Fidelity portfolio manager James Abela has observed a curious — but welcome — change in the share market over the last six months.
"The market has shifted from focusing on value styles, valuations and short-term earnings to long-term realities of business models, as well as market structures," Abela said on the Fidelity blog.
The revised focus seen in February's reporting season would "likely continue into 2023", he added.
"Operating margins, earnings growth, persistency of returns, cash generation, debt levels, market structures within industries, competition intensity levels, consumer confidence experience by companies, top-line sales outlook, and the visible level of certainty in management presentations."
Meanwhile, Australian consumer sentiment remains ambiguous. Optimism seems to be mixed with worries about the second half of this year.
"Post-COVID, we have seen an increase in consumer spending," said Abela.
"However, this flies in the face of the data reflecting consumer confidence, which is at low levels due to the flow-through impact of housing costs and cost of living, which is impacting the consumer psyche as spending concerns are emerging, but not yet visible in retail sales trends."
So how does this translate to which ASX shares to buy right now?
4 attributes to look for in the best ASX shares to buy
The Fidelity team has deduced that the market revolution would trigger higher demand for four types of stocks: quality, momentum, transition, and value.
"The fund maintains a strategic tilt toward quality and transition or value with the intention of providing a higher-than-average growth outlook with a low valuation premium to navigate the beginning of 2023."
Abela's definition of quality takes in sectors such as software, health, consumer services, defensives, and insurance brokers.
Value shares come from industries such as real estate, airports, travel, global industrials, and gold.
To be precise, he named 11 specific stocks that his fund holds that are standard bearers of these desirable categories:
| Type | Abela's description | ASX shares |
| Quality | "higher returns, higher growth, long duration, quality accounts and management teams" | Altium Limited (ASX: ALU) WiseTech Global Ltd (ASX: WTC) Steadfast Group Ltd (ASX: SDF) |
| Momentum | "moderate returns with an upward trend, sentiment strong, cyclicals themes are favourable" | Orica Ltd (ASX: ORI) Evolution Mining Ltd (ASX: EVN) IGO Ltd (ASX: IGO) |
| Transition | "in recovery mode with some milestones or positive sentiment shift, but market still feeling uncertain about the outlook" | Flight Centre Travel Group Ltd (ASX: FLT) Auckland International Airport Limited (ASX: AIA) Collins Foods Ltd (ASX: CKF) |
| Value | "sentiment weak, valuations near lows relative to replacement cost or attractive in the eyes of industry participants" | Vicinity Centres (ASX: VCX) Ampol Ltd (ASX: ALD) |
Australian conditions remain strong
Abela reckons the valuation of ASX shares generally — in terms of price-to-earnings (P/E) ratios — continues to chug along at the "lower range compared to history" because of the dark economic clouds.
"The dispersion range between high-growth and low-growth companies has begun to expand as the scarcity of earnings growth, certainty, sustainable margins and confidence in management has narrowed."
Employment numbers have remained strong in Australia, indicating the country is not yet "experiencing any material economic weakness".
"However, the drift toward softer business investment or employment is likely to create downward pressure in the current positive economic circumstances."
