Australia Strategy: Equity sector strategies - Spring 2021

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
01 October 2021, 9:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • Morgans research analysts re-set their equity sector views, strategies and best stock ideas as the global economy eases pandemic restrictions.
  • Solid opportunities reside among financials, energy, industrials and consumer services, while we remain cautious on the iron ore majors for now. See also the just updated Morgans Best Ideas for stock pick details.
  • See also the just updated Morgans Best Ideas for stock pick details.

Pro-risk bias drives an overweight equities allocation

As the pace of lockdown restrictions eases, we think the cyclical ‘rotation’ in global stock markets has further to run, given the upbeat prospects for the recovery coupled with significant pent-up demand.

Our Asset Allocation Update - Q4 2021 details our overweight exposure to equities, although we do moderate this stance slightly noting the emergence of new risks and the reintroduction of volatility. Australian equities enjoyed 11 straight months of gains to September 2021.

However, the key risk to the outlook is a significant slowdown in China, which is a scenario that has increased in probability over the last quarter, leading to our neutral stance on the iron ore majors for now.

While markets may face near-term hurdles, we continue to advocate looking through the noise and see risk assets outperforming defensive positions over the next 3-6 months.

Equity portfolio construction

We continually seek to re-balance Balanced Equity Portfolio exposure to all of yield, value, cyclical and growth factors. Ultimately we’re looking for best-of-breed companies capable of thriving regardless of the macro-economic backdrop.

Resources, Energy and Financials have benefitted from the bounce back in economic activity, but a potential tightening in lending standards for residential housing and a slowdown in China will may limit upside in the short term.

On the flipside, household balance sheets are in great shape, which should continue to support the recovery in consumption. We also see upside risks to dividends as uncertainty from the virus clears, keeping payout ratios elevated.

We prefer a targeted portfolio approach favouring reflation (Financials, Energy) and COVID reopening beneficiaries (Travel, Gaming, Traditional Retail).

In Q3 the Morgans Equity Model Portfolios added exposure to reflation (STO, TPG), a growth compounder (TNE) and a tactical value catalyst (TAH), while also adding to stocks with some defensive attributes (EDV, TAH).

Morgans analysts see solid opportunities among financials, energy, select cyclicals and consumer services stocks, but remain cautious on iron ore, staples and large-cap online stocks near term.


Figure 1: Energy stocks have lagged rebounding energy prices but are now showing signs of strength  

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Morgans, IRESS

Find out more

We share the full list of 20 stocks with material upcoming catalysts and share our analysts' comments in our full research note.

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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.

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