2023 ASX Sector Analysis
Covering agriculture, mining, technology, finance, energy, industrial, and more; Australia's top fund managers share their insight into how the ASX is shaping up in 2023.
We asked them: Which sector are you most exposed to and why? Which stocks do you own in that sector?
Our biggest exposure currently is to commodities and energy – these stocks have typically performed well throughout inflationary periods and, if in the right commodity, can hold a level of pricing power. We have a combination of oldworld fossil fuel stocks as well as the emerging green battery metal related companies as we continue to believe that the energy transition will require both areas to deliver. Some of the fossil fuel stocks we own include Whitehaven Coal (WHC), New Hope Corp (NHC), Stanmore Resources (SMR), and Karoon Energy (KAR). Some of the battery mineral related stocks include Syrah Resources (SYR), Lynas Rare Earths (LYC), Chalice Mining (CHN), Capstone Copper (Canada listed) and Arafura Rare Earths (ARU).
If you are interested in learning more about the Small Cap Stocks and how to invest in this area read more here.
Our two largest exposures are in the Industrial and Consumer Discretionary sectors. The Industrial space is primarily driven by our overweight exposure to the mining services sector, which we’ve gone into detail on above. Our second largest exposure, being the Consumer Discretionary sector, is entirely based on bottom-up view of each individual company. Three of our larger positions within the Consumer Discretionary sector are Webjet (WEB), SkyCity Entertainment (SKC) and Tabcorp (TAH). In the case of SkyCity and Tabcorp, both companies have an opportunity to expand operating margins over the medium term, either through internal initiatives at SkyCity or a more favourable regulatory / taxation environment for Tabcorp. Both have benefitted as lockdowns measures have eased and are expected to prove defensive in the face of a potentially weaker macro-economic environment.
We are a generalist and don’t really take a sectoral bet. Currently we have above average exposure to gold as the US dollar starts to weaken. We also have some exposure to selective technology and long dated assets as the US 10-year bond yield has eased. Finally, we have enjoyed a decent exposure to retail stocks in recent times but have been reducing this during December.
Technology is well represented. We own Hansen Technologies (HSN), Data#3 (DTL), Life360 Inc (360) and Dicker Data (DDR) among others. We like technology stocks due to their capital-light growth and because they’re relatively less sensitive to the economic cycle (although I suspect this will be tested next year).
Consumer Discretionary although we wouldn’t say that was a sector decision but rather where there were some stocks we like. PWR Holdings (PWH) is one, it has a very strong position in high end automotive cooling and is moving into other areas such as aerospace/defence. Webjet (WEB) is another, it made it through the downturn and has come out with more market share and a lower cost base. As airline capacity increases and travel with it, earnings should progress well.
Our largest sector exposure is to the traditional industrial space. Within that sector, three stocks where we have material investments include Auckland Airports (AIA), Lifestyle Communities (LIC) and Kelsian Group (KLS).
In the software we have found a number of compelling growth companies with global opportunities. Gentrack (GTK), a software provider to utilities and airports; Knosys (KNO), Knowledge management; Ansarada (AND), Virtual Data Room and Governance software.
Wealth Management is another sector well represented: Sequoia (SEQ) & Diverger (DVR). These two business service Accountants and Financial Advisors. Along with other listed players including Centrepoint Alliance (CAF), WT Financial (WTL) and CountPlus (CUP) we see a lot of value that could be created with consolidation. In the meantime, SEQ and DVR are growing, capital light businesses that pay dividends. Prime Financial Group (PFG) is a combined Financial Advice and Accounting group.
US Financials. We own 3 of the 4 largest banks (not Wells Fargo), Goldman and Virtu. We expect market activity to lift later in 2023 but in the meantime, the US yield curve is at its most invert since 1981 measured as 10 years minus the 2-year bond yields. (10’s are 80 basis points below 2’s at time of writing) so as that unwinds either way should be better for these companies. All trade on ~10- 12x P/E and still earning good returns in a tough environment.
We are exposed to energy. This is one reason why Under the Radar Report’s stock performance has been so strong, certainly compared to the average. We have tipped small cap niche conventional oil developers/producers, namely Karoon Energy (KAR), as well as lithium producers, Pilbara Minerals (PLS) and Allkem (AKE) to name two. We’ve also backed uranium producers such as Paladin Energy (PDN) and Bannerman Energy (BMN). We believe that the energy trend will continue because there is so much uncertainty and energy is literally the keystone for economic growth. Without it, you can’t grow, it’s that simple.
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