Stocks to sell in May 2020
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 11 May 2020, 11:30 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
The strong rebound in risk tolerance which drove April’s equity rally partly reflects improving clarity in Australia’s path to economic recovery. However several unknowns remain, and equities are in notable disagreement with pricing in defensive asset classes, giving cause for ongoing caution.
Many stocks (e.g. Banks, Retailers) look to be discounting risks fairly via much weaker pricing, but many do not.
In our latest Sells, Trims and Non-preferred Stocks note we flag stocks that are either:
- outright sells
- looking expensive (trim profits or switch)
- least preferred in their sector (no need to be there)
An evolving state of play
The pandemic has triggered the largest co-ordinated global monetary and fiscal response in history, supporting our optimism that while economic growth will take a sharp hit, it can subsequently recover.
Over the last few weeks, investors have gained far more clarity on what the road-map to recovery looks like in terms of the potential pace of re-opening of the Australian economy.
However the situation does rely on the containment of new COVID outbreaks, and several economic unknowns remain, hence the situation does remains fluid.
Broader risk rally looks complacent to what’s ahead
In April, key equity indices including the S&P500 (+13%) enjoyed their biggest monthly gains since 1988. However there remains a much larger than usual range of uncertainties driving equities, and a large range of potential economic outcomes in the coming months.
These can be boiled down to a debate on whether the recovery in key economies will take V, U or extended U or L shapes.
Second order impacts such as the economic response to the removal of Government stimulus are a notable concern to watch.
Defensive asset classes tried, but failed to match the risk-tolerance displayed in equity markets in April by largely trending.
This ongoing disagreement in key asset classes is conspicuous and is cause for our broader caution on the market.
Areas to trim some profits, upgrade quality and reduce risk
Not all industries and business will return to operations at the same pace and magnitude hence selectivity remains key.
Many sectors have been quick to discount the risks in coming months. For example price-to-book ratios for the major Banks are now lower than they were in the global financial crisis.
Similarly, Retailers and REITs already look to be pricing in coming risks to earnings, such that downside risks do look more limited than in other sectors.
On the other hand, recent strong performance of Healthcare and IT now places their valuations at extreme levels and we’d be surprised if they continued to outperform if the world does slowly recover.
Morgans clients can access the full list of stocks we highlight to sell or trim by logging in.
We have also recently published our Morgans Best ideas note for May 2020 which provides a list of our most compelling current Buy ideas. If you would like more information, please contact your adviser, nearest Morgans office or apply for a free trial web account to gain access to our online platform, including research notes for two weeks.
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