Market volatility to carve out winners and losers: Zenith

Looming recession fears and share market volatility will provide opportunities for active stock selection as winners and losers emerge from the asset class mix.

Zenith Investment Partners has shared which investment categories are pricing attractively amid recent market weakness. 

According to Steven Tang, head of portfolio solutions at Zenith, taking an active management approach when higher interest rates start to bite Australian households and economic growth is key.

“Should we enter a recessionary environment, we expect higher quality companies to outperform, and we have therefore increased our exposure to quality-focused equity fund managers. As a consequence, our portfolios are well-equipped to perform in a broad range of markets,” he said.

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The firm believes Australia is more vulnerable to a recession than the US, with the Reserve Bank of Australia (RBA) taking a more dovish approach to setting interest rates. 

As a result, companies that can produce sustainable cash flows and can internally fund their growth will prove victorious over firms reliant on external funding for their growth.

“We are now seeing some asset classes that have previously been expensive now looking cheap. One of these is global small caps, which are priced for a more pessimistic outlook, which isn’t in our base case. They also look cheap relative to large caps,” Tang observed.

Similarly, valuations in certain emerging markets are also presenting attractive opportunities alongside sectors which are sensitive to interest rates, such as infrastructure. 

Government bonds are also offering pleasing investment returns of approximately 4 per cent to 5 per cent. However, growth-focused, higher risk assets remain key to portfolio diversification over the longer term, Tang emphasised.

“Bond yields are higher and, accordingly, we have been progressively increasing exposure to high-quality government bonds in our portfolios. 

“But 4–5 per cent returns aren’t quite as good when inflation is running at 5–6 per cent. However, with equities, corporate profits can grow at the inflation rate, so the capital base is both protected and growing.”

High-quality companies remain a “must” for portfolio diversification and offer shelter as a hedge against inflation and recession risks, the Zenith head reminded investors. 

The investment firm favours firms in strong financial positions with longer dated debt or debt at comfortable levels to provide higher returns.