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Ask a Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part one of this edition, we’re joined by Yarra Capital Management’s fixed income specialists, Darren Langer, co-head of Australian fixed income, and Chris Rands, co-portfolio manager of the Yarra Australian Bond Fund. Today they explain why it appears the market is overpricing in the expected interest rate rises from the RBA, and what this means for the inflation outlook and the Aussie housing market.

The Motley Fool: A lot of investors were caught off guard by the hawkish tightening we’re seeing from the US Fed and RBA. What’s your outlook for inflation and interest rates in 2022 and heading into 2023?

Darren Langer: The risk was that central banks would overreact. And that’s basically what’s happened and is still happening to some extent.

But we think that things are going to start to slow down much faster than what central banks are expecting. You might start to see a shift in some of that rhetoric in the next few months. But for now, particularly the Fed, they’re very hawkish. That’s obviously not a great thing for bond markets or for risk assets when they’re in that sort of mode.

Chris Rands: Really, as far as people being caught off guard with inflation, it’s the oil price shock that occurred from the Russian Ukraine invasion.

Looking through our inflation indicators, commodity and food prices are causing a large increase in inflation levels. It was very hard to see this coming, and it is this shock that’s taken inflation a leg higher.

If you assume that conflict will continue, then the oil price should remain high. Food prices should remain high. So that sets it up to have a base of higher inflation than the 2012 to 2019 period.

If the RBA is saying we’re going to get this inflation down by hiking rates, it stands to reason that it needs to come from things that are not oil and not food. So something else needs to come down to bring inflation down. Whether that’s rents or whether that’s consumer discretionary spending or something like that, those are the prices that they’re going to be targeting.

Looking at the US, there are signs that that’s starting to occur. You’re starting to see inventories build and those types of things. From that perspective, it looks like inflation should be a bit sticky for the next 12 months. And that puts the RBA in a position to raise rates. But we don’t think it’s going to be anywhere near as high as what the market expects.

MF: What level of interest rates are you expecting from the RBA?

CR: My calculations for what the economy can handle suggest a cash rate of 1.5%, that’s probably about neutral. Once you start going beyond that I think you’re going to start causing a bit of stress on people who’ve borrowed too much money over the past 18 months.

If the RBA wants to get back to neutral, it should start at 1.5%. If they really want to slow the economy down because they think it’s too hot, they probably need to go above 2%.

MF: When can investors expect some easing?

DL: I think this is going to be a similar tightening cycle to what we observed in 1994. That was a very rapid tightening cycle, both by the Fed and the RBA, but within the next 12 months, they were both easing interest rates. So, as you get towards the back-end of 2023, if they keep hiking fairly aggressively, they’re more than likely going to have to start cutting rates.

Markets are starting to price in that eventuality. You’re starting to see the longer-dated futures contracts pricing is easing now. Whereas before the yield curve has been quite steep, and they were pricing higher rates forever. Now they’re starting to realise that rate hikes are biting much faster than central banks would have thought.

MF: One of the big concerns right now is how higher interest rates will impact the Australian housing market. What’s your outlook?

DL: We feel house prices are going to be under some pressure. We’ve had such a rapid rise in prices over the last 12 months, and a lot of those people borrowed a lot of money. There are a lot of fixed-rate loans starting to come off in the next six to 18 months, so that will bite quite quickly.

In Australia, most of our housing market is floating rate rather than fixed-rate, like in the US. So it bites a lot quicker here, which is one of the reasons we don’t think the RBA is likely to tighten interest rates as much as the Fed will.

CR: For the housing market, wages over the past three years have barely moved, whereas house prices have risen 30%. A big chunk of that, in my opinion, is just low rates. And if you move rates back the other way, then you need to take some of those prices out.

If the RBA stops at 1.5%, which I think is neutral, then you might look at 2019-2020 levels for where house prices will stop. If rates go back to 2.5% or 3% like the market is forecasting, then it could be worse than that.

***

Tune in tomorrow for part two of our interview, where Yarra Capital’s Darren Langer and Chris Rands discuss fixed income investing strategies in the new higher rate environment.

(You can find out more about the Yarra Australian Bond Fund here.)

The post Why the RBA is unlikely to hike interest rates to the heights the market has priced in: fund managers appeared first on The Motley Fool Australia.

