TOL - 1st Mar, 2023
4 stocks for offence and defence for today's volatile markets
In this episode, Alphinity's Mary Manning and Forager's Chloe Stokes share their market outlook for the year ahead (and their top stocks).
Lately, it seems like hopes of a central bank pivot have been quashed.
In its latest meeting, the Reserve Bank of Australia revealed it hadn't given any thought to a pause in the early months of the year and instead, only considered a 25bps or 50bps hike. This came as a surprise about-face to a more hawkish policy position in a bid to stimy inflation back to target.
For those not in the know, CPI inflation over the 12 months to December was 7.8%, the highest it's been in more than three decades (or since 1990, to be exact).
Similarly, the US Federal Reserve is struggling to contain inflation, with the Personal Consumption Expenditures price index (the Fed uses this to measure its 2% inflation target) rising 5.4% over the past 12 months. Meanwhile, underlying core inflation lifted 4.7% over the year, compared to December's 4.6% rise.
Obviously, it's going to take a lot to get inflation back to target. And investors, rightly so, are currently following central bank statements like gospel.
But markets are forward-looking, with most of the world's indices currently in the black year to date.
So in this episode, Livewire's Ally Selby was joined by Alphinity Investment Management's Mary Manning and Forager Funds Management's Chloe Stokes for their outlook interest rates, the possibility of a soft or hard landing in the US, as well as their top stock picks for offence and defence in this environment.
Note: This episode was filmed on Wednesday 22 February 2023. You can watch the video, listen to a podcast, or read the edited transcript below.
Edited Transcript
Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and it seems that hopes of a central bank pivot have been quashed with both the Federal Reserve and RBA recently becoming hawkish once again. So how do you play defence and even offence in this kind of market? Well, to find out, we're joined by Mary Manning from Alphinity and Chloe Stokes from Forager.
I've got a few quick stats for you.
Late last year we surveyed Livewire readers. 90% of you told us that interest rates would peak sometime this year, while 70% said inflation would peak in the first six months of the year.
Chloe, is there any possibility of that still happening? Maybe the latter, yes, but how about the former?
Chloe Stokes: I don't have a strong view of when interest rates will peak, nothing too different from the market. I think the market is pricing in another couple of rate rises, which seems perfectly reasonable to me. I think what it's really going to depend on at the end of the day is how consumers respond to those rate rises.
Ally Selby: Okay. Over to you, Mary, do you feel like interest rates could peak this year?
Mary Manning: I think the forward curve is suggesting that interest rates should peak around July this year. I think that is a reasonable expectation. I think the interesting thing is what's going to happen after the peak? Are they going to go up and stay up or are they going to go up and start to come down?
The one thing that I'm watching very closely to determine the trajectory after the peak is the labour market. And the labour market in the US continues to be very strong, which suggests [rates will stay] higher for longer.
Ally Selby: Okay. That leads perfectly to my next question. Do you think we'll see a pivot from central banks as economic growth slows or will interest rates stay higher for longer because of inflation?
Mary Manning: I think it's very important to differentiate between different central banks in the world. So right now, I can't remember a time when there has been so much differentiation between what's going on in different countries.
Forward curves are telling you that the US is going to peak and start reducing rates later in the year. Europe is going to peak and then stay very high. Certain emerging markets like Brazil have already pivoted. And then, of course, you have China, which is doing a completely different thing because of the COVID reopening.
And so I think to have a blanket statement about whether central banks are going to pivot is a bit dangerous and you need to do very specific macroeconomic analysis to see what's going to happen in different countries. So as a global fund manager, that's an area for opportunity because I don't think every country is going to peak and pivot at the same time. So that brings up opportunities.
Ally Selby: What do you think, Chloe? Anything to add there?
Chloe Stokes: I try not to waste too much time on macroeconomic forecasts. It's definitely not my strong suit. We have a really strong preference for positive real interest rates, though. We definitely don't want to go back to the craziness of 18 months ago when interest rates were at zero and equity market prices were insane. It's really hard to find compelling opportunities in that kind of environment.
Ally Selby: Do you feel like there could be a soft or hard landing in the US? What are you pricing in?
Chloe Stokes: Three or four months ago, we thought there was a really high reward for purchasing cyclical businesses. And so we weren't necessarily predicting a soft landing, but we were buying stocks that would benefit from one because they were priced for a hard landing. However, those stocks have largely rallied now and that's changed a bit, so I would say we have a much more balanced portfolio now than what we did three or four months ago.
