Rudi's View | 10:01 AM
Updates on strategies, model portfolios, key picks, best buys and conviction calls.
By Rudi Filapek-Vandyck, Editor
It appears the team of commodity analysts at Morgan Stanley didn't need to see Anglo American's Grosvenor mine on fire to express a positive view on the outlook for metallurgical coal.
A visit to China had already convinced the analysts the market was grossly under-appreciating how much of supply-constraints are occurring inside the country.
Now Anglo American's misfortune is adding further pressure, Morgan Stanley has made met coal its number one commodity pick.
Investors ready to ride the rally are guided towards the following key stock calls:
-Yancoal Australia ((YAL))
-Whitehaven Coal ((WHC))
Plus Teck Resources in the US and Shougang Fushan in China.
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Strategists at Citi remain of the view the US economy will experience a recession in the second half of this year.
It is this base case premise that has Citi forecasting three Fed rate cuts before year-end, with the first one to be delivered in September.
Starting off from that forecast, Citi strategists believe it is inevitable there will be a -5%-10% sell-off in US share markets in the months ahead, as investor optimism meets economic reality.
Current expectations remain high, but slowing growth ahead will make it increasingly more difficult for companies to continue beating forecasts, including for those megacap growth companies, Citi argues.
The good news is: Citi remains positive on the outlook for US markets, with the strategists advocating investors buy into pullbacks and prepare to buy into the upcoming correction.
In terms of sector exposures, the strategists suggest companies with compelling longer-term outlooks, perhaps enhanced by generative Ai potential, provide a means of navigating economic weakness, while benefitting from an eventually less hawkish Fed.
In addition, cyclicals typically get valuation support as Fed easing unfolds, providing an attractive barbell to Growth, Citi finds. Defensives should benefit from a clearer line of sight to earnings growth.
Citi's upgraded projection now sees the S&P500 finishing year-end around 5600 (currently above 5500) with scope to rise further to 5800 in 2025. The anticipation is that earnings growth, and thus also investor interest, will broaden as the year progresses, with the index no longer relying on a small basket of megacaps and Ai-growth companies.
Peers at Goldman Sachs also see the S&P500 at 5600 by year-end and they too believe elevated multiples mean today's outperformers in US markets could be subjected to outsized punishment in case of an earnings 'miss' in the quarters ahead.
It is Goldman Sachs' view that all 'beats' will still be rewarded, irrespective of whether companies trade on low or High PE multiples, but any disappointment from a company on high multiples is likely to be punished harshly, while a low PE stock might be viewed more favourably.
The next quarterly reporting season in the US starts in less than two weeks, but those concerns are more focused on earnings reports later in the year.
Morgan Stanley's global investment committee's recommendation is for investors to not extrapolate the first six months, which have been surprisingly fantastic though carried by a small base of outperformers, and focus on Quality Value that is as yet still reasonably priced.
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