Rudi’s View: Strategy Updates & Model Portfolios

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By Rudi Filapek-Vandyck, Editor

The global teams of market analysts at Morgan Stanley have updated their modeling for all major economies and financial markets. The number one observation that stands out for Australia is the local bourse doesn't need imminent RBA rate cuts to finish the year on a positive note.

On the local analysts' assumptions and projections, the ASX200 can still generate a total return (dividends included) of 9% by December 31st, with the year-end target lifted to 8100 as Morgan Stanley sees a better outlook for corporate earnings growth in FY25.

The analysts make a point in emphasising the revised forecasts still include a local central bank that will be lagging its international peers in policy loosening.

With fiscal stimulus keeping economic growth on better footing, but also inflation higher-for-longer, the RBA is expected to wait until 2025 before starting to cut the official cash rate in February. By then, weakness in local labour maket data should become more noticeable, the updated forecasts predict.

The RBA is projected to execute three rate cuts of -25bp each in 2025. Throughout the second half, however, the RBA will stand out as a notable exception while central banks in most developed countries are cutting interest rates.

Morgan Stanley's preference lays with international equities (Overweight), where the favourites are Japan and Europe, with a suggestion investors should start rotating into resources. Other key Overweight sector ratings include Insurance, Utilities, Energy, and Global Healthcare. In quant terms, the preference lays with both Quality and Value.

The broker's Model Portfolio (see also further below) continues to hold an Underweight exposure to Australian banks.

Morgan Stanley's base case scenario sees the S&P500 at 5400 by year-end, carried by a projected 19x multiple on earnings growth of 8% in 2024, while looking forward to 13% growth for 2025. As is custom these days, the broker also offers a bull case scenario of 6350 (circa 20% upside) and a bear case outcome of 4200 (circa -20% downside).

One of the eye-catching forecasts included is the analysts believe large caps should continue to outperform small caps "given stronger earnings revisions, more durable margin profiles, and healthier balance sheets".

In terms of quant segments, the preference lays with quality growth, quality cyclicals, operational efficiency, strong EPS revisions, high free cash flow, and high alpha.

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US market strategists at Goldman Sachs equally updated their modeling recently, but Goldman Sachs's year-end target for the S&P500 has remained unchanged at 5200, effectively implying the index is going nowhere (on a net basis) over the coming seven months.

Goldman Sachs's EPS forecasts for US companies sit below Morgan Stanley and market consensus, with a projected 8% growth for 2024, followed by 6% in 2025. Market consensus is still working off 9% and 14%, respectively.

Goldman Sachs strategists offer four alternative scenarios:

1. “Catch up,” the S&P 500 would end the year at 5800 (plus circa 13%)
2. “Catch-down,” the S&P 500 would fall to 4500 (minus -12%)
3. Continued mega-cap exceptionalism would lift the index to 6000 (plus 17%)
4. Recession fears would push the index down to 4500 (minus -12%)

One of Goldman Sachs's bugbears is investor allocations relative to US equities remain elevated by historical comparisons, plus there are multiple risks on the horizon for Big Tech.

On Goldmans' scheduling, the Federal Reserve starts cutting interest rates in July, with one more follow-through before December, then followed by four further cuts in 2025.

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The share market would not be true to its public forum character if market strategists at Citi were to simply agree with all of the above. Citi very much likes tech-heavy and cyclical equity markets, which translates into favouritism for the US and Asia (Taiwan, Japan, Korea), though Europe (but not the UK) has recently been upgraded to Overweight.

The Ai story has much further to run, argue Citi strategists, so investors better stay the course.

Citi also prefers commodities, including precious metals, as US bond yields/interest rates and the US dollar should become less of a headwind, with a negative bias towards crude oil ("sell any rallies"). The strategists also emphasise investors should not sell in May this year, unless the portfolio owns equities in Latin America.

Citi's argument is the region is not as cyclical as is commonly believed, despite being the home of many commodity plays. Citi is cautious on consumer spending, globally and generally.

On Citi's projections, the Fed starts cutting in July, for four cuts in total. Its year-end target for the S&P500 is only 5100, implying a net negative return over the coming seven months. Citi has US equities in the Neutral basket, with Australia and the UK both as Underweight.

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T Rowe Price too is Underweight the Australian share market, with the fund manager arguing local equities seem richly valued with plenty of earnings risks on the horizon.

The RBA is expected to remain more hawkish for longer, while consumer spending is showing early signs of weakening under the pressure of higher-for-longer interest rates.

T Rowe Price is Overweight Japan, and Neutral most equity markets, though Underweight Europe and China.

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Strategists at Wilsons remain constructive on the Australian economy and share market, arguing it is valuations in the US that look stretched.

"Our domestic base case is that the economy recovers from its current below trend growth phase and picks up moderately through the back end of 2024 and through 2025."

But also:

"From a domestic perspective the easing in US rate fears and lower US bond yields has translated to the Australian interest rate markets, despite little in the way of domestic evidence to support this shift.

"Australian inflation is broader than the US, albeit our economy is currently weaker. The reasonably significant fiscal stimulus coming in the 2025 financial year led by the July 1 tax cuts, also complicates things for the RBA.

