Sure, 2022 might be the year when interest rates rose at a breakneck pace. But 2023 is when consumers and businesses will really feel the pinch.
That's because any changes in central bank rates take a while to cascade into the real world, then even longer for that to have an impact on household budgets and company earnings.
The team at Firetrail reckons ASX-listed businesses will have to deal with a double-whammy this year.
"As we enter 2023, businesses continue to grapple with inflationary cost pressures, but now have the accompanying issue of a slowing demand environment," read its memo to clients this week.
"As the lagged impact of central bank rate tightening filters through the economy and conditions get tougher, only the best businesses will navigate effectively."
Weak companies will "be under pressure", warned the Firetrail analysts.
"For 2023, consensus is expecting 10% growth in earnings per share for the S&P/ASX 200 Index (ASX: XJO) ex-resources," read the memo.
"In talking to companies and doing our own analysis, we believe that will prove too optimistic."
Yes, this is a pretty pessimistic assessment of the state of play. But fortunately, the Firetrail team reckons it has successfully looked past "the short-term noise" to identify "significant medium-term upside".
Let's go overweight on health
One sector that they're bullish on is healthcare.
In fact, the Firetrail Australian High Conviction Fund is now "substantially overweight" in that industry through three particular ASX shares:
"The defensive nature of healthcare is an attractive feature supporting all three companies," read the memo.
"However, our high conviction in these names is derived from our bottom-up work."
Resmed scored a huge win about 18 months ago when major competitor Koninklijke Philips NV (AMS: PHIA) was forced to recall its CPAP machines due to safety issues.
Unfortunately, the company was not able to take full advantage in 2022.
"ResMed has been hamstrung due to a global semiconductor shortage. The chip shortage has prevented ResMed from being able to supply the soaring demand of customers," read the Firetrail memo.
"As chip shortages ease, which is happening right now, we believe 2023 calendar year earnings will beat expectations."
'The ultimate defensive'
In 2022, CSL saw a recovery in plasma collection rates, but the effects of that have not yet made it to the balance sheet.
"Plasma collections flow through to earnings with a lag, which suggests 2023/24 will be strong years for earnings."
The Firetrail team called CSL shares "the ultimate defensive".
"The cost of collecting plasma tends to run counter to the economic cycle. Tougher economic conditions lead to an increase in donors, typically at lower cost."
Private hospital operator Ramsay hasn't yet fully returned to pre-COVID activity levels, but the Firetrail team is banking on a 2023 comeback.
"Ramsay will likely deliver above-trend growth in 2023/24 as the surgery backlog is addressed," read the memo.
"Nursing shortages and wage negotiations are placing pressure on Ramsay's expenses line. However, the recent contract negotiation with BUPA illustrates that Ramsay is now flexing its muscles to offset these higher costs."
The Firetrail analysts conceded all three healthcare stocks are trading on price to financial year 2023 earnings ratios of greater than 30.
But the team is forecasting that 2025 earnings will be 35% to 40% higher for the trio.
"On a three-year view, the healthcare stocks provide growth, relative earnings certainty, and valuation upside. An attractive trifecta in a tough environment."
