Australia Strategy: Equity sector strategies - Winter 2021

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
01 July 2021, 2:30 PM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • Morgans research analysts re-set their equity sector views, strategies and best stock ideas as the economic recovery builds momentum.
  • Solid opportunities reside among banks/financials, energy and select cyclicals, while retail and online stocks look vulnerable in the short term.
  • See also the just updated Morgans Best Ideas for stock pick details.

Pro-risk bias drives an overweight equities allocation

We think the market’s cyclical rotation has further to run, driven by the strong economic recovery coupled with significant pent-up demand. Our Asset Allocation update – Q3 2021 details our pro-risk bias to our investing strategy, leading to an overweight exposure to equities.

Resources, energy and financials have all benefited from the reflationary backdrop, driving a large portion of the Australian equities market. Household balance sheets are in great shape offering ongoing support to consumers and we see upside risks to dividends as COVID-19 uncertainty gradually clears.

Bouts of inflationary fears will likely lead to a fall in the value of risk assets but we see any significant pullback as an opportunity to reweigh portfolios given our view that inflation concerns will prove transitory (Michael Knox).

Equity portfolio construction

Strong arguments cautioning against opposing inflationary and deflationary risks can be made. We think a “barbell” approach to best insulate portfolios against macro risks is prudent, incrementally re-balancing exposure to all of yield, value, cyclicals and growth. Ultimately we’re looking for best-of-breed companies capable of thriving regardless of the macro-economic backdrop.

Our approach to balanced portfolio construction favours the beneficiaries of reflation (banks, financials, resources/energy) balanced against stable yielders. For growth portfolios we like higher exposure to “re-opening” plays (travel, gaming, traditional retail).

In Q2 the Morgans Equity Model Portfolios up-weighted banks (over-provisioning, dividend upside), added financials (SUN, CPU, rates leverage), quality cyclicals (ALQ, RWC) and growth options (HUB). We have moderated exposure to yielders (utilities/infra), but they still feature in balanced portfolios.

In this note, sector analysts see solid opportunities among banks/financials, energy and select cyclicals, but call out retail and online stocks as looking vulnerable in the short term, largely as a function of their out-performance.

Figure 1: Relative sector performance indexed to COVID-19 milestones: The beneficiaries of reflation continue to outperform

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

Source: Morgans, IRESS

Find out more

We share the full list of 20 stocks with material upcoming catalysts and share our analysts' comments in our full research note.

Download full research note

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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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