Rudi’s View: Strategy Updates & Model Portfolios

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | May 23 2024

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.

The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE

If you already had your free trial, why not join as a paying subscriber? CLICK HERE