MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Ron Shamgar, head of Australian equities at TAMIM Asset Management and John So, co-founder at VP Capital.


What’s hot right now?

Equity markets around the world continued to experience another challenging month in June.

“The main concerns on investor minds are persistently rising inflation and how far central banks will have to raise rates to combat this,” Shamgar said.

“TAMIM Management believe the current inflation figures are due partly to the excessive government stimulus and zero interest rate policies of the last two years, coupled with COVID related lockdowns across China and the ongoing sanctions on Russia – all adding to commodity price increases and supply chain bottlenecks fuelling inflation further,” he said.

“By raising rates, central banks will slow economic growth and dampen consumer spending.”

Shamgar explained it will be a delicate balancing act between controlling inflation from getting out of control, and accepting a higher medium term inflation target range, without forcing economies into a hard landing and a deep recession.


Current market conditions resemble the ’70s

The issues and dilemmas above are what markets are currently grappling with, he said.

“Having looked back in history, the current conditions resemble the 1970s period, where the 1973 oil crisis caused prices to spike and inflation topped at 13% back then.

“By mid-1974, Australia was in an economic recession.”

Markets sold off aggressively between 1973 to 1974, which then followed a significant rally on the ASX that saw markets triple in value up until the 1980s.

“This all happened during an interest rate hiking cycle and an inflationary environment,” Shamgar added.

The above brief history is not necessarily what will happen this time around, but it goes to show that after the initial normalisation of asset valuations, the current conditions can be very favourable for asset prices in general.

“After all, owning real assets and businesses with pricing power is the best hedge against inflation,” Shamgar said.


Energy sector “does well” during high inflation periods

“We are currently seeing a reset in valuations for all companies as investors are continue searching for a ‘new normal’ valuation benchmark in a higher interest rate environment,” he explained.

“This may take some time to play out over the next few months depending on how much central banks front load rate rises.”

Shamgar said TAMIM Management has increased its exposure to the energy sector – “we have seen that during periods of high inflation this sector tend to do well.”

“We have identified the coal and oil sectors as the most attractive sectors right now due to a combination of factors creating the perfect storm for higher-for-longer prices.”


Oil and coal stock picks

In the coal sector, Shamgar said he prefers New Hope Corporation (ASX:NHC) and Whitehaven Coal (ASX:WHC) as they have long mine life and high quality coal which fetches a premium pricing.

“Both stocks are trading on approximately 2x profit and will be paying 20% dividend yields over the next 18 months and buying back shares.”

In the oil and gas sector, Shamgar said he likes Woodside Energy (ASX:WDS) as a beneficiary from prices.

“Following the merger with BHP oil business the group is now twice the size and will attract larger global investors.

“We also expect a buyback to be announced this year, WDS is trading on 7x profit and paying 9% yield.”

“We expect coal and oil prices to remain elevated for longer than what the market is expecting as the accelerated transition to renewable energy sources has created significant underinvestment and shortages of coal and oil.

“This is highlighted even more right now by the Russian sanctions and increased nationalism sentiment we are seeing around the world.”


Interest rate sensitive businesses

He added there are also several interest rate sensitive businesses that profit from rising rates.

“These include global registry provider Computershare (ASX:CPU), which holds $25bn of cash on behalf of clients and earns an interest income.

“Every 1% rise in rates adds $250m of income to CPU.”

Another beneficiary is payments company EML Payments (ASX:EML) he said, which also earns an interest on its $2 billion customer funds – every 1% rise in rates should add $15m of income to the group.

“In times like these it is important not to panic and remain focused on company fundamentals, whilst keeping in mind that it always feels worst right before sentiment turns around.

“We advise investors to retain large cash balances as volatility will continue for the rest of the year and there could be better buying opportunities ahead.”


John So, co-founder at VP Capital

In the next short while, So said you can either take a dive into some of the higher risk stocks and see if they bounce – or alternatively, there are some safer sectors which are not going to go up as much when the market picks back up, but they will probably do well in an inflationary environment and tougher economy.

One such example, he says, is the consumer retail space.


Consumer retail stock picks

“I think as cost of living and high interest rates all become an issue for the average day to day consumer you are going to see people tighten their belt a bit,” So explained.

“Businesses such as Collins Foods (ASX:CFK), which owns some of the Kentucky Fried Chicken franchises will benefit because of its affordability.

“Its share price has come down like the rest of the market, so you are buying it relatively inexpensively compared to a couple of months ago.”

On a similar trend is the Reject Shop (ASX:TRS) – a discount retailer which, again “for the same reasons as CFK will benefit as high cost of living and interest rates continue to eat into disposable income”.

“Consumers with mortgages will choose to buy cheaper household items and a business like the Reject Shop is going to benefit,” he said.

“The other interesting thing about Reject Shop is that since it is a beneficiary of higher cost of living, its share price has fallen very significantly in-line with the market.

“Investors will be picking it up for low, single digit cash flow multiples – it is a defensive business, has been around for many years in Australia, and has withstood many recessions, so I think it a safe place to be given how far the share price has retreated.”


The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.