Winter 2022: Equity sector strategies

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
01 July 2022, 10:30 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 financial and geopolitical challenges.
  • We prefer a targeted portfolio approach in equities favouring the beneficiaries of reflation and quality cyclicals with strong market positions that can absorb rising costs.
  • In this note, Morgans analysts currently see solid opportunities among consumer staples, healthcare, financials and materials/energy. See the Morgans Best Ideas for stock pick details.

June quarter snapshot

The June quarter saw a broad sell-off in capital markets as investors continue to re-balance exposure to risk-assets when (risk free) interest rates are now being lifted assertively by Central Banks to combat inflation. The US Fed took a more aggressive stance during the quarter where its aim to rein in inflation now appears to take priority over supporting asset prices.

In early June the Fed hiked rates by a further 75bps marking the biggest rate hike since 1994. Opinions are still mixed among economists as to whether a US recession can be averted. Unfortunately, markets are likely to remain vulnerable to volatility while the risks of rapid tightening, a global slowdown and the Ukrainian conflict play out.

Quarterly US earnings were slightly better than expected overall, but weren’t strong enough to overcome the macro themes dominating investor attention. While tough results among the mega-caps including Amazon, Google and Walmart grabbed the headlines, stocks in the S&P500 – excluding the “FAANGS” – reported credible year-on-year profit growth of ~12%.

Changes to our Equities biases

Tactically we prefer a bias toward domestic equities over international due to a higher risk of central banks overtightening policy and a deteriorating growth backdrop in China and Europe. Despite the sharp fall in the US stock market this year so far, US equities still appear much more highly valued than their peers in the rest of the world.

While that might not tell us much about the outlook for relative returns in the near term, comparatively high valuations in the US are perhaps a reason to suspect that the stock market in the US will underperform those elsewhere over the next 12 months.

The short-term performance of Australian equities will likely see ongoing volatility from higher interest rates and a moderating pace of economic growth will challenge returns in the short term. As tailwinds from commodity prices and the post-pandemic reopening start to ease we think above average earnings growth for the market will be harder to come by.

We prefer a targeted portfolio approach favouring reflation (Financials, Energy) and quality cyclicals with strong market positions that can absorb rising costs. In this note, Morgans analysts current see solid opportunities among consumer staples, healthcare, financials and materials/energy.

Figure 1: Commodities are now fearing a slowdown in economic activity

Growth stocks have had a choppy ride since the onset of the pandemicSource: Morgans Financial, Factset

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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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