One thing is certain right now: uncertainty.
No one knows how long high inflation will last, when interest rates will stop rising, when the war in Ukraine will end — or if Australia, the US or the world will end up in recession.
Wilsons head of investment strategy David Cassidy said in a recent memo that the chaos will clear in the medium term. But in the meantime it might be an idea to bunker down.
"While we do not think the global economy will go into recession or inflation will remain elevated, we believe having an above-average allocation to quality defensives during this period is sensible until we get more clarity on the global economy."
Ideally such "quality defensive" ASX shares shouldn't just be about minimising downside risk.
"Quality defensives should also outperform in a slow-growth environment — not just in recessions — have pricing power in inflationary environments, and outperform over the long-term."
So what sort of attributes does the Wilsons team look for in their definition of "quality defensive"?
Cassidy mentioned four characteristics that they target:
- Ability to compound earnings over time
- Low beta to the market (less volatility)
- Monopolistic position in the market or a clear market leader
- High return on equity
Two ASX shares in particular are excellent examples right now, which Wilsons currently lists on its Australian Equity Focus target list:
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A giant in a recession-proof industry
Health and biotechnology giant CSL Limited (ASX: CSL) is the prototype of a stock that investors should hold right now, according to Cassidy.
"CSL is the definition of a quality defensive — with resilient earnings, high ROE and the ability to positively surprise the market."
The idea is that consumers always need healthcare, regardless of what the economy is doing or how much they're weighed down by their mortgages.
"Recessions rarely disrupt the need for medical care or medications," said Cassidy.
"Many of these companies also have a competitive advantage through R&D capabilities or patents for their products/services."
The CSL share price is down more than 8% for the year-to-date and in excess of 19% from its pre-COVID highs.
Poor performer ready to turn it around
According to Cassidy, another industry that doesn't suffer from waning demand is insurance.
"Households and businesses need insurance, whatever the economic conditions."
And his pick in that sector is Insurance Australia Group Ltd (ASX: IAG).
Cassidy admits the company has had its issues in recent times.
"IAG has traditionally been a high-quality insurer, although this has been tested over the past 2 years with COVID, bushfires and perils."
In fact, in recent years IAG shares have turned out to be a poor investment even over the long term. The stock had dived 33.6% over the past five years.
But Cassidy is convinced its worst days are behind it.
"We think IAG's turnaround is on track, and this should lead to strong earnings growth over the next 12 months."
Many analysts agree with Cassidy. Six out of twelve analysts surveyed on CMC Markets currently rate IAG shares as a strong buy, with one other recommending it as a moderate buy.
