Create a quality shares watchlist

Further market turmoil looks likely as investors struggle to judge the timing and severity of recessions in the real economy. We are in an inflationary bear market, which is very tough to judge. There will likely be further legs down for share prices, but the stock market will bottom out before the economy does. The important things for investors now are to not get sucked into buying too early into what are just relief rallies and to also have an eye on the quality shares they may soon get an opportunity to own at exceptionally good value. 

Our UK large cap quality screen is showing a mix of tactical defensive plays and some longer term quality stalwarts. The former group, including tobacco companies Imperial Brands (IMB) and British American Tobacco (BATS) have done well on the whole this year as the steady income marks them out as something of a stagflation hedge. The latter group, which includes names like drinks group Diageo (DGE), engineering group IMI (IMI) and software business Sage (SGE) have seen more negative share price performance in recent months, largely because shares with the return on equity and margin characteristics we screen for had been so expensive.  The timing is not necessarily right for now, but these are worth keeping on a watch list. 

Long duration assets, such as shares in US companies with strong market positions and reliable cash flows had been bid up to super expensive valuations on the back of low interest rates. The aggressive hiking the Federal Reserve has embarked on to fight inflation has been very bad for those expensive companies but, as our screen shows, these are businesses with enduring quality characteristics. Investors should hold tight for now, as there is probably further selling to come, but the opportunities around the corner are tantalising.