Australia Strategy: Autumn 2022 - Equity sector strategies
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 04 April 2022, 12:00 PM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
- Morgans research analysts re-set their sector views, strategies and Best Ideas as markets adapt to new financial and geopolitical challenges.
- Solid opportunities reside among financials, materials/energy, and industrials stocks, particularly those with pricing power to help combat cost inflation.
- See the Morgans Best Ideas for stock pick details.
March quarter snapshot
The March quarter saw a broad re-organisation of risk in capital markets as investors accept that persistent inflationary forces place upside risk on interest rates beyond previous expectations and as they interpret the implications of new geopolitical risks (commodities disruption, inflation). The US Fed approved a 0.25% rate hike in March.
Fed officials also pared their expectations for economic growth and sharply raised their outlook for inflation, while flagging rate rises at each of the remaining six meetings in 2022. Unfortunately, markets are likely to remain vulnerable to volatility while the risks of rapid tightening and the Ukrainian conflict in particular play out.
The February reporting season in Australia was among the strongest on record, with many important portfolio stocks beating market expectations. Australian corporate earnings are robust, and it appears the drivers of recent volatility reflect fluctuations in sentiment much more than fundamentals for Australian companies.
Australian shares trended broadly flat during the quarter, with strong gains in Resources and Energy offset by weakness in Healthcare, Retail and Property stocks.
Maintaining a pro-equities bias
The ASX 200 is the top-performing market in 2022, benefitting from higher commodities and strong economic growth. Materials and Energy have benefitted from the strong gains in commodities but despite the recent easing in price, the ongoing sanctions on Russian supply should keep prices elevated.
Meanwhile, household balance sheets are in great shape, which should continue to support the recovery in consumption. We also see upside risk to dividends as companies continue to normalise dividends as the fog over earnings clears, keeping payout ratios elevated.
We prefer a targeted portfolio approach favouring reflation (Financials, Energy) and quality cyclicals with strong market positions that can absorb rising costs. See our Asset Allocation Update – Q2 2022 for more details.
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.
Morgans analysts current see solid opportunities among financials, materials/ energy and select cyclical industrial stocks.
Commodities/ Materials stocks have materially outperformed industrials since late 2021
Source: Morgans Financial, Company
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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.