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More reading

• Why is the Bubs share price crashing 15% today?
• Why did the Beach Energy share price outperform the ASX 200 last month?
• Down almost 30% in FY22: What’s worrying investors about Wesfarmers shares?
• Why did the Appen share price sink 13% in June?
• Down 16% in June: What put the JB Hi-Fi share price on sale?

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Bubs Australia Ltd (ASX: BUB) share price has returned from its trading halt and sank deep into the red.

In morning trade, the junior infant formula company’s shares are down 15% to 54.5 cents.

Why is the Bubs share price sinking?

Investors have been selling down the Bubs share price today after the company completed the institutional component of its equity raising.

According to the release, Bubs has raised $32.4 million via an institutional placement of 62.4 million new shares and $7.7 million from an institutional entitlement offer. These funds were raised at a sizeable 18.8% discount of 52 cents per new share.

Bubs chair, Dennis Lin, commented:

We are pleased with the support shown by institutional investors in the Equity Raising. We are delighted to welcome new shareholders to the register and are always grateful for the participation from our existing shareholders. Both have displayed confidence in Bubs and our commitment to deliver on future opportunities.

Retail offer

The company will now push ahead with its retail entitlement offer, which is aiming to raise a further $22.9 million. Eligible shareholders will be able to subscribe for 1 new share for every 10.42 shares held at the close of play on Thursday.

However, retail shareholders may feel a little short-changed here, as well as being diluted by the equity raising, they won’t be getting a discount anywhere near as generous as the one institutional investors received.

As these new shares are being offered at the same price as the institutional placement, this means the discount on offer is a paltry 4.6% following today’s decline by the Bubs share price to 54.5 cents.

Why is Bubs raising funds?

Bubs is raising funds on the belief that its recent sales boost in the United States due to supply shortages won’t be a short term thing.

The offer proceeds will be used to support working capital, inventory and growth initiatives. The latter includes its expansion in the US and an increased manufacturing capability to meet accelerating demand.

Time will tell if this was a one-time sugar hit in the US or the start of something big. One thing for sure, though, is that retail shareholders will no doubt be hoping this is the final time Bubs needs to raise funds.

The post Why is the Bubs share price crashing 15% today? appeared first on The Motley Fool Australia.

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More reading

• Why is the Bubs share price in a trading halt?
• Why is the Bubs share price taking off today?
• Best ASX shares to buy in July 2022
• Bubs share price drops despite new Target deal
• Where to find value in growth? Here are 2 ASX shares I’d buy in July

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended BUBS AUST FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Beach Energy Ltd (ASX: BPT) share price delivered a rollercoaster performance last month. The stock hit both a 52-week high and a three-month low in June, despite the company’s silence.

At the end of June, the Beach Energy share price was $1.725, flat with its final close of May.

For context, the S&P/ASX 200 Index (ASX: XJO) slumped 8.9% last month.

So, what helped the ASX oil share outdo the index? Let’s take a look.

Beach Energy share price trades flat in June 

Beach Energy’s stock traded flat in June while the broader market struggled. The company’s home sector, the S&P/ASX 200 Energy Index (ASX: XEJ), also closed the month lower, slipping 0.27% over the period.

Meanwhile, the stock was likely supported by rising (then falling) oil prices.

Oil prices rose to a 13-week high in early June as gasoline demand took the United States by storm.

Brent crude futures rose to US$123.58 per barrel while the US West Texas Intermediate crude price reached US$122.11 a barrel – their highest points since hitting a 13-year high in March.

That also saw the Beach Energy share price soaring to a new 52-week high of $1.91.

Sadly, its exuberance didn’t last long. As oil prices began to turn in mid-June, the stock tumbled 8% to close at its lowest price since March – $1.55 – on 20 June.

Thus, a flat month of trade may have been one of the better-case scenarios for the stock. Particularly as oil prices recorded their first monthly decline of 2022 in June.

Interestingly, many of the company’s ASX 200 energy peers recorded mixed performances last month.

The Woodside Energy Group Ltd (ASX: WDS) share price gained nearly 7% in June. Meanwhile, Santos Ltd (ASX: STO) shares slumped 9.5%.

Perhaps more encouraging for Beach Energy investors is the share’s longer-term performance.

It’s currently 33.6% higher than at the start of the year. That means it has outperformed the ASX 200 by 46% in 2022.

The post Why did the Beach Energy share price outperform the ASX 200 last month? appeared first on The Motley Fool Australia.