"The RBA will certainly lag the global easing cycle due to a stickier inflation cycle and fresh uncertainty over the ultimate impact of the government’s fiscal cash injection announced last week."

Model Portfolios, Best Ideas & Conviction Calls

Morningstar's Best Equity Ideas for ASX-listed stocks currently contains 14 inclusions. Morningstar's approach is centred around 'cheap value', more so than around 'growth':

-TPG Telecom ((TPG))
-Domino's Pizza ((DMP))
-Bapcor ((BAP))
-a2 Milk Co ((A2M))
-Santos ((STO))
-AUB Group ((AUB))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Ventia Services ((VNT))
-Lendlease Group ((LLC))
-Pexa Group ((PXA))

As well as Fineos Corp ((FCL)), ResMed ((RMD)) and Newmont Corp ((NEM)) among international ideas.

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Morgan Stanley's Australia Macro+ Focus List contains the following 10 stocks:

-Aristocrat Leisure
-Car Group ((CAR))
-CSL ((CSL))
-Macquarie Group ((MQG))
-Origin Energy ((ORG))
-Paladin Energy ((PDN))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))
-Treasury Wine Estates ((TWE))
-Woodside Energy

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Morgan Stanley's Macro+ Model Portfolio consists of the following 32 constituents:

-ANZ Bank
-CommBank ((CBA))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-Macquarie Group
-QBE Insurance
-Suncorp Group
-Goodman Group
-Scentre Group ((SCG))
-Stockland ((SGP)
-Aristocrat Leisure
-Car Group
-Domino's Pizza ((DMP))
-The Lottery Corp ((TLC))
-Wesfarmers ((WES))
-James Hardie ((JHX))
-Orica ((ORI))
-Coles Group ((COL))
-Treasury Wine Estates
-CSL
-ResMed ((RMD))
-AGL Energy ((AGL))
-Origin Energy
-Telstra
-Transurban Group ((TCL))
-BHP Group ((BHP))
-Newmont Corp 
-Rio Tinto
-South32 ((S32))
-Paladin Energy
-Santos ((STO))
-Woodside Energy

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Wilsons' list of Highest Conviction Investment Ideas has seen the allocation increase to Woodside Energy, Xero ((XRO)) and Netwealth Group (NWL)).

Other Most Preferred Ideas are Aristocrat Leisure and Collins Foods ((CKF)).

More ideas come with "long term growth" profiles:

-Ridley Corp ((RIC))
-TechnologyOne ((TNE))
-Universal Stores ((UNI))
-ARB Corp ((ARB))
-Neuren Pharmaceuticals ((NEU))
-Pinnacle Investment Management ((PNI))

Among Resources stocks, there are two favoured ideas:

-Beach Energy
-Liontown Resources ((LTR))

And there's a Speculative basket too:

-Immutep ((IMM))
-Clarity Pharmaceuticals ((CU6))

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Wilsons' Focus Portfolio's largest overweight remains towards growth companies, including a large overweight to the healthcare sector. The largest underweight allocation remains for local banks. The Portfolio also holds a slight overweight allocation to resources, but this is due to "active positioning" in green metals and energy (underweight iron ore).

In terms of individual stocks, the Focus Portfolio encompasses the following:

Consumer Discretionary
Aristocrat Leisure, IDP Education ((IEL)), Lottery Corp, Collins Foods, Breville Group ((BRG)), Webjet ((WEB))

Energy
-Woodside Energy

Financials
-ANZ Bank, National Australia Bank, Westpac, Macquarie Group, Insurance Australia Group ((IAG)), Netwealth Group, Steadfast Group ((SDF))

Healthcare
-CSL, ResMed, Telix Pharmaceuticals ((TLX))

Industrials
-Worley ((WOR))

Information Technology
-Xero

Materials
-BHP Group, Amcor ((AMC)), Evolution Mining ((EVN)), Mineral Resources, Arcadium Lithium ((LTM)), Sandfire Resources ((SFR)), South32 ((S32))

Real Estate
-Goodman Group, HealthCo Healthcare & Wellness REIT ((HCW))

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Macquarie Wealth's recommended Growth Portfolio currently includes the following stocks:

-Goodman Group
-Seek ((SEK))
-Aristocrat leisure
-Northern Star ((NST))
-CSL
-Computershare ((CPU))
-NextDC
-The Lottery Corp
-Flight Centre
-Mineral Resources
-Cleanaway Waste Management ((CWY))
-Steadfast Group
-Arcadium Lithium
-ResMed
-Pexa Group
-Treasury Wine Estates
-Viva Energy ((VEA))

Macquarie Wealth's recommended Income Portfolio currently has the following composition:

-Suncorp Group
-Telstra
-National Australia Bank
-Westpac Bank
-ANZ Bank
-BHP Group
-CommBank
-Premier Investments ((PMV))
-Coles Group
-Viva Energy
-Atlas Arteria ((ALX))
-Aurizon Holdings
-APA Group
-GPT Group ((GPT))
-Deterra Royalties ((DRR))
-Metcash ((MTS))
-GUD Holdings ((GUD))
-Charter Hall Retail REIT ((CQR))
-Amcor

Weekly Insights this week: https://fnarena.com/index.php/2024/05/22/rudis-view-rate-cuts-equal-optimism/

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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