Ally Selby: Okay. Over to you, Mary. Are you positioned for a soft or hard landing in the US?
Mary Manning: Alphinity is always running a diversified portfolio. So similar to what Chloe said, we're not betting the farm on one macro outcome. That can be quite dangerous from a portfolio construction perspective. But I would say that a soft landing is more likely.
In fact, one of my colleagues is in the US right now, and there is a thesis out there that there's going to be "no landing" and that we've moved from hard, to soft, to potentially no landing very quickly.
So as I mentioned before, the one thing I'm watching there is the labour market, and I just got back from a trip to the US last week. The labour market remains very, very strong. Household balance sheets remain very strong. Corporate balance sheets remain very strong. And so if you add all those things up, it's hard to see what's going to cause a hard landing - other than a major policy mistake - because corporates and households are still in a very good position.
Ally Selby: You said you're balanced there, but which sectors would you be backing in this kind of environment? Which do you think could outperform?
Mary Manning: So we do have a lot of consumer stocks because consumers continue to perform very well, and a lot of the multinational stocks, building on the point I made before about the world being quite differentiated right now. So you can buy a US consumer stock like Starbucks (NASDAQ: SBUX) that is still benefiting from certain tailwinds in the US but it's also a China reopening story at the same time. LVMH (EPA: MC) would probably be in that category, also. One area where we're not positioned in is the big tech companies. So two years ago we owned most of the mega-cap tech companies and now we hardly hold any of them. So that's been a big change in the portfolio.
Ally Selby: Over to you, Chloe. Which sectors are you positioned in right now? Knowing that you're in a balanced portfolio, which sectors do you think could outperform?
Chloe Stokes: We don't have a strong view on sectors at the moment. There's nothing super obvious to us in terms of sectors or macro bets.
We have quite a large exposure to small-cap stocks, as we often do. We think there are some really good opportunities out there and some really compelling valuations.
Ally Selby: Okay. I'm hoping I can get a response from you to this question. I'm hoping for a stock for offence and defence in this environment. What have you brought for us today?
Chloe Stokes: So at the pointy end, we like a stock called Open Lending (NASDAQ: LPRO). It's US-based. It's a technology platform that provides credit risk analysis to banks and credit unions. Now, this is pretty heavily leveraged to a soft landing. It needs the auto market to recover and the credit environment to remain benign, but if those two things happen, it's a very good, cheap stock.
And then for defensive, we like UK-listed Tesco (LON: TSCO). It's a grocery retailer, it's trading at around 10% free cash flow yield and it's distributing pretty much all of those cash flows to shareholders through a combination of dividends and share buybacks. It's the market leader in the UK, so the largest grocer.
In terms of dealing with cost inflation, Tesco is probably best placed and they've been doing a really good job of maintaining market share against the discount retailers, ALDI and Lidl, which they weren't doing so much of in the past. So we think in any kind of macro environment, this stock should do pretty well.
Ally Selby: Okay, over to you Mary. What are your stocks for offence and defence?
Mary Manning: So my offence is Airbnb (NASDAQ: ABNB). So it's highly levered to a strong consumer and travel. Airbnb was just recently added to our portfolio. We had COVID, where nobody travelled and then we had the revenge travel season. And we wanted to make sure we knew what normalised travel looked like. Airbnb just came out with very strong results and very strong commentary on the fact that revenge travel is actually more like the new normal and they're seeing very strong bookings into the European summer. And so that gave us the confidence that Airbnb is a good company to own as markets recover and as the economy stays strong.
The stock for the defensive side would be Waste Connections (NYSE: WCN). So Waste Connections is one of the largest waste companies in North America.
All of the questions that you asked before - whether inflation peaks or central banks pivot, or whether it's a hard landing or a soft landing - under every single one of those scenarios, people are going to need their trash picked up.
And so that's sort of the very basic case for Waste Connections. And behind that, it's a very strong company with good operating metrics, very impressive management, and an attractive valuation.
Ally Selby: Okay, well that's all we have time for today. I hope you enjoyed that thematic episode as much as I did. If you did, why not give this episode a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
Featuring
Chloe Stokes,
Forager
Chloe joined Forager at the end of 2017 as a research analyst for the Forager International Shares Fund. She was previously employed by both KPMG and Deloitte in corporate finance roles, working on M&A advisory and restructuring engagements.
........
Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
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