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More reading

• Santos and Woodside on watch after oil prices crash 10%
• 5 things to watch on the ASX 200 on Wednesday
• 5 things to watch on the ASX 200 on Tuesday
• Broker names 2 of the best ASX energy share to buy in FY23
• Why are ASX 200 energy shares dragging on the market today?

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Wesfarmers Ltd (ASX: WES) share price had a tough time in FY22 as it dropped approximately 30%.

Wesfarmers benefited in FY20 and FY21 from big boosts with DIY projects at home, as well as with technology to learn, work and entertain ourselves at home.

However, that boom has now faded as the Australian economy and ASX share market enter a new phase of higher energy costs, broadly elevated inflation and rising interest rates.

While the latest RBA interest rate rise of 50 basis points to 1.35% came after the end of FY22, it marks the second month in a row of 0.50% increases, which the market was largely expecting. However, higher interest rates are supposedly meant to pull down on asset values.

Let’s look at some of the highlights during FY22, which finished last week.

API acquisition

After seeing off a challenge from Woolworths Group Ltd (ASX: WOW) to buy Australian Pharmaceutical Industries (API), Wesfarmers finally completed its acquisition of the pharmacy and healthcare business at the end of March 2022.

Wesfarmers describes API as “a leading distributor of pharmaceutical goods and operates a portfolio of complementary wholesale and retail businesses.” It operates the Priceline Pharmacy, Soul Pattinson and Pharmacist Advice brands. API also operates Clear Skincare clinics, a provider of skin treatments, laser hair removal and non-invasive cosmetic procedures and also the manufacturer of pharmaceutical and personal care products.

The total cash consideration paid to API shareholders for the acquisition was $774 million.

Why was the deal attractive to Wesfarmers? The Wesfarmers managing director Rob Scott said:

API will be the foundation business of our new health division as we develop capabilities and invest in the growing health, wellbeing and beauty sector. We see opportunities to strength the competitive position of API and its partners, by investing in expanding product ranges, improving supply chain capabilities and enhancing the online experience for customers.

Sales and earnings decline

The Wesfarmers FY22 half-year result showed that its financial numbers had started to go backwards.

Excluding significant items, revenue was down 0.1% to $17.8 billion and net profit after tax (NPAT) fell 14.2% to $1.2 billion.

While these numbers were still impressive compared to pre-COVID times, it is said that share prices follow earnings. If the NPAT is going down, that makes it harder for the Wesfarmers share price to grow (or even stay at the same level).

The company explained the FY22 first half was disrupted by store closures and trading restrictions due to COVID-19, pointing to around 20,000 store days where stores were completely closed to customers. It also spent money on supporting its team members.

Wesfarmers also noted that it intended to increase its focus on price leadership and is “well positioned to continue to provide customers with great value on everyday products as rising cost-of-living pressures impact household budgets.” Time will tell what impacts this has on profit margins.

Business plans

Investors recently had the chance to look at an investor presentation by Wesfarmers about how it planned to grow each segment. Seeing growth ideas could help sentiment about the Wesfarmers share price.

For example, with Officeworks, it plans to evolve the core offering while adding new customer segments and services, such as working with schools.

With Kmart, it wants to improve the online customer experience and grow online profit. It suggested that ongoing cost of living pressure will drive customers to look for more ‘everyday value’ more frequently, which Kmart could provide. Target is being repositioned as a digitally-led retailer.

With Bunnings, Wesfarmers has plans to upgrade, expand or open 15 to 20 new Bunnings warehouses and small formats per year. It’s also ‘evolving’ the supply chain to support online fulfilment and commercial growth. It also plans to roll out Tool Kit Depot and grow Beaumont Tiles. In terms of product prices, Bunnings said that it wants to deliver more value and “go harder” on the lowest prices that matter the most.

Wesfarmers share price snapshot

Over the past month, the Wesfarmers share price has fallen 8%.

The post Down almost 30% in FY22: What’s worrying investors about Wesfarmers shares? appeared first on The Motley Fool Australia.

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More reading

• Why are ASX 200 retail shares getting bought up today?
• How did ASX 200 retail shares perform in June?
• Why did the Wesfarmers share price tumble 11% in June?
• What’s the outlook for Wesfarmers shares in July?
• Experts name 2 ASX dividend shares to buy next week

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Appen Ltd (ASX: APX) share price continued its slide during the month of June.

