There are a handful of very promising S&P/ASX 200 Index (ASX: XJO) shares to consider investing in, according to the fund manager L1 Capital.
In its recent monthly update for the listed investment company (LIC) L1 Long Short Fund Ltd (ASX: LSF), the fund manager said that L1 is being "relatively cautious on the outlook due to the lagged impact of significant interest rate hikes, weakness in leading economic indicators, gradually increasing pressure on corporate earnings and tail-risk from geopolitical tensions."
L1 is expecting ongoing market volatility as investors "continually reassess their expectations for the economy, interest rates and corporate profits."
The fund manager noted that it's identifying "numerous mis-priced stocks" that it thinks can deliver "attractive long-term returns".
With that in mind, these are two ASX 200 shares that L1 thinks have a positive future which are in its portfolio.
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QBE Insurance Group Ltd (ASX: QBE)
The fund manager noted that the recent QBE result impressed the market, where cash net profit after tax (NPAT) was 15% to 20% better than the market (consensus) expectations.
L1 said that the result "demonstrated the considerable progress the company has made in delivering stronger and more consistent earnings."
QBE is continuing to improve the performance of its North American business which has struggled for many years.
The fund manager also said that the ASX 200 share has "considerably strengthened its reserving which we believe places it in a solid position to deliver consistent earnings growth over the next few years."
In explaining the bull case for QBE, L1 said:
We have been cautious on QBE for many years, given the clear industry and company-specific issues it was facing. However, after 15 years of headwinds, we now believe the company has finally reached a turning point and is set to deliver stronger margins, dividends and return on equity (ROE) going forward.
The market has yet to fully factor in this inflection point, with QBE trading on only 10x FY23 consensus price/earnings (p/e) ratio (versus a 10-year pre-COVID average of ~13x).
Downer EDI Ltd (ASX: DOW)
Another ASX 200 share that L1 is positive about and owns is Downer.
Downer said that it employs around 33,000 people, mostly in Australia and New Zealand.
Downer also says that it operates in sectors that are "closely connected" to the investment that is being driven by population growth and urbanisation. These sectors include roads, rail, light rail, other public transport, power, gas, water, telecommunications, health, education, defence and other government sectors.
Those sectors are served by transport, utilities and facilities.
L1 noted that the Downer share price fell in February after reporting "weak first half FY23 earnings which were adversely impacted by challenging weather and labour market conditions, as well as below-market cash flow conversion due to a build-up of working capital."
The fund manager also noted that the company also downgraded its FY23 full-year earnings guidance for the second time after an initial downgrade in December last year.
After the recent negativity, L1 is positive about the Downer share price over the longer term. The fund manager concluded about the ASX 200 share:
While the first half result and revised guidance are clearly disappointing, we continue to see value in Downer over the medium term.
