australia’s most respected health journalist, broadcaster and commentator, Dr Norman Swan, Julia Lee, one of Australia’s best-known financial experts, founder and CEO of Burman Invest. and Chris Wheldon, Portfolio Manager of Magellan High Conviction Strategies and an Assistant Portfolio Manager of global equities’ strategies.
In the last session for the day, Julia Lee CEO of Burman Invest., Jaqueline Fernley CFA - Head of Equities, JBWere, and James Holt, Senior Investment Specialist, Perpetual Investments, discussed which Australian shares will thrive and which shares will dive.
New economic cycle and reflation trade
We have rebounded from Covid-19 with business condition at a record high, consumer confidence, the highest it's been in 11 years and lower unemployment, said Lee.
One of the key drivers, said Lee, is the amount of money sloshing around in the global economy – during the global financial crisis (GFC), the stimulus was 4% of GDP, during Covid-19, the Australian stimulus has been more 20% of GDP. All that money is trying to find a home.
Reflecting on the current market conditions, Lee said we are at the beginning of a new, multi-year business cycle. The market presents a lot of opportunities but Lee suggested it is important for investors to look at debt, ability to service debt and cash holdings. Outside of solvency, make investment decisions based on what the company will look like in the future, she said.
Fernley from JBWere also believes that we are in the first phase of an economic cycle with revival of the reflation trade. In this phase, you normally see energy, banks, financials, and broad-based resources such as base metals rally and outperform, she said.
One of the sectors "I would traditionally expect to also move that but has not is insurance," said Fernley. We are in middle of consumption bubble – people are buying houses, cars and other big-ticket items and all these items will need to be insured. That is one space where there is more room to run, she said noting that IAG is her domestic stock pick.
S-curve and market risks
Covid-19 has pushed some trends further along their S-curve
For example, Zoom which has seen multiple years of growth in one. Some of the businesses in sectors such as cloud computing, online shopping, digitisation of everything, work from home, and climate change/de-carbonisation have seen exponential growth, she added.
Talking about the market risks, Fernley warned investors to beware of companies without pricing power as they continue to face supply chain disruptions and input cost pressures. That will impact inflation in a transitory fashion in the short term but the bigger issue for corporates is profits, she added. Wage and cost pressures have also become common in commentary from companies during the reporting season.
To manage your portfolio in light of the above risk factors, Fernley recommends investors look for companies that have pricing power. If the businesses you have invested in cannot pass on the pricing pressure, run away, she warns.
Fernley also asked investors to be careful about the consumer discretionary sector as we are in a consumption bubble. I’d go and buy a logistics player, such as Qube, she said. As they are getting the benefit of both the commodity and consumer cycle without the operational leverage risk attached to the discretionary retailers.
The decisive decade
Lastly, the decisive decade is open us, said Fernley noting that the ‘Paris Effect’ has only just began. The money will follow the emission reductions – we no longer have to choose between profit and purpose – we can have both, she said. “Companies need to provide a legitimate path to net zero or be subject to a rise in their cost of capital.”
James Holt, Senior Investment Specialist , Perpetual Investments compared the Covid-19 recession to a war, where government spends “truckload of money”, we build ships, send people overseas and fight battles. While it’s not a war with violence and is against a disease, it has the same characteristics, Holt said.
After a war, people come home, spend, get reemployed and the economy takes off like a rocket. This should see a powerful return to value investing.
Top stock picks
Julia Lee, Burman Invest – BHP, Monadelphous Group, Altium and CSL
Jacqueline Fernley, JBWere – CSL, IAG and Qantas
James Holt, Perpetual Investments – Premier Investments, Iluka and La Française des Jeux (Paris: FDJ)
The above content is not intended as financial or investment advice and should not be construed as such. Please seek advice from a registered financial adviser, before making any financial decisions.