The artificial intelligence data services company’s shares lost 13% of their value last month.

This meant that the Appen share price was down 50% since the start of the year at the end of June.

Why did the Appen share price tumble?

The main catalyst for the Appen share price decline was broad market weakness, which was felt hardest in the tech sector.

For example, the ASX 200 index dropped a disappointing 8.9% last month and the S&P ASX All Technology index lost 10.3% of its value over the period.

What else?

Also putting some pressure on the Appen share price was a broker note out of Citi.

According to the note, its analysts downgraded the company’s shares to a neutral rating and slashed their price target on them by 28% to $6.60.

Citi made the move on the belief that Appen could fall short of its earnings guidance after a weaker than expected start to FY 2022. It notes that this will mean the company requires a very big second half to meet guidance, which is far from guaranteed.

And while Citi concedes that the takeover approach from Telus International shows that demand for human labelled artificial intelligence training data clearly exists, it isn’t enough for a more positive rating.

Elsewhere, the team at Macquarie upgraded Appen’s shares late last month to a neutral rating with a $5.70 price target. Its analysts are pleased with the company’s plan to diversify away from major tech customers. However, with 80% of its revenue coming from major US tech giants, it warned that this strategy will take some time.

Macquarie also suspects that Appen will have to deliver on its guidance to regain investor confidence. Though, with Citi predicting an earnings miss in FY 2022, this may not happen.

The post Why did the Appen share price sink 13% in June? appeared first on The Motley Fool Australia.

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More reading

• What on earth happened to ASX 200 tech shares in June?
• Bargains or value traps? Expert rates 3 ASX shares that halved this year
• Why are ASX tech shares struggling today?
• Why Appen, BWX, Imugene, and Wesfarmers shares are dropping
• Down 7%, what’s impacting the Appen share price today?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Appen Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The JB Hi-Fi Limited (ASX: JBH) share price was not spared during the sell-off in June. It fell over 16%, while the S&P/ASX 200 Index (ASX: XJO) dropped about 9%.

It was a big fall for the ASX 200 in one month, but it was an even bigger drop for the ASX retail share.

Despite the decline of more than 25% since the end of April 2022, JB Hi-Fi shares have only just gone lower than where they were before the COVID-19 crash in 2020.

The operator of The Good Guys stores, as well as JB Hi-Fi stores in Australia and New Zealand, has seen a lot of sales through its doors (and online) over the past two years. However, investor sentiment has turned against the business in the backdrop of high inflation and rising interest rates.

What happened in June?

The retailer didn’t release any market-sensitive news to investors during June. The last operational update came in May, which I will recap in a moment.

However, one of the main things that did happen in June was that the Reserve Bank of Australia (RBA) decided to increase the interest rate by 50 basis points, or 0.5%. That’s a large increase in one month, though the RBA did it again yesterday.

As a retail business, some investors may be thinking that there could be less demand for products sold by JB Hi-Fi.

For example, Macquarie is feeling pessimistic about the outlook for the retail sector, though acknowledges that JB Hi-Fi is high quality in the industry. It pointed out that households have already bought a lot of household products during COVID, so demand here could reduce.

The broker UBS has similar thoughts, noting the increasing costs in numerous areas that households are now facing, which will make it a tougher environment for the ASX retail share.

The UBS price target is now $38 on the JB Hi-Fi share price, while the Macquarie price target for the ASX retail share is $40.90.

Latest sales update

While the following figures are essentially old news considering the inflationary environment, it’s worthwhile pointing out that JB Hi-Fi was still achieving growth.

The ASX retail share said that in the third quarter of FY22, JB Hi-Fi Australia sales were up 11.9% year on year, JB Hi-Fi New Zealand sales were up 4.8% and The Good Guys sales went up 5.5%.

It also said that the aforementioned sales momentum had continued into the fourth quarter in April. However, the company warned that it was still seeing disruption to stock availability and operations because of COVID-19 and other local and global uncertainties.

The company points to four competitive advantages that it has – scale, a low-cost operating model, multichannel capability and its people and culture.

The post Down 16% in June: What put the JB Hi-Fi share price on sale? appeared first on The Motley Fool Australia.

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More reading

• Why are ASX 200 retail shares getting bought up today?
• How did ASX 200 retail shares perform in June?
• ASX 200 retail shares in the doldrums today despite improving sales data
• ASX 200 midday update: Tech shares tumble, Collins Foods jumps
• What impacted ASX 200 retail shares this week?

