WHY VALUE STOCKS ARE IN DEMAND

In this article, our head of research, Richard Hemming explains the big economic conditions and where the big value is to be found in ASX stocks.

The board and senior management of Australia’s third largest pathology firm, ASX listed Australian Clinical Laboratories (ACL) must have been reading Blue Chip Value two weeks ago, when we upgraded Healius (HLS) to Buy, because following publication the firm made a hostile bid to merge with its larger rival.

HLS is up 20% this month. Not bad.

Another highlight is the near 7% dividend yield of ANZ Bank (ANZ).

The bank is one of the best valued in the sector. The above yield is before you include franking credits, and the stock trades on a single-digit price/earnings multiple. Yes, you read that right. Compare those figures to the average industrial yield of 4% and P/E multiple of 16 times.

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Fears of financial contagion are exaggerated

More to the point, to borrow from Mark Twain, the fears of a financial contagion following the demise of Silicon Valley Bank and the capitulation of Credit Suisse, are being proven greatly exaggerated.

While there was initial surprise about Credit Suisse, the bank has been teetering on the brink for some time due to poor management.

The question of the importance of regional banks such as SVB is a deeper one, however. What we can say is the market as a whole has looked past this event, as well as that of Signature Bank’s failure. We agree with the market.

In the case of our own banks, they have increased their capital adequacy to historically high levels due to banking regulator (APRA) requirements. To me this indicates that there are buying opportunities. Subscribers read Blue Chip issue #126 to find out our favourite banks that we think investors should consider buying now.

Global growth is at 3%

Overall, it is evident that global growth is not falling off a cliff.

Right now this is at 3%, while for rich OECD countries it’s at 3.4%, having been 3.7% prior to SVB.

There should be some weakness owing to uncertainty, but this will not be material based on historic examples putting it at 0.5 percentage points, according to the IMF.

Think about this: China is rebounding, supply chain blockages are easing and energy prices have fallen.

What about interest rates?

The US Federal Reserve did not pause its rate rises, raising by a quarter rather than a half last week, to a new target range of 4.75- 5.00%, the highest level since 2007. Our own RBA makes its decision on Tuesday and may pause at the current 3.6%.

Whatever happens, the inflation genie is a long way from being back in the bottle. Aggregate demand is still racing at a faster pace than aggregate supply, causing rising prices. It is highly likely that more pressure will need to be brought to dampen economic activity with inflation domestically tracking at 6.8%.

Although it is moving in the right direction, coming down from 7.4% in January, it is well above the RBA’s official target rate of 2-3% over time.

Actions for subscribers!

Subscribers read Blue Chip issue #126 to find out our favourite banks that we think investors should consider buying now.

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