With the new financial year underway, many investors are wondering what ASX stocks to buy in the current market cycle.
The artificial intelligence (AI) theme dominated markets in FY 2024. Names like NVIDIA Corp (NASDAQ: NVDA) surged to record heights of over $1,000 per share before its 10-for-1 stock split.
Whereas AI frontrunner Microsoft Corporation (NASDAQ: MSFT) rallied 31% over the past year following its purchase of OpenAI, owner of the well-known "ChatGPT" language model, in 2023.
Various money managers are now sceptical about AI's dominance moving forward. Global fund manager GQG Partners is one such entity. After a strong run riding the tech rally, the firm is reportedly rotating out of tech and into the consumer staples sector.
Two notable consumer staples stocks recently catching the attention of investors are Coles Group Ltd (ASX: COL) and Qantas Airways Ltd (ASX: QAN). Brokers currently recommend these two ASX stocks as buys. Here's why.
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Why GQG is shifting away from AI and tech
As to what ASX stocks to buy outside of tech, GQG Partners recently offered some insight. The global fund manager recently slashed its tech exposure, including AI-related stocks like Nvidia, according to The Australian Financial Review.
The GQG team reduced its tech holdings from 43% of the portfolio to just 21%, citing concerns over the sustainability of the AI-driven rally.
"From the semiconductor standpoint, things weren't broadening out as much – spending was really isolated to that cluster around AI and data centres," said portfolio manager Brian Kersmanc, per the AFR.
Additionally, GQG found that the market was pricing in some "blue sky scenarios" for these shares. This could impact what ASX stocks investors buy in FY 2025.
"[A]lthough optically [they] looked cheap on a price-to-earnings basis", Kermansc added, "to get to the estimates that were prevailing in the market, you had to get to some pretty aggressive assumptions".
Instead, GQG is now focusing on consumer staples stocks. It believes these are more attractively priced. For instance, Coca-Cola Co (NYSE: KO) – now considered a defensive name – is a major holding. This is due to the combination of lower valuations and stable earnings.
"We're seeing staples stocks trading at 52-week lows because they had a multiple de-rating, falling from around 29 times earnings as people realised they didn't want to pay a premium for safety because a recession wasn't happening," Kermansc said.
Are these two ASX stocks to buy?
Coles shares are currently trading at around $17 apiece, equating to a price-to-earnings (P/E) ratio of 22 times. This represents a significant drop from its P/E of 33 times in January 2021.
Analysts at Morgans suggest that Coles remains an ASX stock to buy. According to my colleague James, the broker has an add rating on Coles with a price target of $18.95, suggesting a potential upside of 11.5% at the time of writing.
For FY 2024, Morgans also forecasts fully franked dividends of 66 cents per share, yielding approximately 3.8%, and 69 cents per share in FY 2025, yielding around 4%.
If an investor were to buy the ASX stock today, the total shareholder return could be around 15.5% over the coming 12–24 months if Morgans is right.
Qantas could be another ASX stock to buy according to Goldman Sachs. Shares in the airline are trading at a P/E ratio of 6.3 times at the time of writing. This is down from a P/E of 22 times in June 2023.
Despite its recent regulatory hurdles, Qantas has caught the eye of investors.
Goldman Sachs rates Qantas as an ASX stock to buy with a price target of $8.05. This indicates a potential upside of over 36% as I write. The brokers also notes that Qantas' FY 2024/2025 earnings projections are ahead of pre-pandemic levels.
Consider ASX stocks to buy over AI?
AI stocks have enjoyed a massive rally, but the excitement may be waning. GQG Partners' shift from tech underscores the risks of over-reliance on high-growth sectors with uncertain future prospects.
In contrast, experts say Coles and Qantas could offer stable earnings and dividends, making them potential ASX stocks to buy in economic turbulence.
