This week's surge in US and ASX shares has many investors wondering whether the market has turned a corner.
One expert who believes it might have is Wilsons equity strategist Rob Crookston.
"There is a very plausible scenario that we are approaching the peak of the global inflation cycle," he said in a memo to clients.
"Central banks will start to turn progressively less hawkish and bond yields will continue to compress further. As we enter 2023, this should be a key consideration in Australian equity strategy."
The biggest beneficiaries of a stock market pivot will be ASX growth shares.
"These stocks have underperformed during periods of rising bond yields and outperformed when bond yields fall. This past year has been no different," said Crookston.
"Therefore, a dovish shift in the [US Federal Reserve]'s narrative should be a tailwind for growth stocks as bond yields fall further."
Other ASX shares that might benefit are real estate investment trusts, gold producers, and some small-cap stocks.
As we await the re-rate of these shares, Crookston named three particular stocks that have the best prospects in his team's eyes:
'One of the leading thematics of the next decade'
Among the S&P/ASX 100 (ASX: XTO) shares, Crookston loves data centre operator NextDC Ltd (ASX: NXT) for a valuation re-rate.
"We are attracted to NextDC given the long runway for further structural growth in cloud computing," he said.
"In our view, this is one of the leading thematics of the next decade."
NextDC also has a "high degree of earnings predictability" that comes from long-term customer contracts that provide recurring earnings and built-in cost pass-throughs.
Crookston noted that NextDC shares have already started their revival.
"The stock is up 19% month to date, driven by a rerating," he said.
"We think the stock can continue to rerate if we get more positive news on inflation over the next few months."
'Attractive runways for growth'
Among the ASX small-cap shares, Crookston is bullish on Universal Store Holdings Ltd (ASX: UNI).
"Universal is a specialty retailer of casual and youth apparel with a diversified brand portfolio (Universal Store, Perfect Stranger, Thrills) and a fast-growing online platform," he said.
"The business has an attractive product offering, an experienced executive team and attractive runways for growth online."
The Wilsons team likes how the chain will see "strong earnings growth" from new physical stores and an expansion in private label sales, which enjoy higher margins.
The business is also "capital light" and generates a high return on capital invested of around 50%.
While the economy will slow down in the coming year due to higher interest rates depressing consumer spending, Crookston feels like Universal can fight through it.
"We think the business will be more defensive than the market is expecting, with Universal's average customer-base (under 30s) being more resilient to a slowdown."
The stock has fallen 25.5% since the start of the year, and this presents a buying opportunity.
"After de-rating to a forward PE multiple of ~12.4x, Universal's valuation looks relatively attractive considering its consensus 3-year EPS CAGR of ~20%. This is a PEG [price to earnings to growth] of 0.6x."
'Significant long-term growth opportunities'
Another small cap the Wilsons team is warm on right now is Pinnacle Investment Management Group Ltd (ASX: PNI).
The share price for the multi-affiliate investment manager has taken a painful 42.5% hit year to date.
"The business has de-rated considerably due to the negative FUM [funds under management] and fee impacts associated with equity market weakness and fund underperformance, particularly amongst its growth-focussed affiliates such as Hyperion."
But just as it sank with the general market's fortunes, the ASX share is poised to bounce back with any sort of turnaround in 2023.
"While Pinnacle's leverage to capital markets has been a material headwind in FY22, we believe the company's affiliates are exposed to significant long-term growth opportunities once markets recover."
