How these ASX investors are positioned (including 17 stocks on their watchlists)

With a strengthening view in developed markets that inflation has been tamed, many commentators also believe interest rate tightening is done. But market volatility persists, spurred by a combination of factors including geopolitical risks such as wars and elections, to name a few.

So, we recently asked a couple of professional investors, Shaun Weick from Wilson Asset Management and Romano Sala Tenna from Katana Asset Management, how they’re currently positioned to avoid the potholes and drive returns in 2024.

In this wire, they outline some of the risks they believe you should keep on your radars, share how much cash they are holding to safeguard portfolios, and highlight the stocks they're watching most closely this February reporting season.

What metrics and macro indicators are you watching most closely?

As a boutique, Australian equities-focused asset manager, Sala Tenna notes that when weighing individual companies, “the balance sheet has moved up the list” in terms of importance.

“We believe that a lot of past sins have been hidden by the record-low cost of debt. If rates remain at more normal levels, we will see who has no clothes on when the interest rate hedges roll off,” Sala Tenna says.

“We are also more focused on the quality of business models, as this will determine the ability to maintain margin as consumption shrinks.”

Sala Tenna emphasises his view that within this later stage of the economic cycle, companies exhibiting sustainable growth will trade at an even higher premium.

From a macro perspective, he notes that inflation is “front and centre and really is the only game in town.”

“We are also focused on US market index technicals, as they are proving the most reliable signal at present.”

WAM watches for catalysts

At Wilson Asset Management, the investment team watches for “catalyst” events that can drive significant changes in share price.

“This could include acquisitions or divestments, management changes, which we believe can drive improvement in operating performance, or most importantly, earnings upgrades – which is a particular focus for us leading into the February reporting season,” Weick says.

On the macro front, Wilson Asset Management is closely focused on inflation and interest rate expectations.

“We believe interest rates have peaked and expect central banks such as the RBA and US Federal Reserve to cut interest rates at some point this year, which sets up a favourable backdrop for equities, in particular small-cap companies, which have underperformed the broader market by more than 25% over the past 18 months,” Weick says.

How much cash are you holding?

Katana Asset Management runs two ASX-focused investment strategies: the Katana Capital (ASX: KAT) and the Katana Australian Equity Fund. The first of these is effectively fully invested, with a cash balance of just 3%.

The managed fund currently holds a 21% cash weighting, down from 35% six months earlier. Sala Tenna says decisions to invest more – or less – of this cash are made based on a combination of top-down and bottom-up considerations.

“Bottom-up is pretty straightforward - if we identify stocks that meet our criteria, then we will utilise our cash reserves,” Sala Tenna says.

“Top-down is a little trickier and is where investors usually run into trouble! But from here we would continue to deploy capital if price technicals continued to be constructive, the macro-environment continued to support the soft-landing thesis, and interest rate cuts arrive before the consumer is overly damaged.”

Over at Wilson Asset Management, the WAM Active portfolio currently holds approximately 11% in cash, which is in line with its historical average.

“We are bullish on the outlook for equity markets and continue to deploy capital into attractive opportunities that fit our process, while at the same time taking profits and recycling capital in stocks we think have run hard over the past few months, as we believe they are more susceptive to profit taking on reporting results,” Weick says.

What stocks are you watching most closely

Katana is a size-agnostic asset manager, investing across the market cap spectrum of ASX companies, though it tends to favour large caps. But in the next 12 months or more, Sala Tenna is focusing more closely on companies in the small- to mid-cap market segment.

“The larger end of the market has been essentially picked over and is not offering a lot of opportunities to outperform the index,” he says.

“Yes, large caps will continue to appreciate as the record level of passive flows (ETFs and the like) drive index buying. But we suspect that the best source of alpha in the coming year will be, firstly, within mid-caps and then eventually in the emerging end.”

Sala Tenna also expects to see a considerable uptick in mergers and acquisitions activity in 2024, having identified what he believes is a record number of potential takeover candidates.

Four small and mid-cap companies he believes are in the “sweet spot” for M&A activity this year are:

• Pepper Money (ASX: PPM)

• West African Resources (ASX: WAF)

• Praemium (ASX: PPS)

• De Grey Mining (ASX: DEG)

Wilson Asset Management views periods of heightened share price volatility – such as the half-yearly reporting season that’s just got underway – as ideal buying opportunities.

From a sector perspective, Weick and the team at Wilson Asset Management believe the local market is “broadly underweight” in consumer discretionary, financials, REITS, and parts of the industrials space.

“More recently, we have seen share prices rally aggressively where low expectations are met and often coincides with higher short interest,” Weick says. He cites Collins Foods (ASX: CKF), Credit Corp (ASX: CCP), and Megaport (ASX: MP1) as recent examples.

WAM watching retail, housing and tech

Some of the companies WAM is watching closely during this reporting season include the following retail names, where Weick says expectations appear quite low.

• Harvey Norman (ASX: HVN)

• Premier Investments (ASX: PMV)

• Breville Group (ASX: BRG) 

• Nick Scali (ASX: NCK)

Within the media and advertising industries, Weick and the team are watching the results and outlook statements from OoH Media (ASX: OML) and News Corporation (ASX: NWS), “whereby we think earnings could prove to be more resilient.”

Among housing and infrastructure-leveraged companies, WAM expects the following companies to benefit from improving conditions:

• Boral (ASX: BLD)

• Summerset Group (ASX: SNZ)

• Ingenia Communities (ASX: INA)

• Qualitas (ASX: QAL)

And finally, Weick believes the ASX technology space could deliver some positive investor surprises this earnings season, despite the sector’s “more divergent performance recently.” Key company results he’s watching here include those from:

• Life360 (ASX: 360)

• Car Group (ASX: CAR)

• Cettire (ASX: CTT)

This article first appeared on Livewire Markets.