FY21 sector outlooks and strategies
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 28 September 2020, 1:05 PM
- Sectors Covered:
- Equity Strategy and Quant
Morgans research analysts re-set their sector views, strategies and preferred picks in light of ongoing COVID-19 risks to the economy.
As the market comes to terms with the new 'normal' operating environment, we see better opportunities among the major banks, ag/food, energy and select industrials, and among sub-segments of the REITs.
We remind investors to look through the noise and adjust their strategies to prepare for opportunities as the market turns its attention to the fundamentals and the reality of countries having to coexist with COVID-19.
A gradual path higher but be prepared for turbulence
Australia escaped the original onslaught of COVID-19 relatively lightly: its GDP decline in the June quarter, while a substantial 7.0%, was rather less than the 9% or so experienced by the median OECD economy.
It was however enough to do serious damage to corporate earnings in FY21 to pose ongoing risks to improved profitability in the future. The unequal nature of the recovery and the potential for a resurgence of COVID-19 offshore will mean investors will need to position portfolios for resilience.
We continue to expect the markets to make further gains, but we are preparing for a more turbulent ride ahead. We think the best gains will be driven by sectors that have largely underperformed so far (Banks, Ag/Food, Industrials and Energy).
This would be something akin to what happened between mid-May and early-June when the economic recovery continued despite the virus, against a backdrop of ongoing policy support.
September quarter moves and opportunities
The Energy and Banks stocks have been the clear large-cap laggards during the market's strong rebound from the March "COVID" crunch but we see reasons for optimism as the market turns its attention back to the fundamentals of the economic rebound.
Westpac, Woodside and Santos are preferred exposures. Despite the strong run, we remain constructive on Retailers given our view that robust growth will continue over the balance of 1H21 at least supported by the key online sales periods and FX tailwinds.
The outlook for the Ag sector (Nufarm (NUF), Initec Pivot (IPL), Costa Group Holdings (CGC) has continued to improve over the past quarter following generally good seasonal conditions and a favourable near-term rainfall outlook.
We see some of the better opportunities among essential Industrials businesses (Amcor, Aurizon), and also among sub-segments of the REITs sector.
Sectors like Online and Travel look most vulnerable to a re-escalation of concerns around CV19, given their strong rebound off their lows.
Our analyst key picks are profiled in more detail in our dedicated Morgans Best Ideas publication.
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