Strategists back ASX’s miners and insurers in inflation revival

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Tom RichardsonJournalist
Oct 30, 2023 – 4.20pm

Miners, energy stocks and general insurers are the sharemarket’s best antidote to the value destruction wrought by the bond sell-off, which signals accelerating inflation ahead, strategists warn.

Amid a record-breaking rout in government bonds as investors demand more compensation in the form of higher yields, the alternatives in the sharemarket are limited, according to Barrenjoey’s Damien Boey.

“We take a positive stance on resources, gold and energy, but are underweight banks, REITs [real estate investment trusts] and some interest rate-sensitive exposures,” the broker’s chief macro strategist said.

“Insurance stocks benefit as rates rise. We like travel, Qantas is reeling from political developments and is cheap.

“Telstra is another one, as we think the market saw higher bond yields as a reason to sell all bond proxies, but we think not to be indiscriminate, healthcare names are defensive as well.”

Barrenjoey strategist Damien Boey says he likes resource and gold stocks as bond yields signal inflation ahead.  Oscar Colman

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On Monday, the S&P/ASX 200 Index extended its losses to hit a fresh 52-week low of 6751 points. The surge in the yields of US 10-year Treasuries since the start of September has punctured the valuations of riskier assets such as equities worldwide.

Mr Boey said the United States government’s weakening fiscal position, as it faces ballooning bills for wars in the Middle East and Ukraine, means investors are worried above-target inflation will persist.

“US government debt is more likely to go up than consolidate, so that means the amount of money the US government and the Fed need to create to service the debt and pay the interest is enormous, you’re talking maybe 3 per cent of GDP,” he said.

“So, I’m not saying the government is going broke, but people are saying fiscal policy is dominating interest rates, not monetary policy.”

Avoid banks, retail

UBS’ equity strategist Richard Schellbach said investors should focus on the thematic drivers for shares over the next six to 12 months, rather than short-term flare-ups such as the risk of a widening conflict in the Middle East.

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“Those geopolitical events have always led to outperformance from gold and oil, that’s well understood,” Mr Schellbach said.

“But for the broader equity market the bigger picture remains the corporate profit cycle, the health of the domestic consumer, and central banks’ rate settings.”

The broker likes insurance stocks, which are benefiting from a premium repricing cycle, and argues investors should avoid banks, real estate, and consumer discretionary businesses such as apparel or home furnishing retailers.

“Our work indicates there’s further underperformance from those sectors to come and you need to be closer to the point of seeing rate cuts on the horizon before you can embrace the cyclicality,” Mr Schellbach said.

Some of the market’s best known stocks are beholden to their own issues.

On Monday, UBS financials analyst Scott Russell slashed his valuation on financial advice and wealth platform business Insignia by 26 per cent to $2 a share from $2.70.

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On October 20, Insignia said its chief executive Renato Mota would leave in February, as it struggles to integrate acquisitions and stabilise funds under administration outflows.

“We believe near-term operational risks are skewed to the downside and mid-term strategy appears uncertain whilst the company recruits for new management,” Mr Russell told clients in a research report.

Meanwhile, UBS has a buy rating on supermarket giant Coles after its September quarter trading update showed sales increased 6.7 per cent to $10.3 billion. The broker has a $16.25 price target on the stock, around 7 per cent higher than the $15.17 Coles shares were fetching on Monday.

“Looking forward, population growth and trading down from out of home are supports to real like-for-like sales growth,” the broker said.

“Yet execution at Coles continues to trail Woolworths and its broader position in market suggests greater risk of share loss to Aldi.”

Tom Richardson writes and comments on markets including equities, debt, crypto, software, banking, payments, and regulation. He worked in asset management at Bank of New York Mellon and is a member of the CFA Society of the UK as a holder of the Investment Management Certificate. Connect with Tom on Twitter. Email Tom at tom.richardson@afr.com

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​It’s too early to cycle into cyclical and interest rate sensitive stocks as the yields on US Treasury bonds keep rising. It’s too early to cycle into cyclical and interest rate sensitive stocks as the yields on US Treasury bonds keep rising. 

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