Searing inflation, unrelenting interest rate rises, and an economy walking a recessionary tightrope. The landscape of 2023 is an unfamiliar one for anyone that began building a portfolio this side of the GFC.
Many have resorted to labelling this tightening environment as the 'new normal'. But for it to be new, it needs to be the first of its kind — but is that really the case for the set of conditions investors are now facing?
The Motley Fool's chief investment officer, Scott Phillips, suggests otherwise. In chatting with Nabtrade's Gemma Dale on the latest Your Wealth podcast, Phillips gives his reasoning on why this might be more suitably dubbed the 'old normal'.
So, how can we better prepare our portfolios for a return to a more conventional share market?
Inflation and interest rates matter
If you were hoping that the New Year marked the end of inflation's influence on ASX shares, you might be disappointed.
In answering Gemma Dale's question on whether the hidden tax — alongside interest rates — will make an impact on investments this year, Phillips responded:
[Interest] rates matter to the price of the assets that I buy […], rates matter to the amount of debt a company can affordably carry, and what it can do with that debt; and what my investment thesis looks like with those rates.
Inflation matters because pricing power matters. If you are a business that can't pass on higher costs, you have no choice but to deliver lower margins, [and] lower profits.
While this might seem like uncharted territory for some, Phillips says this is more akin to the 'normal economic circumstance' of the 1980s and early 1990s. A period of time where some level of ongoing inflation was expected and interest rates moved up and down — not just down.
So, what does that mean for investing in ASX shares and portfolio construction?
Build a resilient portfolio
Importantly, the answer isn't to try and predict winners based on a specific economic situation a year from now. Instead, Phillips opined that a more reasonable approach to this 'old normal' is by taking a holistic view of the companies you're investing in.
Think about the sort of companies you own or might want to invest in. Think about their resilience in the face of a range of economic circumstances. If you look at your company and say, if this happens, it'll be great… but if that happens, it'll be terrible. […] I don't think that's the smartest way to go about it because I don't think you want to be in a situation where you you have only one way to win and a very clear way, unfortunately, also to lose.
Essentially, the best companies to invest in are those that can continue to grow through most — if not all — environments that they are faced with. Whereas, companies that are dependent on ultra-low interest rates for their survival are, by nature, less resilient.
Finally, the Motley Fool CIO highlighted some ASX shares that could be well-placed to grow through this 'old normal' during the podcast. Companies such as Domino's Pizza Enterprises Ltd (ASX: DMP), Lovisa Holdings Ltd (ASX: LOV), Resmed CDI (ASX: RMD), and Cochlear Limited (ASX: COH).
On the flip side, Phillips cautioned listeners on price takers, saying "I'd be really careful of businesses that don't bring pricing power to the table."
