MoneyTalks: The ASX sectors to avoid and the ones to get into - with Pathfinder fundie Hamesh Sharma

Stockhead reaches out to Hamesh Sharma, portfolio manager of Auckland-based Pathfinder
We discuss which sectors to avoid and which to get into right now in this high inflation environment

Which ASX sectors to avoid for now

Yesterday, the ABS said Australia’s year-on-year CPI rate was 6.1% for the June quarter, the highest level since 2001.

It was a big jump from March quarter’s 5.1% – as food, petrol, housing and health costs increased significantly in the last three months.

Pathfinder portfolio manager, Hamesh Sharma, said many issues have come together all at once to create a ‘perfect storm’ for the economy.

“We’ve turned the immigration cap off, making things worse with Covid,” Sharma told Stockhead.

“We’ve also seen supply chain issues, as well as food prices going through the roof. So it’s been that kind of perfect storm in both Australia and New Zealand.”

Sharma said the Pathfinder funds have sold out of the real estate investment trusts (REITs) positions early on, before the recent slump in properties took hold.

“A lot of REITs have inflation-linked rental growth, but given that we’re starting off from a greatly overvalued level, we believe there’s scope for properties to move lower,” said Sharma.

He also believes that retail discretionary is another sector to avoid right now.

“I wouldn’t want to be in discretionary stocks like Nick Scali (ASX:NCK) or Harvey Norman (ASX:HVN) right now.

“Because if we get a proper recession, people are going to hunker down and save more money, so there would be more pain to come,” he added.

Sharma also pointed to the high leverage or debt built into the housing market in both Australia and NZ.

“Any significant fall in housing prices, like we’re seeing now, will hurt and people will start to feel poor.

“Pockets will get a bit tighter, so you’d want to stay away from the discretionary sector for that reason,” Sharma said.

These sectors could prevail

On the flip side, Sharma believes that staples and agricultural sectors could provide a good inflation hedge.

Costa Group (ASX:CGC) and Woolworths (ASX:WOW) are two names that Sharma likes from these sectors.

The commodities or energy sector is also a good inflation hedge says Sharma, despite the Pathfinder fund being unable to invest in the sector due to its ESG mandate.

“If I was going to be playing commodity stocks though, I would look at the blue chips with solid balance sheets right now.”

“For example, Woodside Energy (ASX:WDS) and BHP (ASX:BHP), you can’t go wrong with them long term.”

As for the Tech sector, Sharma says there’s good tech and bad tech.

Some tech stocks just don’t have the right product or business model, but others have been sold off somewhat unfairly due to the broad-brushed dumping of tech stocks.

Because of that, Sharma believes there could be some good, cheap buys out there.

In this sector, his fund holds Xero (ASX:XRO) and Pushpay (ASX:PPH).

He also recommends those stocks with good recurring revenue models like Wisetech Global (ASX:WTC).

Share prices today:

ASX small caps to watch

In small cap land, it’s been a very rough time in both Australia and NZ, but Sharma still reckons there are diamonds amongst the rocks.

“With high interest rates, people are now suddenly questioning valuations on these smaller stocks,” he said.

“But for those that are still performing operationally, you can look through the short-term noise and sell-offs because you can find some good opportunities out there on a three to five year view.”

In this category, Sharma says he holds water tech company De.Mem (ASX:DEM).

“While De.Mem’s share price is being hammered, operationally they continue to deliver albeit at a slightly slower pace. So we still believe in their thesis in the medium term.”

Another small cap Sharma has is Polynovo (ASX:PNV), a medical devices company.

“The chairman’s been buying the shares aggressively in the market, which is a good sign.”

“They also have a lot of business in the US, and will benefit from a reopening there.”

Sharma also likes the dual-listed bladder cancer specialist, Pacific Edge (ASX:PEB).

“They’ve proven their business model in New Zealand, and they’re pushing out into both Asia and the US.”

“Pacific Edge’s valuation multiples have come down a long way.

“But if they can get back on track with selling now that hospitals are open, they could be a very good stock in the small cap index,” said Sharma.

Share prices today:

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.