As the S&P/ASX 200 Index (ASX: XJO) sinks ever closer to correction territory, many investors are wondering what the best defensive plays are.
It's no wonder, with the benchmark losing 3.8% over the past month, or 5% since its 13 August peak.
One prominent fund presented this week that it's taking a 3-pronged approach to identifying the most resilient ASX shares for such troubled times.
According to Pengana Australian Equities Fund analyst Mark Christensen, his team is aiming for ASX stocks that meet one of these criteria:
- Inflation protection through pricing power and long-term contracts
- 'Forecasting errors' for the post-lockdown and post-COVID performance
- Resilience to supply chain and inventory disruptions
Perhaps the easiest one to immediately identify is the first criteria. Which ASX companies have enough market power to set their own prices?
"We look for business models that have an element of inflation protection built into them, and which have pricing power," Christensen said.
If you can raise prices, you've got it made
Australia's largest telecommunications company is a "good example" of this, according to Christensen.
"Telstra Corporation Ltd (ASX: TLS) has 25% of their valuation effectively tied up in a long-term bond with the government essentially — it's with the NBN," he said.
"[The agreement] has a step-up linked to inflation… So if inflation does run away, Telstra benefits by having that income stream also accelerate."
Telstra shares are up more than 29% on the year.
The analyst cited supermarket giant Woolworths Group Ltd (ASX: WOW) as one business that had strong consumer pricing power.
"At both ends really. It has the pricing power to push back on inflation impacts from its suppliers, and pass on any pricing [rises] it feels it needs to its customers," said Christensen.
"If you're able to increase the value of each box you sell, but sell the same number of boxes, then that's a good equation for your bottom line."
Woolworths shares have lost 3.6% over the past month, but have gained almost 16% this year.
National Australia Bank Ltd. (ASX: NAB) would benefit simply from the nature of the industry it is in.
"The banks in general do well in a rising interest rate environment."
The NAB stock price has lost more than 4% in the past month but is still 20.7% up for the year so far.
The Pengana Australian Equities Fund currently holds all 3 of these ASX shares. In fact, 5 of its top 7 holdings meet one of the above "defensive" criteria.
"[We're] making sure we've got companies that, at the very least, will not lose in an interest rate or inflationary environment. But more than that, if we can find winners — those that benefit."
