Sectors worth watching in H2: SG Hiscock
Equities investors might want to assume a flight to safety in larger caps and blue-chip companies, but it’s too simplistic to assume these will benefit from current market uncertainty, according to SG Hiscock & Company portfolio manager, Hamish Tadgell.
At a more fundamental stock level, there is a risk of overestimating recent revenue growth trends for many companies, he explains.
“Inflation has seen an increase in most company’s top line as they’ve increased prices. As inflation falls, it will become harder to push through prices. This will see a slowdown in sales and margins unless costs are pulled or there’s productivity gains,” Tadgell said.
For the large caps and blue chips, it is important to focus on the fundamental drivers and value.
“Which companies have pricing power, secular tailwinds, and competitive advantage and position to navigate this environment? Balance sheet strength is the other thing that’s critical in tougher times and when rates are increasing as they are, it becomes even more pronounced,” he said.
According to Tadgell, energy and technology sectors are likely to continue to do well as these are driven by secular changes.
He said: “Secular changes like the energy transition and shift to renewables, backed by large Government fiscal initiatives like the US Inflation Reduction Act, is providing opportunities for future-facing commodity suppliers and service providers like Pilbara Minerals and Worley.
“The technology evolution including the cloud, big data processing, and AI also provides great opportunity for data centre providers like NextDC and Infratil as well as those companies that can harness the productivity and service benefits of this innovation.”
He outlines that insurance companies such as AUB Group, QBE Insurance, and Insurance Australia Group, which have all seen over 20 per cent growth on the ASX in the last six months alone, are likely to benefit from current market conditions.
Recently, Insurance Australia Ltd (IAL), part of Insurance Australia Group, made headlines after it received the largest-ever penalty imposed against an insurer for breaches of consumer protection law.
Tadgell believes the second half of 2023 will require equities investors to be active and selective as the implications of higher interest rates start to emerge.
“We are seeing stress in the housing and discretionary consumer-facing sectors which we expect to broaden out and carry downside risk to earnings,” he said.
“This all points to a relatively uncertain outlook and a need to be active and more selective in navigating markets.”
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Rhea Nath
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