With the new financial year underway, it's time for investors to think about positioning their portfolios for the new macroeconomic regime.
The benchmark S&P/ASX 200 Index (ASX: XJO) has recently bounced from a low on 20 June. It closed the day on Tuesday at 6,606.3, 0.06% higher.
Themes of inflation, central bank tightening, surging interest rates, and – even after two long years – COVID-19 continue to dominate the narrative for ASX shares.
In FY22, energy and mining shares were the dominant players and, by all accounts, look set to perform into the new financial year.
The chart below shows the returns for each of the ASX's major sector indices this year to date. Energy and utilities have outperformed whilst all other sectors are in the red.
What sectors will perform in FY23?
According to a blend of its global macro models and analyst expectations, Trading Economics expects the S&P/ASX 200 Index to trade around 6,500 points by the end of this quarter.
"Looking forward, we estimate it to trade at 6079.65 in 12 months time," it added.
It's a bold prediction that points to further downside, but it may have some merit, according to some experts.
Analyst Chris Savage at Bell Potter is cautious on the technology sector in FY23 due to the shifting interest rates cycle. He wrote in a recent note:
We remain cautious on the outlook for the tech sector in the second half of 2022 given the likelihood that interest rate rises will continue both domestically and offshore due to inflation remaining stubbornly high.
With this in mind we are more attracted to stocks in the tech sector with reasonable cash flows/earnings.
Meanwhile, energy shares look set to continue flourishing in FY23, with a number of tailwinds still behind the sector.
Analysts at JP Morgan note there's still plenty of uptake of fossil fuels forecast into the next decade. It's a view shared by Lazard Asset Management.
It says that the energy sector, being so crucial to the economy's functioning, could continue to rate higher in FY23.
Healthcare shares could also be set to catch a bid in FY23, with the sector already showing signs of recovery in July.
Recent Deloitte analysis found that the "health care sector [had] a powerful opportunity to accelerate innovation and reinvent itself" after battling through COVID-19.
Analysts at Goldman Sachs reckon the average earnings per share (EPS) could grow by around 30% in H2 FY22, suggesting health care could offer some upside this year.
Bringing all the opinions and information together, it appears that cash-rich, fundamentally sound ASX sectors trading at respectable valuations will be the net performers in FY23.
This aligns with the stage in the current macroeconomic cycle whereby investors are increasingly pricing in a number of macro-risks, namely inflation, recession fears, and surging interest rates.
