The uncertainty with inflation, interest rates, and the economy has many investors flummoxed about which ASX shares are the best to buy at the moment.
Do you go for the sectors that are out of favour in a contrarian move? Or do you run with the crowd to take advantage of the momentum?
Fidelity portfolio manager Casey McLean had some ideas recently.
"The only certainty in markets today is uncertainty," McLean said on the Fidelity blog.
"Although financial markets are averse to uncertainty, there has been a remarkable lack of volatility recently. Is this the calm before the storm?"
This is where Australia is heading
Although 12 interest rate rises in 13 months is historically extreme, McLean reckons "the real pain" is yet to be felt in Australia.
"We are right at the precipice of the fixed rate cliff where the majority of borrowers lucky enough to lock in 2% mortgage rates will reset to 5% to 6%," he said.
"With the last couple of interest rate rises, the cacophony of complaints has grown noticeably louder indicating the pain threshold has been reached. Further rate rises will only amplify this pain."
The trouble is that, while headline inflation is coming down, the underlying core inflation is remaining "stubbornly high".
"This is translating directly into wage growth and risks fuelling a wage-inflation spiral," said McLean.
"Putting this together, it likely means that even if we are close to the peak in interest rates, they are unlikely to be cut quickly — unless economic conditions become dramatically worse."
These conditions don't mean investors can't buy ASX shares right now. They just need to be super selective.
"Opportunities to take advantage of the robust growth in Australia are emerging which we expect will help set up the market when the cycle turns."
Do you really need a new big-screen TV right now?
Considering this predicament, there are two types of ASX shares that look cheap to the Fidelity team right now: consumer staples and small caps.
"Do you really need another coffee machine or big screen TV now?" asked McLean.
"Consumer staples are far more attractive in the current environment."
Those necessities cover a few different areas.
"Everybody needs food and drink. If you've got to go to the hospital, you've got to go to the hospital, even more so now considering the number of surgeries that were postponed over COVID.
"Insurance is another non-negotiable, especially in light of the amount of natural disasters Australia has seen recently… People will spend on these essentials regardless of inflation."
Immigration will play an important factor in supporting consumer demand.
"Australia's 29-year run without a recession is the stuff of legend, even able to navigate the Global Financial Crisis without falling into recession," said McLean.
"However, what many don't realise is that Australia did… experience a technical recession in 2009 on a GDP per capita basis. It was only the growth in population from immigration that saved us."
'Small caps look particularly compelling'
Because of the low concentration of technology companies in the S&P/ASX 200 Index (ASX: XJO), it has been a laggard in this year's global rise in equities.
"This has left the Australian market looking good value, trading in line or below historic average multiples," said McLean.
"Small caps look particularly compelling, having underperformed their large cap peers by 15% over the last two years, and having the tendency to perform well in a cyclical recovery."
The attractiveness of small-cap ASX shares has been backed up by all the merger and acquisition activity over the past year. Both larger listed companies and private equity have come knocking on the doors of small growth companies.
"The value is… being recognised by corporates, with the amount of takeover activity picking up recently over a wide variety of sectors, from utilities to resources and consumer."
