Sector outlooks and preferred picks

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
30 September 2019, 1:40 PM
Sectors Covered:
Resources, Metals

Australian shares are again testing record highs, but traditional valuation metrics look stretched versus tepid profit growth. We see the most compelling opportunities among healthcare, telco and consumer discretionary stocks.

No room for complacency in abnormal times

The market’s most important industrials reported robust results during the August reporting season. However Industrial companies (ASX200 ex-Resources) grew their profits by only 1.0% in FY19 reflecting the challenging economy and a remedial year by the major banks.

Clearly the arbitrage available in equity yields (~4.2%) relative to bond/fixed interest yields (<1%) is fuelling stretched equity valuations, and we caution that this leaves little room for error if companies subsequently disappoint.

Domestic cyclicals stage a comeback

One of the surprises from August was the bounce in domestic cyclicals which had been battling economic headwinds (and investor sentiment) over the last few years. These included stocks exposed to signs of recovery in housing & construction. Retailers in particular enjoyed a good bounce on evidence of a consumer turnaround, helped by undemanding valuations.

Overall, for all the talk about a sluggish Australian economy, cautious consumer sentiment and high energy prices, the local environment looks in reasonably good shape when compared to global issues such as Brexit, the unrest in Hong Kong and the US/China trade war.

Sector outlooks and preferred picks

In this latest research note (available for Morgans clients only), Morgans' sector analysts provide updates on key dynamics, the outlook and nominate their best buys per ASX sector.

Standout opportunities at present include Westpac (Add, 20% forecast 12-month return), Cleanaway (Add, 21%), Telstra (Add, 31%) and Woodside (Add, 15%).

Best Buys by sector

 Banks Westpac
Diversified Financials Link Administration, Kina Securities, Generation Development
Industrials Orora, Cleanaway, PWR Holdings
Healthcare ResMed, Sonic Healthcare, Promedicus
Telco, IT & Software Telstra, Over the Wire
Consumer Staples _
Consumer Discretionary Wesfarmers, Lovisa, AP Eagers, Beacon Lighting
Resources Oz Minerals, Orocobre, Red 5
Energy Woodside, Oil Search, Cooper Energy
Food, Agriculture & Chem Treasury Wine Estate
Infrastructure & Utilities Sydney Airport, APA Group
Online Media Iress, Frontier Digital Ventures
Property Aventus Group, APN Convenience Retail REIT

More information

To view further analysis, Morgans clients can view the full research note. Alternatively, please contact your Morgans adviser or 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.

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