Australia Strategy: Spring 2022 - Equity sector strategies

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

01 October 2022, 7:30 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• Morgans research analysts re-set their sector views, strategies and Best Ideas as markets adapt to emerging challenges.
• Our targeted approach in equities favours stocks with defensive attributes, pricing power and lower exposure to the economic cycle.
• We currently favour consumer staples, healthcare, and some financials along with select materials/ energy exposure.
• See the Morgans Best ideas for stock pick details.

A challenging macro-economic backdrop

The global economy is headed for a likely recession, but most major central banks will press on with tightening monetary policy for some time yet as inflation remains uncomfortably high.

The US economy looks likely to hold up relatively well, while much of Europe succumbs to recession as the terms of trade shock from higher energy prices bites. China’s economy will continue to struggle with a property slump, fading export demand, only limited policy support, and possibly intermittent lockdowns.

Energy commodity prices will remain high amid supply disruption and non-energy commodities don’t have much further to fall. This will make economies that are net exporters of raw materials, such as Australia, the relative winners in what is otherwise a relatively bleak economic outlook.

Overall we have a neutral view on Australian equities as we see ongoing volatility from higher interest rates and a moderating pace of economic growth challenge returns in the short term. As tailwinds from commodity prices fade, we think above-average earnings growth for the market will be harder to come by.

Accordingly, we prefer a targeted portfolio approach favouring defensives, select commodities and financials. Nevertheless, we think some tactical opportunities will emerge as uncertainty shakes investor confidence.

In addition, quality industrials and consumer discretionary valuations are starting to look attractive.

The ongoing volatility and market dislocation will present tactical opportunities, so investors are advised to be nimble with their cash holdings.

S&P500 12mf Consensus Price to Earnings ratio: Value is beginning to emerge for investors willing to look though near term economic risks

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.