- Morgans research analysts re-set their sector views, strategies and best ideas as dynamic forces continue to challenge markets.
- Our approach in equities currently favours stocks with compelling risk/reward profiles among quality cyclicals, small-cap growth stocks and A-REITs.
- Preferred equity sectors include staples, healthcare, financials, retail, travel, resources and energy.
Result season snapshot and 2024 outlook
February results again showed that Australian listed companies remain in good shape. Earnings expectations for FY24 actually ratcheted 0.5% higher led by the Banks, Healthcare and Retail. This suggests ongoing conservatism in market forecasts, offering some margin of safety against rising share prices.
The market’s surprise rally since late 2023 appears a bigger hurdle to further market upside than earnings or economic fundamentals look to be. The implied risk premium (earnings yield) and dividend yield premiums in equities has compressed to historical lows, manifesting in narrow discounts to consensus price targets among the market leaders (ASX20) and narrowing the path for further upside.
So we’re not calling the start of another bull market, but we do think there are plenty of reasons to be optimistic. A likely reduction in interest rates later in the year, cooling inflation and plenty of dry powder should offer solid tailwinds for equities. Below the ASX20, we think the best opportunities lie among smaller caps and those positively leveraged to declining interest rates and stickier inflation, including select cyclicals, small-cap growth and A-REITs.
Small/mid-cap growth and cyclical stocks were the big story in February. They provided a higher proportion of results beating expectations, with a higher-than-average number positively surprising on margins and revenue. Earnings forecasts also held up well in key cyclical segments.
Notably, cyclicals (Retailers, Industrials) represent a larger proportion of the small cap index than for large-caps. So, if the economic slowdown proves to be milder than anticipated and earnings hold, then valuations provide plenty of support here. We expect plenty of ongoing opportunities in small-caps as the segment continues to re-base. Fresh small-cap opportunities being called out by Morgans analysts include Helloworld, NextDC and Universal Stores.
In this note, Morgans sector analysts have upgraded their ASX sector ratings on Consumer Discretionary to Overweight (from Neutral) and Agriculture to Neutral (from Underweight). Downgrades have been applied to sector ratings on Telco to Strongly Underweight (from Underweight) and the Banks to Underweight (from Neutral).
ASX sector & size returns: February trading demonstrated the ongoing rotation away from expensive defensives and into growth and cyclical stocks (Small-caps, Retail, IT, Industrials) as risk appetite recovers
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