Sector Review: Quality Blue Chips
Recent news out of the US indicated that inflation may have peaked, with consumer prices in the US rising less than expectations. This highlights that although growth may be subdued for a time, it is by no means falling off a cliff.
What does this mean for investors?
It did prompt a bout of buying of global equities, because it means simply that although interest rates aren’t going down, they’re not going to keep racing up at the same rate. It also means that investors will continue to attach a premium to companies that have pricing power and strong balance sheets. This is why on average our Blue Chip stocks have been rebounding hard since mid-June.
Look at BHP Group’s $8.3bn bid for ASX listed copper/nickel producer OZ Minerals (OZL), whose assets aren’t even world class. This was an opportunistic bid after OZL’s shares were hit hard by weaker equity markets and a copper price that’s come off its highs. At one level it reinforces the value of producers of “future facing” commodities. At another it shows how the hunt is on for real assets, which I mentioned in Blue Chip’s previous issue. If you remember, we also said that inflation looks to be close to peaking, which is what this week’s US inflation data implied.
The fact is that big economies like the US, Europe, as well as Australia need to get aggregate demand down in order to align it to aggregate supply. This means that interest rates will keep rising, although the fear factor was taken out of the equation somewhat by the US inflation data.
If you are interested in learning more about the Blue Chip Stocks and how to invest in this area read more here.
Stocks that have real earnings, with real assets
Value will continue to be front of mind. This is what we are seeing in Small Caps, with increasing takeover activity, as well as big caps (OZ Minerals). Investors are cashed up, big and small, and looking for assets with which to hedge inflation.
With the reporting season coming up, I’ll go through what we think in Blue Chip sectors in a second, but some perspective is in order, with the reems of market commentary out there looking closely at the minutiae.
For many, their vast majority of wealth is tied up in a house and their own income earning potential from employment. What do equities do? They help you maintain your living standards over time. The markets are cyclical, but stocks are geared towards growth; some achieve this better than others at different times. Our job is to look through the cycles and say, is this stock doing its job at any one time.
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A Blue Chip Value Summary For Each Sector
We’re mainly concerned about the outlook for the Chinese economy. For now we’re happy to look through the lockdown difficulties, given the low quality of data coming out of that country. What we’re about to get is high quality data from the companies themselves. BHP’s bid alone says that it’s looking for more volume, which is what our focus is on.
We are heavily overweight the banks and may look to reduce. Having said that, we’ll still be overweight. If you are uncomfortable with owning too much of any one bank, it might be time to think about selling some.
In the main, the sector has come out with outstanding sales results, complimented by growing profit margins. A perfect world. But historic is the key word. We wouldn’t be buying more, given where are in the interest rate cycle.
If anything we’ll be looking for buying opportunities in the stocks we own. Find out here!
This should be a no brainer, but there is so much government involvement in this space it makes us nervous. We have an exposure because these stocks represent a great hedge against weakening consumer sentiment.
The stocks we own have global exposure in the main, which is a positive. We will hold on subject to valuation.
We like these companies and are happy to remain overweight. It’s easy because Origin Energy (ORG) has done so well. Unfortunately, they are declining in number as private equity and superannuation funds take them over.
A Final Thought
As you can tell, we have a defensive bias with Blue Chips. This provides great ballast for what I consider the exciting component of investing: looking for Small Cap Disruptors With Massive Growth Potential!
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