Australian shares sit close to their 2018 highs, but valuations look a little stretched versus tepid profit growth.
We see the most compelling opportunities among the major banks, healthcare, energy and telcos.
Investment strategy amid difficult markets
Corporate financial results during the recent February reporting season were broadly robust despite ongoing systemic risks relating to housing, the consumer and political/regulatory risks. This and the lack of any significant 'new issues' for Corporates helped to fuel a relief rally through February, which started from a low base.
However, expectations for FY19 corporate profits eroded further and see the market tracking toward a very tepid looking 4.1% compound annual growth in profits over the next three years.
This contrasted a sharp lift in valuations, with the ASX200 Industrials 12-month forward PE recovering to pre-sell-off levels above 16x. We're in familiar territory.
Only six months ago the market was riding a wave of positive sentiment against stretched valuations, heading into a period directed by macro-economic noise rather than underlying fundamentals.
Sector outlooks and preferred picks
In the our latest Australia Strategy research note, Morgans' sector analysts provide updates on key dynamics, the outlook and nominate their best buys per ASX sector. The most pertinent sector views are featured in our upcoming Investment Watch – Autumn 2019 outlook publication.
Standout opportunities at present include:
- Westpac (Add, 36% forecast 12-month return)
- Orora (Add, 24%)
- Telstra (Add, 17%)
- Oil Search (Add, 37%)
Morgans clients can view the full research note here: Australia Strategy – Sector outlooks and preferred picks. If you would like a copy or would like to speak with a Morgans adviser, please contact your nearest Morgans office for access.
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.