ASX shares are down again today. The S&P/ASX 200 Index (ASX: XJO) is currently in the red by 1.31%.
Yet expert investors are scouring the market for opportunities. One of these is Andrew Mitchell from Ophir Asset Management, which runs a few different funds including Ophir High Conviction Fund (ASX: OPH).
Speaking to The Australian, Mitchell outlined the problems the ASX share market is seeing, the types of companies he's avoiding, and whether it's time to start investing yet.
Why is the ASX share market being pummelled?
The main problem boils down to inflation, caused by various factors including the impacts of the COVID-19 pandemic and the Russian invasion of Ukraine.
There has been plenty of selling action by investors recently but, according to Mitchell, there "isn't sufficient evidence" to suggest that we're at the recovery stage yet for ASX shares. He said he wouldn't be surprised to see a bear market rally. In other words, a short-term rise in shares.
Investors also have to contend with the conundrum of how hard central banks will have to go to bring inflation back under control. Mitchell said this to The Australian:
The global economy is slowing and inflation is stubbornly high. It would take a brave person to say the share market is out of the woods at the moment. Although some indicators suggest market sentiment is almost as pessimistic as mid-June, we're seeing increased signs of economic stress, including the jump in UK government bond yields on Friday and the spike in spreads on US junk bonds.
The market is focused on core inflation. How much does the Fed need to lift rates before they are satisfied that aggregate demand will slow? We are all hopeful for a Fed pivot, but with their credibility on the line they may talk tough for longer than everyone expects.
For the US economy, he's expecting this inflation fight to end in recession. He contends the Fed will "likely go too far" because inflation is the central bank's "number one priority, growth is a far second".
ASX shares to avoid
The investment style of Ophir means it's willing to look at most sectors for opportunities.
In terms of investments to avoid, Mitchell doesn't want to invest in businesses with little pricing power, nor those carrying a lot of debt.
He thinks that while the ASX share market has already experienced the sell-off, investors will also start seeing companies issuing earnings downgrades.
Ophir is "very cautious" on consumer discretionary businesses, companies leveraged to the housing market, and financials. It believes they may not recover until inflation is "well under control". This may mean that a recovery isn't seen until inflation is below 2%. This will likely also mean a reset of corporate earnings expectations.
According to Ophir research, over the past 16 bear markets, the share market has bottomed six months before corporate earnings do.
Where are the opportunities?
While he didn't name specific ASX shares, Ophir is looking for businesses that have good management and can grow "no matter what".
It believes businesses making acquisitions at this time could also be interesting. On that point, Mitchell said:
Historically, times like this are the best for making money. You just need nerves of steel. We're focused on companies that are making great acquisitions now that the market won't acknowledge because it's obsessed with only the most defensive businesses.
He also wants to find businesses that have been harshly sold off, while their peers haven't been punished as severely.
Ophir also suggests that choosing good cash-generating businesses will lead to good results. The idea is that the best businesses will emerge stronger than weak competitors.
At 30 June 2022, the five largest holdings (in alphabetical order) in the Ophir High Conviction Fund were: AUB Group Ltd (ASX: AUB), EBOS Group Ltd (ASX: EBO), NIB Holdings Limited (ASX: NHF), Omni Bridgeway Ltd (ASX: OBL), and Resmed (ASX: RMD).
