Australia Strategy: Summer 2022 - Equity sector strategies

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
06 December 2021, 7:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • Morgans research analysts re-set their sector views, strategies and Best Ideas as markets adapt to new challenges posed by Omicron.
  • Solid opportunities reside among oversold financials, energy, and industrials stocks while our caution on China (iron ore majors) is also easing.
  • See the Morgans Best Ideas for stock pick details.

Maintaining a pro-risk bias in equities

The path for further gains in equities looks to have narrowed after a strong run, but we reaffirm our pro-risk stance, supported by a broadening global restart and ongoing negative real interest rates. However, rising bond yields and elevated valuations will limit the probability of strong capital returns in equities in 2022, with the near-term outlook now also blurred by Omicron.

Since the onset of the pandemic, the leading epidemiological advice has warned that adaptation to new strains as they mutate will be required as the world learns to live with COVID. Much more will be known about Omicron by mid-December, with a co-ordinated global response around vaccine adaptation already well-underway and aided by two years of epidemiological experience.

The path through the pandemic was always going to be non-linear, and a strong 2021 coupled with incredibly low volatility did leave markets vulnerable to an event like Omicron. We think portfolios can continue to position for an eventual arrival at full de-escalation of the pandemic and we continue to see risk assets outperforming defensive positions over the balance of 2022. See our Asset Allocation update – 2022 Outlook for more details.

Equity portfolio construction

We continually adjust Balanced Equity Portfolio exposure around quality, yield and value factors with a tilt to cyclical exposure. Ultimately we seek best-of-breed companies capable of thriving regardless of the economic backdrop.

Materials, Energy and Financials have benefitted from the bounce back in economic activity, but a potential further tightening in financial conditions may limit the upside for key sectors. However, household balance sheets are in great shape, which should continue to support the recovery in consumption. We also see upside risks to dividends as uncertainty from the virus clears through 2022, keeping payout ratios elevated.

Dynamics in Chinese industrial production (steel/ iron ore miners) appear as bad as they can get, with Economist Michael Knox now describing them as completely unsustainable, suggesting markets should now consider pricing upside rather than down.

Morgans analysts see solid opportunities among financials, energy and select cyclical industrial stocks. We are beginning to warm to upside risks in the major miners but are now cautious on traditional retailers due to ongoing disruption and Omicron unknowns.

Materials stocks have materially underperformed since August but appear to have found a floor

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Morgans Financial

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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