Positioning for an economic restart
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 13 April 2021, 10:00 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
Despite the ASX 200 up +3.2% and Small Ords +2.3% in the first quarter of 2021 very few companies are trading higher post their February result.
Performance has been concentrated in the reopening/cyclical sectors (Financials, Resources, Energy, Consumer Services, Travel).
It’s hard to argue against the market not moving higher from here given the avalanche of good news but corporate outlook commentary suggests companies and investors will take a cautious approach over the next few months - taking time to assess the impact of the sudden end to the fiscal/support measures (JobKeeper, Homebuilder scheme, and mortgage loan deferrals).
We see further upside in Banks/Financials driven by improving economic conditions, strong capital positions, sector over-provisioning and rising yields (Top picks –Westpac, Macquarie).
An overweight exposure to commodities (energy, metals, softs) via Resources/Ag stocks is supported by improving demand, supply-side constraints, investor fears of inflation and expected USD weakness (Top picks – BHP, Santos, Strandline, Nufarm).
Our Best Ideas profile several domestic cyclicals and small caps supported by their lower relative valuations and leverage to domestic activity (Top picks – Corporate Travel, Sydney Airport, People Infrastructure).
Market volatility also gives us the opportunity to target high quality names on weakness (Such as CSL, Magellan, Next DC).
||Recent results from the Banks have vindicated our positive views and we still think the market is too pessimistic on anticipated bad debts and asset quality. Capital and provisioning strength support the earnings and dividend outlook which should sustain the market’s ongoing rotation into Banks which is well underway.
||A positive outlook is shaped by the economic recovery, improving macro settings (growth vs loose monetary policy) and improving sector risk appetite. A steady lift in bond yields would be broadly positive for the sector.
||Demand looks set to remain solid as consumers and workers spend more time at home, however peak pandemic driven growth is behind us and the defensive nature of the sector may see it underperform during a cyclical recovery.
|Market appetite for the defensive attributes of Healthcare stocks is fluctuating and has arguably peaked as we now recover from the health emergency. Nonetheless, several compelling and structurally driven opportunities remain.
||Sentiment has turned the corner now that the NBN is practically complete, helping to settle down customer migration. Telcos also see an improving outlook in mobile as competitive activity becomes more rational.
|Infrastructure and Utilities
|Providers of critical services with regulated revenues (AST, SKI), resilient demand (AGL), or long-term take-or-pay contracts (APA) should remain in-demand. Ultimately, ultra-low interest rates can plausibly intensify the appeal of strong cash generators (SYD, TCL) once their volumes recover.
|Capital performance will fluctuate with bond rate expectations but REITs continue to offer attractive distribution yields to investors with the sector average around 5.5%.
|Ironically, the economic re-start poses a threat to consumer discretionary share prices. This is both from a valuation/sentiment perspective initially and from an earnings impact as consumer spending patterns find a new base. Significant value does remain in consumer services, particularly in Travel.
|Many companies maintained operations through various restrictions due to the essential nature of their products and services. We expect this resilience to continue in 2021, though the rising AUD is a headwind to watch.
||The end of lockdowns, permanent shifts in consumer behaviour and various governments in stimulatory mode will likely support further improvements in the end markets for the online leaders. This looks captured in near record share prices and we prefer smaller cap exposures.
|Following successive years of drought, far improved seasonal conditions and strengthening soft commodity prices (economic reflation, USD weakness) combine to offer strong sector tailwinds in 2021.
|Metals & Mining
|An overweight exposure to commodities/Resources is supported by: improving demand in-line with the post-pandemic recovery; a highly resilient Chinese economy; genuine supply-side constraints influenced by capital discipline; emerging inflationary forces and US dollar weakness.
|Our conviction in a sustainable oil market recovery is growing helped by steadily improving demand (global growth), declining inventories, US shale issues and a weakening US dollar. This paints a bullish 1-2 year outlook.
Tactics through abnormal markets
Ultimately we think investors need to be nimble across multiple themes (value, growth, yield, commodities, tech) as a bumpy road to recovery is likely to see valuations move through over-valued and under-valued territory.
Equity investors need to consistently review their exposures, and not be afraid to re-cycle profits into relatively cheaper opportunities which are regularly presenting in the current climate.
Morgans clients can access further analysis on each sector, including our Best Ideas list by logging in:
Autumn 2021: Equity Sector Strategies
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