This article was originally published on on July 21th, 2023

The most anticipated recession in history still hasn’t turned up. All those calls about a US-led recession starting in 2023 have been pushed back. In some cases, those calls are being pushed as far back as the second half of 2024. Others, like Goldman Sachs, have just cut the odds of a US recession occurring altogether – it’s now down to a 20% chance in its eyes.

Here in Australia, disinflation continues to occur with the headline print recently coming in at +5.6% year-on-year. Sure, it’s not the RBA’s cherished 2-3% target but it’s a lot nearer than the 8% we were experiencing at the end of last year. The unemployment rate is still below 4% and the economy is still expanding.

Australian GDP (Source: RBA, ABS)

Corporate earnings also continue to be resilient and earnings guidance statements so far this confession season continue to provide an impetus for this market to grind slowly but surely higher in spite of all the headwinds.

All of this begs an important question – what if the optimists were right all along? And if they are, what stocks do you want to own in that dream scenario?

In this edition of Buy Hold Sell, we’re talking about which ASX-listed stocks you would want to own (or not own) in a Goldilocks scenario. Joining moderator Hans Lee are Andrew McKie from Elston Asset Management and Rob Crookston from WILSONS.

Note: This episode was taped Wednesday 12 July 2023. You can watch the show, listen to the podcast, or read an edited transcript below.

Edited transcript

Hans Lee: Hello, and welcome to Livewire’s Buy Hold Sell. I’m Hans Lee. That recession everybody keeps talking about, well, it still hasn’t come. So which stocks would you want to own if inflation comes down, GDP steadies, and rates stop rising? That’s right, we’re talking about the Goldilocks scenario today with Andrew McKie from Elston Asset Management and Rob Crookston from Wilsons. First company, Amcor. The global packaging company with food and beverage clients, primarily. Andrew, buy, hold, or sell?

Amcor (ASX: AMC)

Andrew McKie (BUY): We’d still be a buy, and we’d be a buy under that scenario. If you look at that scenario from an inflation perspective, that dials back. We think that helps them in terms of their costs, and there are some lag effects in that business. They put through price increases in both flexibles and rigids, so they get lag benefits if inflation comes off, we think, in terms of margins. In terms of GDP, they actually haven’t been as defensive as you might think. There’s been a lot of change in terms of consumer behaviour. Think of basket size for staples. And if you think of the actual underlying customer in terms of the businesses that they do business with, they’ve been de-stocking, decreasing inventory. So although the top line’s been growing, it has been driven by price, while volumes have been coming off. So they’ve not been a huge beneficiary of this sort of defensive trade, if you like.

And then lastly, if we saw rates come off, they’re very active in terms of capital management, so we think that decreases interest expense for them. At the same time, it improves valuation as well if bond yields come down. So that’s a buy for us.

Hans Lee: So it’s a buy on Amcor for Andrew. Rob, the share price down about 20% year-to-date. How do you feel about this? Buy, hold, or sell?

Rob Crookston (SELL): It’s a sell for us. And the reason for it, in a Goldilocks scenario, we think there’d be a rotation away from defensives or perceived defensives, which we think Amcor is. We’d probably struggle to hold it in any scenario at the moment. It has low to mid-single-digit growth over the cycle, so we struggle with the growth aspect. And really, over the last 12 months, we’ve seen it hasn’t had the pricing power in the face of lower volumes and higher costs – and that concerns us as well. Is it really defensive? Probably not. So it’s a sell for us.

Fisher and Paykel Healthcare (ASX: FPH)

Hans Lee: Staying with you, Rob. We’re talking Fisher and Paykel Healthcare. A dual-listed company, manufacturing respiratory and sleep apnea products, it returned about 20% this year. Buy, hold, or sell?

Rob Crookston (HOLD): It’ll be a hold for us, Hans. The key here, in the Goldilocks scenario, is that we think growth stocks would perform pretty well. So that lower inflation, lower rate, low bond yield environment that you’d see, I think that would benefit the growth part of the market. And Fisher and Paykel certainly is a growth stock. The reason we’re a hold is that I just see there are better growth opportunities at a reasonable price in the healthcare sector, probably stocks like ResMed (RMD) and CSL Limited (CSL) over Fisher and Paykel. So that’s the only reason we’re a hold.

Hans Lee: Andrew, it’s on a PE ratio of something in the order of about 52x.Buy, hold, or sell for you?

