The 2023 financial year might have been a good one for ASX shares, but it's no time to be complacent.
The pain of 12 interest rate rises is still cascading through the economy, while inflation still rages on at an unacceptably high level.
SG Hiscock & Company portfolio manager Hamish Tadgell, for one, warns investors that the 12 months just finished was a historically unusual situation.
"Over the last year, we have seen a decoupling of activity indicators and financial conditions," he said.
"The market has been incredibly resilient in the face of monetary tightening. Higher rates have been subverted by COVID savings, higher rates for savers and tight labour markets."
The first half 2023, especially, has been caught up in some unexpected hype for the technology sector.
"In the last few months market sentiment has also improved sharply on the AI euphoria and hope of a soft landing."
So what do ASX shares and its investors have to look forward to for the rest of this year?
Here's how Tadgell's crystal ball reads:
How will the economy play out the next 6 months?
The portfolio manager is forecasting headline inflation to cool significantly through the rest of this year.
According to Tadgell, with the unemployment rate not rocketing upward, economic conditions could be positive for ASX shares.
"However, the issue of inflation is far from over given the persistence of services led-inflation."
The big worry is that a wage-price spiral could form.
"Wage increases tend to be stickier than prices, and falling price inflation could boost real wage growth, boosting consumption and causing inflation to be persistent," Tadgell said.
"This raises the risk central banks will have to do more in taming inflation and means inflation and rates are likely to remain front and centre for markets for some time yet."
The result of all this, according to Tadgell, will be that the impact of higher interest rates will be felt unevenly across the economy.
Even if Australia doesn't fall into recession, it sure will feel like it for some sectors.
"This all points to a relatively uncertain outlook and a need to be active and more selective in navigating markets."
The main trap for investors for the rest of 2023 will be "overestimating recent revenue growth trends for many companies".
"Inflation has seen an increase in most [companies'] top line as they've increased prices. As inflation falls, it will become harder to push through price [rises]," said Tadgell.
"This will see a slowdown in sales and margins unless costs are pulled or there's productivity gains."
Every stock you buy now must have these attributes
One might think that in such anxious times, many investors will flee to large caps.
But Tadgell reckons that assumption is "too simplistic" this year.
"It's about focusing on the fundamental drivers and value," he said.
"Which companies have pricing power, secular tailwinds and competitive advantage and position to navigate this environment? Balance sheet strength is the other thing that's critical in tougher times and when rates are increasing as they are, it becomes even more pronounced."
The insurance sector, with stocks such as QBE Insurance Group Ltd (ASX: QBE), Insurance Australia Group Ltd (ASX: IAG) and AUB Group Ltd (ASX: AUB), is one that Tadgell's team favours at the moment.
Energy is also looking bullish because of structural shifts.
"Secular changes like the energy transition and shift to renewables, backed by large government fiscal initiatives like the US Inflation Reduction Act, [are] providing opportunities for future-facing commodity suppliers and service providers like Pilbara Minerals Ltd (ASX: PLS) and Worley Ltd (ASX: WOR)."
Same deal with technology.
"The technology evolution including the cloud, big data processing and AI also provides great [opportunities] for data centre providers like NextDC Ltd (ASX: NXT) and Infratil Ltd (ASX: IFT), as well as those companies that can harness the productivity and service benefits of this innovation."
