Some ASX 200 stocks will do better than others as slower economic growth ultimately feeds through to company earnings, according to one of Australia's largest privately-owned fund managers, Elston.
In a recent article, Elston portfolio manager Leon de Wet said rapidly rising interest rates would "ultimately lead to slower growth", and this would flow through to company earnings.
According to de Wet, "the magnitude of monetary tightening by Central Banks globally has been staggering", and the prospect of recession in many countries remains.
The analyst said the Reserve Bank (RBA) had raised interest rates "more than we had initially expected".
Since the RBA began upping rates in May 2022, it has done so 12 times, taking the cash rate from an emergency low of 0.1% to 4.1% today.
He says the market has already priced in the impact of at least one more rate rise on ASX 200 stocks.
With the next earnings season just two weeks away, de Wet explains the team's thinking:
The impacts of monetary tightening have a lag. While it's difficult to predict what that lag will be, it can typically be somewhere between 12 and 18 months.
We continue to lean toward possible shallow recessions across developed markets in the year ahead.
But even if we're wrong about history's most anticipated recessions, economic growth will slow, including here in Australia. This will in turn weigh on the ability of ASX companies to grow their earnings.
3 ASX 200 stocks this broker is backing
de Wet says Elston remains cautious on the outlook for 2023.
As a result, the team has increased the overall weighting in its ASX shares portfolio to non-cyclical businesses "that should perform regardless of economic conditions".
The examples of non-cyclical ASX 200 stocks that Elston is increasing its exposure to are:
- Rail freight operator Aurizon Holdings Ltd (ASX: AZJ)
- Biotech giant CSL Limited (ASX: CSL)
- Professional services company Worley Ltd (ASX: WOR).
de Wit concluded:
… stubborn core inflation, tighter financial conditions and central bankers that are slow to cut policy rates to boost growth mean distinctly sub-trend economic growth and declining company earnings.
ASX 200 stocks had a great day yesterday following news of lower-than-expected United States inflation data.
The S&P/ASX 200 Index (ASX: XJO) closed the session up 1.56% — or 111.2 points — to 7,246.9 points.
