Fund manager Matthew Haupt from Wilson Asset Management (WAM) has identified some of the most important factors that investors should consider in 2023 with their ASX share portfolio.
Last year saw a large change to the economic landscape as central banks in Australia, the United States and elsewhere ramped up interest rates to try to tame inflation.
In Haupt's view, the economy is likely to slow this year and that could end up having a damaging impact on "bad management teams and poor strategies", according to reporting by The Australian.
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What's going on with the economy?
A month ago, the Reserve Bank of Australia (RBA) increased the Australian cash rate target by 25 basis points to 3.35%. It's expected to increase the interest rate again to 3.6% this week.
Households and ASX shares are now feeling the impact of those rate rises.
While the six months to 31 December 2022 saw "strong resilience" by many companies, the environment has "clearly turned", according to The Australian's reporting.
Inflation has helped the revenue side for some businesses, but costs are also going higher – wages, fixed costs, and borrowing costs are more expensive, Haupt noted.
Haupt said:
Best breed management will shine in this environment, whereas the weak will get shown up. If you've got the wrong management, wrong culture and wrong strategy, it all falls apart.
Now it is crunch time. Managers have two choices: cut jobs and increase productivity. Good ones will do a combination of both – bad managers will probably just cut jobs.
Time to be defensive?
The WAM Leaders portfolio is positioned defensively, with a strong allocation to infrastructure names like Atlas Arteria Group (ASX: ALX) and Transurban Group (ASX: TCL).
The idea is that infrastructure can, and tends to, perform well regardless of what's happening in the economy. At the moment, there are a number of negative indicators, including slowing business and consumer confidence.
Another name that Haupt pointed out was high-quality office owner DEXUS Property Group (ASX: DXS) which trades at a 40% discount to its net tangible assets (NTA). That one looks "compelling" despite the economic outlook.
Other names included packaging business Orora Ltd (ASX ORA), and insurer QBE Insurance Group Ltd (ASX: QBE), which is benefiting from rising interest rates and hiking insurance premiums.
However, Haupt is becoming more cautious about ASX bank shares. Not necessarily because of bad debts but due to strong competition that could hurt their margins.
Haupt suggested that interest rates could stay higher for years. He said:
We could be in for a (Alan) Greenspan era where you're cutting, raising and cutting rates as we navigate inflation. That's why it's prudent to have the slight defensive view.
Defensives do well when the economy goes bad, but defensives do well when interest rates fall too. The cash flows means you're going to get revalued up. That makes them a safe bet right now.
