ST Wong is the chief investment officer of Prime Value Asset Management.

Has the ASX passed its low for this cycle?

I don’t know if we have seen the absolute bottom of this cycle, although I think we’ve seen the lows for many individual stocks.

Investors hope for a return to more normal markets, but we need to avoid anchoring on past growth rates, profit margins or stock prices. There are currently so many uncertainties, including slowing economies in the USA, Europe, and Australia, and a US Federal Reserve aggressively tightening monetary policy to curb inflation. The ASX is likely to be volatile until some of these uncertainties are cleared up.

On the positive side, I’m confident that when we look back at this period three years from today, well-managed and well-financed companies, such as building materials manufacturer James Hardie and fund management house Pinnacle Investments, whose share prices have declined substantially today, will have not only survived but prospered.

Which stocks have you sold amid the market volatility?

We have taken advantage of the market rally to reduce our holdings in the financial sector. These included our holdings in NAB and Macquarie, particularly on the back of their strong share price performance over the past two years.

We have also reduced our holdings in Computershare as the market has gradually come round to appreciate the company’s significant leverage to higher interest rates.

Which stocks look appealing heading into the new year?

I think we’re going to be in a much less narrowly concentrated market going forward, with more opportunities for stock picking.

For example, Fisher and Paykel Healthcare has gone from a company which enjoyed a significant pull forward of respiratory equipment demand to being challenged for sales as the pandemic eased. But there are signs that demand for the company’s equipment is recovering as hospitals run down their inventory, mentioned in the company’s recent half-yearly results. Leading into 2023, Fisher & Paykel’s margins should improve as manufacturing efficiencies return on higher volumes, and as elevated supply chain costs ease.

Any IPOs you’ve bought into, or like the look of?

We bought into the Pexa IPO last year, and added to our position, but exited the stock at just under $20 during late 2021.

What’s a stock you like that (most) people haven’t heard of?

Omni Bridgeway is an interesting company, which funds clients in dispute resolutions when pursuing legal claims. In return for its litigation funding, Omni Bridgeway books a management fee and/or a proportion of a successful settlement sum. The company models itself as a financier and fund manager funding claims from an investment case perspective.

The company is one of the larger operators globally for this differentiated but growing asset class. Claims cases are managed through an investment fund structure, where Omni Bridgeway’s first-generation funds are starting to mature. Omni Bridgeway’s second-generation funds offer a more stable earning profile with management fees, performance fees and share of successful settlements contributing to profits.

More importantly, Omni Bridgeway has an opportunity to lift earnings as management aims for $5 billion in funds under management over the medium term.

Is it time to take profits on the banks?

The RBA is likely to keep increasing interest rates, at least into early 2023. Higher interest rates will continue to underpin positive net interest margin spreads into the first half of 2023 and will be the largest driver of banks’ earnings. However, competition will intensify in the sector, offsetting some of the interest rate benefits. How fierce this competition will be is uncertain.

It may be prudent to take some profits off the table given the strong performance of bank stocks this year, and the potential for looming headwinds such as rising costs for employees and technology, potential increases in bad debts as the economy slows, and softening loan demand as higher interest rates get to work.

The opportunities for 2023 lie with ANZ and Westpac, the cheaper of the major banks. But that opportunity will only be realised if they can sustain a good recovery in their core business, a task made harder by the slowing economy.

What’s a stock you like that you don’t own for some reason?

Cochlear. There are clear structural demand trends for the cochlear implant, and Cochlear is a strong competitor in the global market with an excellent product.

Management is disciplined, holds a strong balance sheet, and it is a high margin business. Very few Australian companies have attained the level of Cochlear’s manufacturing excellence.

Unfortunately, to manage downside risks I avoid owning a concentration of single product companies. For that reason, I don’t own Cochlear for now.

What’s your favourite local bar/restaurant? What’s your go-to order?

Piccolina Gelateria, for high quality Italian gelato. My go-to store is on Glenferrie Road in Hawthorn. Generous scoops, great choice of flavours and fresh ingredients. My preference is the peanut butter gelato.

Any podcasts or TV shows you’d recommend?

I enjoy the New York Times podcast called The Daily, where NYT journalists discuss and explain the news. They look at the topical major issues in some depth – for example, a recent episode covered the many controversies surrounding Qatar’s hosting of the 2022 soccer World Cup.

Source: Australian Financial Review

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