Andrew McKie (SELL): It’s a sell for us, purely on that (PE of 52x). It’s a good quality business, no doubt, but purely on a valuation basis, extending from what Rob’s saying, we think there are better opportunities for our investors elsewhere. We think it is too highly rated for potentially the work they have to do. Obviously, hospitals benefited from COVID. They’ve got to see the consumable side pick up, and there’s quite a pathway for them to improve margins over the next three to four years. So from a relative point of view, we think there’s better opportunities out there. So, great high-quality business, we’ve done a lot of work on it, we like the business, but from a valuation point of view, there are just better opportunities.

Computershare (ASX: CPU)

Hans Lee: Third stock now, Computershare. It was touted as a major beneficiary of rising interest rates, but it’s actually fairly flat over the last year. Andrew, buy, hold, or sell?

Andrew McKie (BUY): It’s a buy for us. So yes, the margin business has benefited enormously, incredible increase in their cash flows from rising interest rates. I think that’s why you’ve seen a slight de-rating – people are expecting cash rates to have peaked and roll off, and that would affect their earnings. And no doubt there is sensitivity to that side, but we’ve probably already seen that in the market. However, the other side of the business, the market-facing side of the business has actually been quite constrained in terms of volumes, if you think of market activity and equity markets from an issuer’s point of view. So in that scenario where we saw a settling down of equity markets and credit markets and more confidence from the economic point of view, we would think the market-facing businesses do a lot better.

At the same time, we’re not going back to QE, we’re not going back to zero rates. We’re still going to have a reasonably robust inflationary environment, and so we think margin business still does well. In that context, potentially by 2025, they’ll be in a net cash position. So it’s buybacks acquisitions for us. It’s a very strong business at the moment.

Hans Lee: Rob, it does have a PE ratio of about 45x, so it’s another one of these high PE businesses. But 13 out of 17 brokers who cover the stock also say it’s a buy. What do you think? Buy, hold, or sell?

Rob Crookston (SELL): It’s a sell for us, Hans. And really, that’s the Goldilocks scenario. It was a rate beneficiary. I just think the market rotated away from those rate beneficiaries. And Computershare fits that, so you have to see the rotation in that sort of scenario.

Hans Lee: So we’ve pitched some stocks at our fund managers in terms of a Goldilocks scenario, now it’s time to see what the experts have brought us. Rob, what is one stock that you think is primed for a Goldilocks scenario, and why?

James Hardie (ASX: JHX)

It’ll be James Hardie. And I think that scenario, again, low inflation, steady GDP, but really the key, lower rates. That would benefit housing construction and renovation. And that’s the key for James Hardie, being a building materials company. So the macro backdrop would be pretty good for Hardie’s in that scenario for us. And what we also like about Hardie’s is that there is a structural story there. And that’s the shift, really, in the US – which is Hardie’s key market – away from timber and towards fibre cement cladding. That’s really the key.

Over the last 12 months, James Hardie has fallen, but really, earnings are actually still flat relative to where they were in FY22, which is pretty interesting. So it’s probably one of the worst macro backdrops it’s had, earnings have stayed flat, which I think shows some of the resilience that Hardie’s has. But that said, you’ve got a good structural story, but I think in a Goldilocks scenario the structural story should accelerate, which is even better for Hardie’s.

Hans Lee: That US housing market story is going to be particularly important for them. Andrew, one stock primed for a Goldilocks scenario, what have you brought us?

Macquarie Group (ASX: MQG)

Andrew McKie: It’s Macquarie Group. We’ve owned Macquarie now for 13 years or so since we started. And for us, the story doesn’t really change too much. In terms of the particular scenario though, if we look at Macquarie’s operations, that would benefit them in terms of rates coming down, inflation coming down. In terms of asset prices, Macquarie is a big asset manager – particularly private markets and infrastructure assets. So we think that would be supportive or remove some concerns in the market about revaluation (mark-to-market) of some of those underlying assets. We think it also helps in terms of flows, because you’re then starting to get to a scenario of looking for yield again. So we think that helps them in terms of net flows. And if equity markets settle down and credit markets settle down, that will help investor confidence generally.

We really like the Green Investment Group, the amount of capital that must be raised to drive the transition to lower carbon emissions, energy. Macquarie are all over that. They’ve recently transferred that division into the Macquarie Asset Management. So they’ll go from being more of an asset owner to an asset manager, which is a lower capital requirement for them, more recurring revenues, more performance fees, less one-off revenues. So yeah, we see a scenario with less capital intensity, higher return on equity, and more recurring revenues generally. So, we like Macquarie.

Hans Lee: To Andrew McKie from Elston Asset Management, to Rob Crookston from Wilsons, thank you both for joining me. And thank you for joining us. If you enjoyed that episode of Buy Hold Sell, please subscribe to our YouTube channel and to both websites, and See you next time on Buy Hold Sell.

If you would like more information, please call 1300 ELSTON or contact us.