Rudi's View | Jul 11 2024
Updates on strategies, model portfolios, key picks, best buys and conviction calls.
By Rudi Filapek-Vandyck, Editor
Macquarie strategists believe the US economy has decelerated into a slowdown, with consequences for which sectors are likely to perform or not on the share market.
The fact the RBA might still hike in August is ignored. Macquarie prefers to take guidance from the fact central banks elsewhere are almost universally moving towards loosening.
Key changes applied to the broker's Model Portfolio include increased exposure to defensives, growth and REITs and reduced exposure to financials and resources.
The strategists also point out the Macquarie proprietary FOMO meter currently reads 1.42, which is at elevated level, while sentiment in the US seems extemely bullish. The combination of the two is treated as a warning signal.
Macquarie suggests further returns from here onwards are most likely to be "weak" and driven by defensives. Macquarie prefers healthcare and staples.
In terms of individual stocks, Macquarie's Model Portfolio has added exposure to Amcor ((AMC)) and GrainCorp (GNC)) -both are new inclusions- and to CSL ((CSL)) and ResMed ((RMD)), as well as to growth stocks Xero ((XRO)) and Block ((SQ2)).
REITs have been overweighted through the inclusion of Mirvac Group ((MGR)).
Exposure to National Australia Bank ((NAB)) and CommBank ((CBA)) shares has been slimmed down, as well as to Suncorp Group ((SUN)) on the expectation of negative impact from La Nina weather. The latter should benefit GrainCorp.
All in all, point out the strategists, average returns from shares tend to be lower during a slowdown phase, with the Australian market taking its lead from the US, based on historical precedents.
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Did anyone mention "resources"?
The past week has seen multiple sector updates by resources analysts, with major shifts in preferences occurring.
All in all, optimism for copper remains, met coal is back on the radar and sentiment towards rare earths and lithium and other battery materials varies from poor to really poor. The outlook for iron ore is not looking great, but not terrible either.
The team at JP Morgan retains its large cap preferences for BHP Group ((BHP)), Rio Tinto ((RIO)) and South32 ((S32)), accompanied by positive views on BlueScope Steel ((BSL)) and Sandfire Resources ((SFR)).
In the local gold sector, JP Morgan retains Overweight ratings for Evolution Mining ((EVN)), Northern Star ((NST)) and De Grey Mining ((DEG)). The broker has downgraded Newmont Corp ((NEM)) and Gold Road Resources ((GOR)) to Neutral.
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Staying with the gold producers, Goldman Sachs reports Australian producers have transitioned back to focus on margins and cash generation rather than production growth throughout the year past (even though M&A remains a theme).
This should make the sector more attractive for investors, but share prices have yet to reflect this change. The broker suspects continuously rising costs are keeping the buyers at bay.
Goldman Sachs suggests those producers with higher costs and lots of capex on the agenda are most likely to underperform peers that offer less risk for cost overruns.
Gold producers currently rated Buy at Goldman Sachs are Evolution Mining, De Grey Mining, Gold Road Resources, and Bellevue Gold ((BGL)).
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Similar caution dominates the latest preview for the upcoming quarterly production report updates and August result releases by Australian gold producers at Barrenjoey.
Most of in-house updates on the sector are generating financial estimates below market consensus, reports Barrenjoey, with a combination of lower production, higher costs and more capex all impacting.
Barrenjoey has singled out Northern Star, Regis Resources ((RRL)) and Gold Road Resources for potentially greater downside risks, and sees relatively lower risk for Evolution Mining, Newmont Corp, and Capricorn Metals ((CMM)).
The broker's advice to investors: those gold equities that demonstrate cash generation relative to peers through reporting season will be rewarded.
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