Tech, insurance and commodity among standout sectors

Oksana Patron

27 July 2023

While the impact of rising interest rates and inflation is still to be fully felt in the market, there are still pockets of opportunity for stockpickers within certain sectors, according to Fidelity International.

The portfolio managers have listed technology, commodity and building materials, insurance and banking among the standout sectors offering investors the most attractive opportunities at the moment.

According to Maroun Younes, co-portfolio manager of the Fidelity Global Future Leaders Fund, the tech sector, which has been delivering strong earnings and had an optimistic outlook, is benefiting from ongoing structural growth in areas such as data centres and the cloud, networks and connectivity enablers, software to create productivity or critical information management, artificial intelligence, and content platforms.

“Looking ahead, earnings will be a significant driver of share prices during the next 12 months. The drivers of sustainability of earnings will also be important considerations – for example, pricing power and market structures, as well as the discretionary nature of consumer spending. Businesses that can withstand any softness in the economic environment will also likely be well sought after,” Younes said.

Another sector that looked quite attractive was commodities and building materials – in particular consumption-related commodities, as consumption-related commodities were exposed to structural growth elements such as decarbonisation; for example lithium, copper or rare earths, and were not running into a headwind of weak Chinese property demand, the manager said.

Casey McLean, portfolio manager for the Fidelity Australian Opportunities Fund, also pointed to the insurance sector as one of the beneficiaries of the current inflationary environment as inflation meant insurers were able to increase their premiums.

“We are also experiencing a high level of natural disasters, both in Australia and in markets like the US, which pushes up claims inflation, reinsurance rates and ultimately insurance premiums. Further, a higher interest rate environment means insurers are able to earn good returns on the investment of premiums. Overall, the outlook for their earnings looks pretty strong over the medium term,” McLean added.

At the same time, the bank sector was described by Fidelity’s managers as a “well prepared to weather a downturn”, but the market will likely focus on asset quality in upcoming results, they said.

“Since the RBA paused hiking rates in July, market expectations for two 25 basis point increases in the cash rate have eased slightly to one 25 basis point increase, following a weaker monthly inflation figure. This, combined with a slight softening in competitive dynamics across both mortgages and deposits, has led to a share price rally in banks, which have outperformed the broader market over the last few months,” Zara Lyons, portfolio manager for Fidelity’s Australian Equities Fund, noted.

“However, we think this rally may be short lived if the economy deteriorates further from here. The yield curve continues to be inverted implying that the market expects slowing economic growth in the future and potential easing in policy rates.”

Small cap equities sector was identified as one of the sectors that was often overlooked and although it did as a sector underperformed over the past two years, Fidelity said the cycle was now about to turn and conditions would be substantially more favourable for them and many will be in a strong position.