Three defensive buys for (near) record highs

Mark Gardner

MPC Markets

If someone had said that 2023 would see the strongest start to a trading year in over 20 years, you would have laughed. If someone then said the ASX Accumulation Index at fresh highs, you probably would have clicked the unfollow button.

But here we are.

The wild ride of 2022 saw global inflation peak at around 10%, the most savage interest rate hiking cycle in 40 years, and geopolitical instability causing a whole raft of new supply chain issues. All of these headwinds were seemingly forgotten by investors during the summer holidays.

Looking forward to 2023, the rosiest scenarios seem to be priced in. Need I remind you that a lot of things still have to go right for a “soft landing” to be achieved. On the pessimistic side of the argument, we have the US facing an interest rate-induced recession, inflation likely to average 4-5% (double the target band), and a tight labour market that will have to weather the mass retirement of the Baby Boomer generation.

While this might seem very negative, we also see it as one of the most forgiving circumstances to review your portfolio as central banks return to the historical norm for interest rates.

Maqro's portfolios are currently at our highest cash levels since the pandemic as we see the risk/reward firmly to the downside at these levels. Our focus is now finding defensive buys that will survive whatever 2023 has in store for the market. In this wire, I’ll share three examples which we have been eyeing closely.

Consumer staples – Elders (ASX: ELD) 

The chart of Elders may look ordinary but there’s more than meets the eye. At first glance, it looks like the company has performed poorly over the last year. In our view, assumption-based research from many analysts has also held the stock back. But this is where we believe an opportunity lies.

Often described as an Australian agricultural ETF, Elders has drastically improved its business model over the last eight years, with CEO Mark Allison doing an outstanding job executing the eight point plan he put in place when he took over.

As you can see in the following table, Elders have expanded into six diversified revenue streams. Not all are dependent on the agricultural cycle (diagram 1)...

Source: Elders full year results summary, February 9th 2023

...which transformed the company into a far less cyclical name with much smoother earnings (diagram 2).

Source: Elders full year results summary, February 9th 2023

Analysts are forecasting for ELD to double both its earnings and dividend next year. While many are nervous about Allison’s departure come November this year, I also trust that a man who has turned a cyclical basket case into a diversified and consistent performer will have a solid plan for the handover. 

Healthcare - CSL (ASX: CSL)

Despite being undoubtedly one of Australia’s great success stories, CSL has had an ordinary few years by its own standards. But with COVID in the rear-view mirror and a US$11.7 billion investment in aging and obesity with the Vifor acquisition (the second largest outside of the Telstra float), we think this year will see CSL return to a solid uptrend.

Plasma collection volumes now exceed pre-pandemic levels and over the COVID period, CSL grew its collection fleet by 30% and a rollout of the new plasmapheresis platform is improving procedure times by >30%. The company has also used the COVID downtime period wisely improving both efficiency and capacity.

Vifor: Investing in an established player in the healthcare sector that specialises in aging and obesity is about as non-cyclical as it gets. While the two companies don’t cross over much in terms of product offerings, they do in terms of operational economies of scale. The pace at which CSL can implement cost savings will improve the already EPS accretive acquisition, something CSL has a good track record of.

Management has 13-15% guidance on EPS growth, while analysts’ consensus is for only 12% so if CSL can deliver a better-than-expected result this earnings season, record highs are not out of the question.

High Yield Bonds: (ASX: USHY)

It may sound ridiculous but one advantage of higher interest rates is higher interest rates. For the first time in years, bonds are once again a viable investment option. Investment grade bonds yielding around 4-5% and high yield corporate bonds anywhere from 7-10% depending on your risk appetite. We like a recently listed bond ETF from Global X ETFs, USHY.

Investing in US dollar-denominated high-yield corporate bonds, USHY aims to offer high yields with less duration risk, compared to investment grade bonds. It has over 1150 bonds in the portfolio which diversifies default risk. 

It already has an average yield of around 6.5% but this is likely to increase as older, lower-yielding debt rolls out and newer, higher-yielding bonds come in. USHY gives you an (almost) risk-free opportunity to get paid to be patient until opportunities arise or the global economy stabilises.

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2 stocks mentioned

Mark Gardner
CEO and Head of Equities
MPC Markets

Mark is the CEO of MPC Markets bringing more than 25 years of experience in fixed-income and equities trading. Mark takes a wholistic approach to investing, specialising in top-down thematic and macro analysis to identify opportunities and trends...

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