ASX shares are now in a position not seen for 3 decades, and portfolios must adjust.
This is according to SG Hiscock portfolio manager Hamish Tadgell, who reckons earnings are still growing faster than valuation multiples.
"Strong synchronised [global] growth, surging commodity prices and rising inflation expectations… That confluence of events has not been in train for 30 years," he told a company webinar.
Despite the current re-emergence of inflation, Tadgell presented a graph of the 10-year US treasury bond yield that showed the long-term trend is still deflationary.
"The big question now is: Will that deflationary trend be broken or not?"
Growth vs value is irrelevant now
While Tadgell still believes the market is in the "growth" phase, with earnings growing faster than valuations, this chapter is almost at an end.
"The cycle is maturing and the rate of growth is going to start fading… and we need to think about inflation risks."
Therefore he warned punters that the old 'value or growth' debate is an irrelevant distraction right now.
"Stock selection, rather than that focus on growth vs value, is really what investors should be focusing on."
4 ways Tadgell is screening for ASX shares
According to Tadgell, his SGH20 high-conviction fund is using 4 criteria to filter for the right shares in the unusual circumstances the world is currently in:
- Quality companies with pricing power
- Quality cyclicals leveraged to economic recovery
- Structural growth winners discounted on higher inflation expectations
- Longer-duration assets with margin of safety or clear catalyst
Among cyclicals, Tadgell revealed "energy is a clear overweight bet" for his fund currently, taking Woodside Petroleum Limited (ASX: WPL) as an example.
He presented CSL Limited (ASX: CSL) and NextDC Ltd (ASX: NXT) as demonstrative of discounted structural growth winners.
"Healthcare and a lot of the infrastructure stocks have been de-rated or underperformed significantly," said Tadgell.
"We have been adding to CSL and NextDC, which are 2 stocks that… have very long-term growth, are great businesses, have high barriers to entry and strong competitive advantages."
Two quality companies with "pricing power" that the SGH20 fund has bought up are Aristocrat Leisure Limited (ASX: ALL) and Uniti Group Ltd (ASX: UWL).
Among the ASX shares that meet the "long duration assets" criteria, Tadgell took logistics company Qube Holdings Ltd (ASX: QUB) as an example.
"We're still conscious of those inflation risks, so we're only doing it where there's compelling valuation or there's a clear catalyst," he said.
"Qube Logistics is a company which we added a little while ago. We think it's very strongly leveraged to an increase in container volumes as markets reopen."