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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New Zealand software maker Xero Limited (ASX: XRO) has made plenty of investors wealthy during its lifetime.

The company originally listed on the NZX, but over its almost 10-year life on the ASX, the stock has gained an impressive 1,636%, according to Google Finance.

But 2022 has seen the party come to an abrupt pause.

Unfortunately, Xero shareholders have watched in horror as their shares made a 44% loss over the 2022 financial year.

In fact, Xero shares plunged 14% just in the final month.

Yikes.

Growth over profit

There is no doubt much of the stock price plunge has been due to investor sentiment turning against technology businesses.

The S&P/ASX All Technology Index (ASX: XTX) has shed more than 40% since November as the market turned against high-growth companies.

Xero certainly didn’t release any shocking news over the past 12 months that would suggest it deserves to be almost halved.

Even the freefall in June seemed to be driven by external factors.

“Xero recorded a loss of 13.8% over the month, a marked underperformance of the broader S&P/ASX 200 Index (ASX: XJO),” reported The Motley Fool’s Sebastian Bowen.

“This was despite the absence of any news or announcements out of Xero over June. So it’s likely the nasty falls Xero shares experienced were purely driven by the investor apathy towards tech shares that we saw during the month.”

The only performance-related bump could have been back in May after the release of its full-year financials.

Even though the company posted decent numbers, the market punished it for investing its earnings back into the growth of the business — rather than boosting profits.

Xero shares sank 10% within just a few hours of that result.

The pros love Xero

Despite the rapid fall in the stock price, Xero still has plenty of fans.

In fact, professional investors seem to suggest the high quality of the business means it’s now more attractive to buy than ever before.

According to CMC Markets, nine out of 15 analysts rate Xero as a strong buy.

Back in May, Shaw and Partners portfolio manager James Gerrish revealed that the accounting software provider was the biggest holding in his personal portfolio.

“We didn’t think the [financial] result was a bad one. They have simply prioritised growth over profit, which the market currently doesn’t like.”

The post How did Xero shares do in the 2022 financial year? appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Wednesday
• Here are the top 10 ASX shares today
• What’s going on with ASX 200 bank shares on Tuesday?
• Why the ASX 200 is rallying after the RBA’s rate hike today
• Why is the Woodside Energy share price leading the ASX 200 higher on Tuesday?

Motley Fool contributor Tony Yoo has positions in Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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With interest rates rising, the outlook for both ordinary Australians and businesses is pretty gloomy.

Consumer spending will certainly dip for the rest of this year, and debt repayments are becoming more onerous for homeowners and companies.

But there are some ASX-listed businesses that have enough tailwinds that macroeconomic conditions might not be enough to put them off.

Medallion Financial Group director Phillippe Bui recently named two such ASX shares to buy:

No end in sight for the energy crisis 

The war in Ukraine continues to drag on, which means global oil and gas supplies will remain disrupted at an unprecedented scale.

“We expect energy prices to remain above historical averages, despite the possibility they may moderate during 2022,” Bui told The Bull.

This is why he likes the look of Santos Ltd (ASX: STO), despite already seeing the share price increase more than 13% year-to-date.

It was even up in excess of 32% until everything cooled off in June.

Bui expects Santos’ fortunes to kick on.

“Over the medium term, we expect LNG prices to remain resilient, given an expected reduction in coal fired energy.”

Bui is not the only one bullish on Santos. According to CMC Markets, 11 out of 17 analysts surveyed rate the energy producer as a strong buy. A further three recommend it as a moderate buy.

Santos shares also pay out a tidy 2.6% dividend yield.

Margins squeezed but business is growing

Industrial property provider Goodman Group (ASX: GMG) has been a darling of investors over the last half-decade as demand from e-commerce ran hot.

But this year the valuation has taken a 30% dive.

“The share price is off its year highs in response to investor concerns regarding rising interest rates possibly impacting margins.”

This may be an overreaction by the market though, as Bui noted Goodman is a growing business.

“The company still has a substantial development pipeline and a track record of increasing rent per square metre by 10% a year in the past six to seven years.”

He was also pleased with the last financials.

“This integrated commercial and industrial property group upgraded impending fiscal year 2022 results. It lifted earnings per share [EPS] guidance [by] 23%.”

