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1) It continues to be a tough old grind for those – like myself – who are not invested in the resources sector.
Fund manager reports for November are just coming out, with QVG Capital saying the Small Resources Sector was up 11.6% in the month.
"With limited exposure to Resources, we did not keep up with the benchmark."
Rather than jump into a resources sector which they say "usually lacks the earnings certainty of through-the-cycle return on invested capital (ROIC) we desire," QVG Capital is sticking with industrials such as fast growing Johns Lyng Group Ltd (ASX: JLG) and even faster growing Lovisa Holdings Ltd (ASX: LOV).
Although not traditionally cheap – fast fashion jewellery retailer Lovisa shares trade at around 40 times earnings – with sales up 60% for the first 19 weeks of FY23, it won't take too long for the company to grow into its premium valuation.
As QVG Capital reminds us, over longer timeframes, share prices follow earnings. If Lovisa can keep up its breakneck global store opening pace in conjunction with double digit comparable store sales, the future looks bright.
2) Put simply, equity markets are facing two major headwinds…
- Higher interest rates.
- Slower economic growth.
The Reserve Bank of Australia (RBA) today raised interest rates by another 25 basis points, bringing the cash rate to 3.1%.
Whilst this inflicts more pain on variable-rate mortgage holders, long-suffering savers are finally able to earn a decent return on their cash balance, with some savings accounts paying close to 4%.
A no-risk 4% compares pretty well to the 3.6% fully franked dividend yield on offer for Commonwealth Bank of Australia (ASX: CBA) shares, and very well to the 2.7% fully franked dividend yield on offer for Woolworths Group Ltd (ASX: WOW) shares. Given those two companies are both growing slowly and trading on premium valuations, given the choice, I'd happily park my cash in the bank.
No wonder industrial sector equities are on struggle-street.
3) The economy is not the stock market, and so although 2023 is likely to see slower or even negative growth for some companies, shares could perform well.
In a recent article on Livewire titled "Why 2023 could be the biggest buying opportunity since the GFC," J.P. Morgan Asset Management's global team believes "2023 will see the traditional 60/40 portfolio record its best year since 2010. In their view, average forecast returns for both equities and bonds will continue to climb even if a global recession hits."
The team is tipping both developed and emerging market equities to rebound, and although the S&P/ASX 200 Index (ASX: XJO) has outperformed its developed market peers, they are projecting it to return 7%+ per annum over the next 10-15 years.
In a world fixated on the next monthly move by the RBA or the next inflation print or the next jobs report, you've got to love their long-term perspective.
A 7% per annum return compounded over 10 years will roughly double your money. Not exciting like the tech-stock boom (RIP) some of us recently enjoyed, but very good, especially when compared to just about every other asset. Can you imagine your $1 million investment property doubling in value by 2032? It would require someone taking on an astronomical monthly repayment to take that property of your hands.
No wonder property prices are falling.
4) So which stocks will be beneficiaries in 2023?
If only we knew. The J.P. Morgan boffins referenced above have a preference for defensive sectors, including healthcare and banking stocks.
I'm happy to pass on bank shares.
Quality large-cap ASX 200 healthcare stocks like CSL Limited (ASX: CSL), Ramsay Health Care Limited (ASX: RHC) and Cochlear Limited (ASX: COH) all trade on nose-bleed valuations. I'll pass on them too, thank you very much.
No wonder stock picking is hard.
5) One sector that is cheap is energy, despite many shares having already had a great run so far this year.
Interviewed in the AFR, SG Hiscock portfolio manager Hamish Tadgell says his fund is positioned for higher inflation and the energy transition, with a top three holding being Woodside Energy Group Ltd (ASX: WDS) shares.
The Woodside share price has already gained more than 60% so far in 2022, but Tagell's still a fan, saying in terms of balance sheet, "it's got good growth options through Scarborough and the West Australian developments it's looking at. And that's in a world where I think there's clearly an increased demand for gas."
Woodside shares trade at just eight times trailing earnings. Add in a trailing 9% fully franked dividend yield and you can see the attraction.
