Why you need defensive ASX shares in your portfolio right now: WAM

2023 could be the year when the quality of businesses shines through.

| More on:
A businessman waers armour and holds a shield and sword.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • WAM is cautious about the year ahead as inflation remains strong and interest rates rise
  • Lead fund manager Matthew Haupt believes defensives could be the place to invest
  • Names like DEXUS, Orora and QBE could be names that outperform in the fund manager’s view

Fund manager Matthew Haupt from Wilson Asset Management (WAM) has identified some of the most important factors that investors should consider in 2023 with their ASX share portfolio.

Last year saw a large change to the economic landscape as central banks in Australia, the United States and elsewhere ramped up interest rates to try to tame inflation.

In Haupt's view, the economy is likely to slow this year and that could end up having a damaging impact on "bad management teams and poor strategies", according to reporting by The Australian.

What's going on with the economy?

A month ago, the Reserve Bank of Australia (RBA) increased the Australian cash rate target by 25 basis points to 3.35%. It's expected to increase the interest rate again to 3.6% this week.

Households and ASX shares are now feeling the impact of those rate rises.

While the six months to 31 December 2022 saw "strong resilience" by many companies, the environment has "clearly turned", according to The Australian's reporting.

Inflation has helped the revenue side for some businesses, but costs are also going higher – wages, fixed costs, and borrowing costs are more expensive, Haupt noted.

Haupt said:

Best breed management will shine in this environment, whereas the weak will get shown up. If you've got the wrong management, wrong culture and wrong strategy, it all falls apart.

Now it is crunch time. Managers have two choices: cut jobs and increase productivity. Good ones will do a combination of both – bad managers will probably just cut jobs.

Time to be defensive?

The WAM Leaders portfolio is positioned defensively, with a strong allocation to infrastructure names like Atlas Arteria Group (ASX: ALX) and Transurban Group (ASX: TCL).

The idea is that infrastructure can, and tends to, perform well regardless of what's happening in the economy. At the moment, there are a number of negative indicators, including slowing business and consumer confidence.

Another name that Haupt pointed out was high-quality office owner DEXUS Property Group (ASX: DXS) which trades at a 40% discount to its net tangible assets (NTA). That one looks "compelling" despite the economic outlook.

Other names included packaging business Orora Ltd (ASX ORA), and insurer QBE Insurance Group Ltd (ASX: QBE), which is benefiting from rising interest rates and hiking insurance premiums.

However, Haupt is becoming more cautious about ASX bank shares. Not necessarily because of bad debts but due to strong competition that could hurt their margins.

Haupt suggested that interest rates could stay higher for years. He said:

We could be in for a (Alan) Greenspan era where you're cutting, raising and cutting rates as we navigate inflation. That's why it's prudent to have the slight defensive view.

Defensives do well when the economy goes bad, but defensives do well when interest rates fall too. The cash flows means you're going to get revalued up. That makes them a safe bet right now.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Defensive Shares

piggy bank at end of winding road
Defensive Shares

3 safer ASX shares Australian investors can rely on in November

Worried about the markets? Check out these defensive stocks.

Read more »

A couple makes silly chip moustache faces and take a selfie on their phone.
Blue Chip Shares

3 blue-chip ASX shares I think are so safe you could hold them forever

No shares are 'safe', but some are safer than others.

Read more »

Two smiling work colleagues discuss an investment or business plan at their office.
Defensive Shares

Why I'd buy these top defensive ASX shares before Christmas

These stocks could be compelling picks in the next few months.

Read more »

rising asx share price represented by man with arms raised against blackboard featuring images of dollar notes
Defensive Shares

I'll be investing $5,000 in this defensive ASX stock following its first-class result

This is one ASX share that has products customers can't seem to live without...

Read more »

Two mature women learn karate for self defence.
Defensive Shares

2 defensive ASX shares for lower-risk investors

I think any investor can comfortably add these two shares to a portfolio today...

Read more »

Man drinking from a bottle sitting on a floating ring in the middle of a harbour going nowhere.
Defensive Shares

2 ASX shares to confidently buy now and hold forever

Long-term thinking is the key with these two ASX names.

Read more »

Two mature women learn karate for self defence.
Defensive Shares

2 recession-proof ASX shares to buy in August

These stocks could be two of the most defensive on the ASX.

Read more »

a woman pushes a man standing in a shopping trolley pointing ahead far off into the distance.
Defensive Shares

1 reliable ASX stock I'd be as happy as Larry to hold through a recession

Here's my pick for a recession-resistant ASX share to buy today.

Read more »