Australia Strategy: Spring 2023 - Equity sector strategies

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

05 October 2023, 7:00 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• Morgans research analysts re-set their sector views, strategies and Best Ideas as evolving forces pose challenging markets.
• Our approach in equities currently favours stocks with compelling risk/reward profiles among quality cyclicals and select mid-to-small caps.
• Preferred equity sectors include staples, healthcare and financials along with select materials/energy exposure.
• See Morgans Best Ideas for stock pick details.

Patience required in equities

The combination of faltering economic growth and central banks still focused on above-target inflation will remain a challenging backdrop for equities. In some ways, the investment environment today resembles early 2000. With the Federal Reserve well into a tightening cycle, real yields on short and long-term fixed income securities have risen materially. Meanwhile, richly-valued equities offer comparably poor earnings yields after a tech-led bull run.

Like 2000, we expect the Fed to cut rates as growth slows but unfortunately this won’t be painless. Thus the surprising resilience of economic activity in the first half of 2023 is unlikely to last: we forecast a slowdown in the major advanced economies as the effects of tighter monetary policy feed through and China’s recovery falters.

Expansionary US fiscal policy, which has fueled risk assets over the past few years, is contracting, hitting commodities prices and curbing economic growth. We fear the next leg down will be corporate profits and we maintain lower-than-normal exposure to global equities. Geographically we prefer US exposure given its exposure to structural growth drivers and relative economic resilience to a global slowdown.

Ongoing volatility from high interest rates and a moderating pace of economic growth will likely challenge returns in Australian equities in the short term. US fiscal policy is contracting, hitting commodities prices and curbing economic growth, further prolonged weakness in the AUD will continue to drive up cost pressure.

Given Australia’s economic sensitivity to falling commodity prices, investors need to tread carefully over the next 3-6 months. 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, tilting toward what we believe are the best relative opportunities and the best risk/return profile e.g., small caps, quality cyclicals.

Among few changes, Morgans Sector analysts have downgraded their rating on the Telco sector to Neutral (from Slightly Overweight).

Relative three-month asset class performances

Source:  IRESS, Morgans

Find out more

If you would like more information, please contact your adviser or nearest Morgans office. 

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.