TOL - 24th Apr, 2023
11 ASX stocks for Quality, Momentum, Transition, and Value
Over the last six months, the market has shifted from focusing on value styles, valuations and short-term earnings to long-term realities of business models as well as market structures. The focus we saw during reporting season will likely continue into 2023: operating margins, earnings growth, persistency of returns, cash generation, debt levels, market structures within industries, competition intensity levels, consumer confidence experience by companies, top-line sales outlook, and the visible level of certainty in management presentations.
Global news and concerns about the financial system began this month with the failures of US banks Silicon Valley Bank and Signature Bank. In Europe, Credit Suisse collapsed and was purchased by UBS. The American and European financial system regulators have prevented a major collapse of confidence in the global financial system, which has stopped the series of events that would take investors back to the 2009 global financial crisis. In Australia, we believe the banking system remains well capitalised as a result of the conservative business activities and strong regulation, which has positioned the country with relative strength.
Mergers and acquisitions (M&A) emerged for a number of companies, which signalled that companies may be struggling for growth, but also have strong balance sheets to utilise. Companies’ motivations to undergo M&A are broad and include seeking growth options in: a rising inflationary environment and a lower expected growth world, attempting to put strong balance sheets to work to optimise returns on capital, seeking to move up or down the value chain to secure supply in an increasingly competitive world, or increasing scale and leverage to lower costs. We will likely see this trend continue throughout 2023.
Australian consumer sentiment remains somewhat of a double-edged sword, with the outlook looking optimistic with concern about the second half of the year. Post-Covid, we have seen an increase in consumer spending (hotels, cafes, restaurants, shopping centres, holiday destinations, rental accommodation, business trips and preparing for family gatherings). However, this flies in the face of the data reflecting consumer confidence, which is at low levels due to the flow-through impact of housing costs (mortgages, rent cost increases) and cost of living, which is impacting the consumer psyche as spending concerns are emerging, but not yet visible in retail sales trends. With employment remaining strong, Australia is not experiencing any material economic weakness; however, the drift toward softer business investment or employment is likely to create downward pressure in the current positive economic circumstances.
Valuation of the equity market (price to earnings ratios) continues to be in a lower range compared to history due to increasing pressures on the business environment. The dispersion range between high-growth and low-growth companies has begun to expand as the scarcity of earnings growth, certainty, sustainable margins and confidence in management has narrowed.
If we look at the ‘Toddler index’ (which signifies the proportion of each index where companies have been listed less than 3 years) market liquidity is getting tighter and company aging profile is increasing.
The toddler index
Compare this to 2017, when liquidity levels were high, so company "ageing" was declining (which was also the case in 2016, 2007 and 2000).
The Fund maintains a strategic tilt toward quality (software, healthcare, global consumer services, defensives, insurance brokers) and transition or value (real estate, airports, travel, global industrials, gold) with the intention of providing a higher-than-average growth outlook with a low valuation premium to navigate the beginning of 2023.
Fidelity Future Leaders Fund QMTV weights as at 31 March 2023
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James has been portfolio manager of the Fidelity Future Leaders Fund since 2013, after joining Fidelity in 2003. Prior to that he worked at Constellation Capital Management, BNY Equities and Ernst & Young. James holds a Master of Commerce.
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Important information: All information is current as at April 2023 unless otherwise stated. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making any investment decision, investors should consider seeking independent legal, taxation, financial or other relevant professional advice. This document is intended as general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. You should also consider the relevant Product Disclosure Statements (‘PDS’) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 044 922 or by downloading it from our website at www.fidelity.com.au. The relevant Target Market Determination (TMD) is available via www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated about specific securities may change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. You should consider these matters and seeking professional advice before acting on any information. Any forward-looking statements, opinions, projections and estimates in this document may be based on market conditions, beliefs, expectations, assumptions, interpretations, circumstances and contingencies which can change without notice, and may not be correct. Any forward-looking statements are provided as a general guide only and there can be no assurance that actual results or outcomes will not be unfavourable, worse than or materially different to those indicated by these forward-looking statements. Any graphs, examples or case studies included are for illustrative purposes only and may be specific to the context and circumstances and based on specific factual and other assumptions. They are not and do not represent forecasts or guides regarding future returns or any other future matters and are not intended to be considered in a broader context. While the information contained in this document has been prepared with reasonable care, to the maximum extent permitted by law, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. Past performance information provided in this document is not a reliable indicator of future performance. The document may not be reproduced, transmitted or otherwise made available without the prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Fidelity Australia. © 2023 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.
11 stocks mentioned
2 funds mentioned
James has been portfolio manager of the Fidelity Future Leaders Fund since 2013, after joining Fidelity in 2003. Prior to that he worked at Constellation Capital Management, BNY Equities and Ernst & Young. James holds a Master of Commerce.
Expertise
James has been portfolio manager of the Fidelity Future Leaders Fund since 2013, after joining Fidelity in 2003. Prior to that he worked at Constellation Capital Management, BNY Equities and Ernst & Young. James holds a Master of Commerce.
Expertise
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