In this Stockhead series, corporate advisory firm Barclay Pearce Capital  highlights the key trading themes of the week, along with which companies and sectors readers should be keeping their eye on.

By post-COVID standards, January marked a fairly wild month on the ASX and early signs in February suggest the volatility looks set to continue.

Stubborn inflation is forcing central banks to respond, which means financial conditions look set to tighten.

By this point, markets know the US Fed is going to raise rates.

And in comments earlier this week, RBA governor Philip Lowe left the door open to a rate rise in 2022, although he stressed the central bank is willing to remain “patient” and look through higher inflation prints in the near-term.

For investors, it means capital now has to be allocated while central banks face a more acute policy challenge to normalise rates without blowing up the recovery.

As complexity rises, Stockhead caught up for our first chat of the year with Trent Primmer, Head of Trading at Barclay Pearce Capital.

The tech selloff in January meant that 45 of the top 50 ASX small caps to start the year were in resources.

And that’s where Primmer and his team have steered their portfolios as local investors get ready for February reporting season.

Commodity focus

Around the middle of last year, Barclay Pearce Capital took the view that supply and demand forces would converge to drive oil prices above US$100/barrel.

“I felt like one of the few people saying that at the time and a few people thought we were crazy,” Primmer says.

“But now you’ve got large investment banks coming out saying the same thing.”

The prediction is still on track, with Brent crude consolidating near US$90/barrel within a broader uptrend.

“Oil is still somewhere we want to be. So we’ve stayed with those blue chip names, — Woodside (ASX:WPL) and Santos (ASX:STO).

“And among those larger stocks, we still like Beach Energy (ASX:BPT) which give more direct leverage to the oil price than your typical blue chips,” he said.

Switching from oil to bulk commodities, the Barclay Pearce Capital team has also allocated the portfolio to iron ore exposure with prices rallying strongly through the end of January.

“We were buying dip there, because we were in that camp that believed the (China) production outlook would change on the other side of the Winter Olympics,” Primmer said.

“So Rio (ASX:RIO), Fortescue (ASX:FMG) and Champion Iron (ASX:CIA) have been our favoured investment in that space.”

And in rare earths, Primmer has been tracking the recent selloff in one of the ASX’s more established players — Lynas Rare Earths (ASX:LYC) — which has fallen below $9 from recent highs above $11.

“That’s a stock where we’ve sitting on sidelines looking for a pullback, which will give us an attractive long term entry point,” he said.

Riding the rates rollercoaster

If the central bank outlook comes to fruition, then guidance from the US Fed suggests it’s going to raise rates faster than the RBA this year.

In that environment, Primmer said to keep an eye on established ASX companies that generate a material portion of their revenues in US dollars, in the event of a rates-based appreciation in the greenback relative to the Aussie dollar.

“Some of those blue-chip names with exposure to US earnings — Aristocrat Leisure (ASX:ALL), James Hardie (ASX:JHL), Cochlear (ASX:COH) and CSL (ASX:CSL) – look good in that scenario,” Primmer said.

Judgment Day

Lastly, Primmer noted that the early-year volatility is flowing into February reporting season, which will see a spate of ASX stocks get graded for their first-half results.

With earnings results around the quarter, Primmer said the Barclay Pearce Capital team sold down some positions in the wake of the year-end Santa rally, and has bumped up its cash weighting to around 30%.

“I’ve always been pretty big believer in holding a higher cash weighting when markets are running hot,” he said.

To illustrate, he highlighted the move in tech stocks since November, as inflation prints stayed high and the rates outlook changed.

“The selloff in those high-beta tech stocks shows you how quickly a hot market can turn.”

And as the post-COVID liquidity taps start to tighten up, investors will cast an increasingly discerning eye over company earnings results.

“I think the perfect time to hold cash is coming up to earnings season because you get a read through — not just on the earnings trend but often on the company outlook,” Primmer said.

In the current environment, this February reporting season will be “judgment day for a lot of these companies”, he said.

“It will show whether their value is underpinned by strong fundamentals, or investors have been buying the stock from fear of missing out.

“There’re still come companies with some sky highs valuations but if they miss expectations — and some probably will — you’ll have a massive smackdown from the market when they report.”

Already there’s evidence of that happening with some sharp selloffs — particularly for tech and ecommerce stocks.

At the same time, it hold makes sense to “hold cash and deploy that for bargains”, Primmer said.

“It will still be the case that fund managers and ‘insto’ investors will be topping up holdings in companies that have reported well.

“And generally they throw in considerable size positions. So if there’s a good earnings read on one of your favourite companies that might have been caught up in the market pullback, that’s where it will pay to deploy some cash, increase your weighting in the stock and ride that wave.”

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.