Goodman is also a favourite among the wider professional community. Eight out of 12 analysts surveyed on CMC Markets rate it as a strong buy.

The post 2 bargain ASX shares with good times ahead: expert appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Interest rates have now jumped an astounding 125 basis points in just nine weeks.

In May, many homeowners had never ever seen their home loan repayments rise. But after the Reserve Bank of Australia increased rates on Tuesday for the third consecutive month, there are now plenty of Australians feeling acute financial pain.

The RBA has a job to do in bringing inflation under control. Otherwise the country could find itself in irreparable long-term trouble.

But will the Australian people become collateral damage, with rising rates degrading consumer morale so much that the country slips into recession?

Shaw and Partners portfolio manager James Gerrish said it’s certainly not out of the question.

“Arguably the main issue facing everyone today is never before in history has the RBA started hiking rates when consumer confidence was already so depressed.”

In normal times, just a slight pullback in real estate prices is enough to curb Australians’ enthusiasm.

But 2022 ain’t normal.

“This year there’s a multitude of factors weighing on us all — including soaring fuel, food and everyday living costs before we even consider lingering COVID & geopolitical tensions,” said Gerrish in his Market Matters newsletter.

“Leading economic indicators are already suggesting that the US has entered a recession… Australia feels likely to follow suit, although our strong labour market and commodities exports should help the downturn.”

Gerrish’s team suspects the RBA will start cutting rates in “late 2023” to give the economy a breath of life. But clearly there’s a long way to go before that can happen.

Meanwhile, everyone may have to deal with a recession. And there are certainly some ASX shares to buy that could fare much better than others during such times.

The ASX shares best placed to withstand an economic downturn

According to Gerrish, the sectors that best survive a recession are utilities, consumer staples, telecommunications, health, and gold.

The areas to avoid are industrials, diversified financials, resources, and real estate.

Packaging supplier Orora Ltd (ASX: ORA) is one that Gerrish likes at current prices.

“We believe Orora is reasonable value trading on an estimated PE [price to earnings ratio] of 17.7x for 2022 while its 4.2% unfranked yield is a useful top-up for performance.”

The Orora share price has risen more than 3% year-to-date during a period when most stocks have taken a tumble.

“The company is growing in North America while inflation has been navigated by timely price increases — i.e. the business has pricing power,” said Gerrish.

“For good measure, sustainability trends are aiding demand for Orora’s cans and fibre packaging solutions. While it stays ahead of the curve in this department things look solid for Orora.”

Coles Group Ltd (ASX: COL) shares are more expensive, but the supermarket giant is another reliable name to get through tough times, according to Gerrish.

“The stock is not particularly cheap trading on an estimated PE of 23.9x for 2022 but a sustainable 3.4% fully franked yield makes it relatively easy to be patient if concerns are growing towards much of the ASX.”

Gerrish added that Coles “delivered a solid result” last quarter with “sales growth driven by accelerating inflation”.

“Everything looks solid over the next year or two with Coles but it will need population growth to expand meaningfully moving forward.”

His third pick, and perhaps with the least conviction of the three, is alcohol and hospitality provider Endeavour Group Ltd (ASX: EDV).

“Our main concern [is] whether the stock’s close to being fully priced,” said Gerrish.

“The stock’s not cheap, trading on an estimated PE for 2022 of 27.8x — richer than Coles for a similar amount of revenue growth. However, margins are better and profitability is growing at a higher clip which could justify the premium multiple.” 

The idea here is that demand for alcoholic drinks, whether bought for home or at a pub, is maintained through economic downturns.

“People are partial to a drink during tough times and the owners of Dan Murphy’s and BWS are clearly well-positioned for this trend,” Gerrish said.

“The group [enjoys] online sales In excess of $1 billion with 40% of its sales now digitally influenced.”

One caveat with recession busters

When picking recession-busting defensive ASX shares to purchase, Gerrish cautioned investors to watch the price they pay.

“We must be mindful that investors have been migrating their portfolios towards defensives for many months,” he said.

“Hence don’t expect any bargains… For example, so far in 2022 the utility stocks are all up while retail is all down.”

The post 3 ASX shares that could survive a recession: expert appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

If there’s a perfect word to sum up the first six months of 2022 for the investing community, I believe it’s “Yuck!” As of the closing bell on June 30, 2022, the U.S. stock market delivered its worst first-half return in 52 years. 

