Pockets of opportunity amidst a slowdown

Recession signals have been flashing red for some time, but the strength of labour markets and resilient consumer spending is suggesting that Australia might be in for a slow slowdown rather than a lightning bolt recession.

In a market environment that has puzzled most, we believe there are pockets of opportunities among companies that can run their own race, aren’t reliant on an uplift in activity or pricing from inflation to deliver solid top-line and earnings growth at attractive returns on invested capital.

Strong performers in global growth and global cyclicals stocks

Australia is home to many leading global enterprise software companies, serving many different industries. Some examples of growth stocks that have solid fundamentals and strong projected growth outlooks include logistics software provider WiseTech (ASX: WTC), online accounting software provider Xero (ASX: XRO), healthcare imaging for radiologists in Pro Medicus (ASX: PME) and REA Group (ASX: REA), serving the online classifieds market.

Global cyclicals are also delivering interesting opportunities, especially in the resources sector which is set to experience strong demand growth over the next ten years. After a strong rally in prices in 2022, lithium and spodumene prices have been weaker this year, which is opening attractive buying opportunities going forward. IGO Limited (ASX: IGO) is one such example of this. In the large cap space, we are seeing strong returns on invested capital into iron ore assets from BHP (ASX: BHP) and Rio Tinto (ASX: RIO), with the latter also expanding into lithium which is attractive to us.

12-month outlook

A recession is unlikely to eventuate and while there will be some heightened geopolitical risks, our view is that we will see a grinding slowdown that will roll through different sectors over the next 12 months. We saw that in the US with a downturn in the tech sector followed by higher interest rates affecting the housing sector. In turn, this had a cascading impact onto the manufacturing sector as consumer preferences switched from goods to services and travel. What will this mean for equities markets? We believe it will be a stock pickers market, which is attractive to us. We will continue to look at company fundamentals and those companies who have been growing their revenues, delivering good earnings and attractive returns on invested capital.

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