ASX bargain shares aren't easy to find despite the recent market sell-off. But two sectors stand out according to a top broker.
The sharp drop in the S&P/ASX 200 Index (ASX: XJO) and global equities over the past few weeks is driven by inflation fears, geopolitical risks and rising interest rates.
But those hoping for a sustained bounce could be disappointed as Macquarie Group sees limited upside.
ASX shares are no bargain buy
This is because the broker reckons ASX shares and United States equities are still expensive, even after the pullback.
Macquarie says:
Based on current real yields, the All-Industrials PE is ~10% too high, with >20% downside for Telecoms and Technology.
Even though US stocks have de-rated, valuations are still higher today than they were before the 20% correction in 4Q18.
Rising rates not priced fully priced into markets
The fourth quarter of 2018 was the last time the US Federal Reserve hiked rates and wound back quantitative easing.
The Reserve Bank of Australia (RBA) is joining its US counterpart in lifting rates. But the markets are not pricing in much of the monetary tightening, which will slow economic growth.
Macquarie adds:
The RBA and Fed are also early in their tightening cycles and are likely to hike at a faster pace over coming months to try and bring inflation under control.
We are yet to see the EPS downgrade cycle that comes from central bank hikes. There is also the risk the Fed hikes the US into a recession in 2023/24, and in this scenario, we caution the All-Industrials PE in recessions since 1960 was ~11x, less than the 18.2x in the 2020 COVID recession.
ASX shares to buy in this environment
However, this doesn't mean there aren't ASX value buys in this market. Macquarie highlights resources and defensives as two categories that its strategy portfolio is overweight in.
High commodity prices are one reason why the ASX 200 is outperforming the US benchmarks during this sell-off.
Macquarie believes this thematic will persist. It reckons China will launch a stimulus program to restart its economy, which will give Australia a further boost.
ASX value shares to put on your buy list
The ASX resources shares that Macquarie believes are best placed are the South32 Ltd (ASX: S32) share price, BHP Group Ltd (ASX: BHP) share price, and Rio Tinto Limited (ASX: RIO) share price.
These shares have high current earnings and further earnings per share (EPS) upside in FY23 if spot commodity prices stay where they are or move higher.
Other ASX shares that the broker is urging investors to buy include the Incitec Pivot Ltd (ASX: IPL) share price and Mirvac Group (ASX: MGR) share price.