Since hitting their respective all-time closing highs between mid-November and the first week of January, the widely followed Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and growth-stock-driven Nasdaq Composite (NASDAQINDEX: ^IXIC), respectively plunged by as much as 19%, 24%, and 34%. You’ll note these figures firmly entrench the S&P 500 and Nasdaq in a bear market, with the iconic Dow Jones just one bad day away from joining its peers. 

But the big question on the minds of Wall Street professionals and investors is very simply, “How far could the stock market fall?” The answer may lie with two key indicators.

Valuation comes into focus during bear market declines

When the benchmark S&P 500 falls into a bear market, it’s not uncommon for equities to experience multiple compression. In other words, price-to-earnings (P/E) ratios, price-to-sales ratios, and so on, decline to reflect a general wave of pessimism throughout the investing landscape and broader economy.

What you might not realize is that this pessimism has resulted in the S&P 500’s forward-year P/E ratio falling into a similar range during significant pullbacks. During the coronavirus crash in the first quarter of 2020, the fourth-quarter pullback of 2018, and the end of the dot-com bubble in 2002, the S&P 500’s forward P/E bottomed out between 13 and 14 each time. 

As of the end of June 2022, the S&P 500’s forward P/E ratio stood at 15.8. If the S&P 500’s forward P/E ratio were simply to fall to the median of its historic pullback range (i.e., 13.5), the index would decline by an additional 14.55% from where it closed on Thursday, June 30. This would imply a bottom of around 3,235 on the S&P 500.

Of course, this calculation only holds merit if the “e” component, earnings, doesn’t change. With the nation’s central bank rapidly increasing interest rates to bring historically high inflation under control, there’s a high likelihood that corporate earnings revisions are in the offing.

FINRA Margin Debt data by YCharts.

Margin debt is an ominous indicator for the broader market

The other key indicator that can be helpful in identifying how much further the stock market could plunge is outstanding margin debt. Margin debt being the amount of money borrowed from brokerages by investors, with interest, to purchase or short-sell securities.

As a general rule, it’s perfectly normal for the amount of outstanding margin debt to grow in-step with the aggregate value of the equity markets over time. What sounds the warning bells is when margin debt skyrockets over a short period. History has shown time and again that rapid increases in risk-taking end poorly.

Since the beginning of 1995, there have been three instances where margin debt increased by 60% or more in a 12-month period. It first occurred between March 1999 and March 2000, and pretty much marked the top of the dot-com bubble. The ensuing bear market was the longest on record (929 calendar days) and wiped out nearly half of the S&P 500’s value.

It next occurred between June 2006 and June 2007, which was just a few months prior to the financial crisis taking shape. The S&P 500 shed 57% of its value by the time March 2009 rolled around.

Lastly, margin debt soared again between March 2020 and March 2021. If history serves as a guide, the S&P 500 could lose half its value. This would put the bottom a long way off at around 2,400. 

Patience pays off handsomely

According to these two indicators, which have proved fairly accurate over the past quarter of a century, the S&P 500 is unlikely to find a bottom until somewhere between 2,400 and 3,235. For context, it ended the first half of 2022 at 3,785.

However, no indicator is foolproof. If there was a surefire index or indicator that told investors when to buy, we’d all be using it by now to get rich.

While the prospect of additional downside in the near-term might be unnerving to some investors, I’d again point to history as your guide. That’s because every single stock market crash, correction, and bear market throughout history (excluding the current bear market) has eventually been cleared away by a bull market rally. In short, it pays to be both patient and optimistic.

With the Nasdaq and S&P 500 in bear market territory, and the Dow Jones mired in a steep correction, now is the ideal time for long-term investors to put their money to work.

Arguably one of the smartest investing strategies to employ when market volatility picks up is dollar-cost averaging. Dollar-cost averaging involves putting your money to work at specific time intervals, regardless of where a stock happens to be trading. It’s a great way to remove some of the emotional aspects of investing in a down market. 

A plunging stock market is also an excellent time to buy dividend stocks. Publicly traded companies that regularly pay a dividend are usually profitable and time-tested. Having navigated tough times before, these are just the type of companies we’d expect to increase in value over long stretches. 

The point being that now is not the time to run for cover. Rather, it’s the time to consider putting some of your available cash, which won’t be needed for bills or emergencies, to work. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post How far could the stock market fall? 2 indicators may hold the answer appeared first on The Motley Fool Australia.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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