There are buying opportunities on the ASX200, but investors need to be 'selective'

Getty Images
  • Morgan Stanley says the global shift in strategy from growth into value stocks can be applied to the ASX200.
  • However, certain factors make the Australian market unique, meaning investors need to be more selective in their approach.

Morgan Stanley’s global equities team thinks US markets have reached a “tipping point” as bond yields rise.

They’ve shifted strategy away from the booming tech sector towards energy, utilities and financials stocks. In other words, a rotation from growth stocks into value stocks.

And closer to home, the bank’s domestic equities team has applied a similar approach to the Australian market.

However, the Aussie version of the trade is “arguably more difficult, given earnings risks in key stocks and sectors,” they say.

For example, going “all-in” on a high-value strategy would require a large over-weight position in the Australian banks.

But while US financials usually benefit from rising rates, the Aussie banking sector is facing a very different set of headwinds: tighter lending standards in a falling housing market, margin pressures from higher funding costs, and battered reputations from the royal commission.

So the analysts say a move into banks “is still too early to consider”.

Morgan Stanley

That’s not to say a value-based strategy — companies which look cheap relative to their earnings fundamentals — isn’t worthwhile.

However, “we prefer to be selective on value” Morgan Stanley says, with a current tilt towards the energy sector.

In addition, Morgan Stanley says weakness in the US tech sector — which got mauled overnight — has led to more scrutiny of growth stocks in the Australian market.

But for starters, tech stocks make up a much smaller component of the ASX200.

And many of the companies with growth opportunities have international exposure, with “superior earnings outlooks and also leverage to a weakening AUD”.

So ultimately, “there are a number of trade-offs to make when playing this late cycle” Morgan Stanley says.

“No simple broad brush will give you the painting you want to admire.”

Balancing out those competing factors for the Australian market, Morgan Stanley’s portfolio still leans further towards value than growth stocks.

Currently, their top five positions are QBE Insurance, Macquarie Group, Woodside Petroleum, LendLease and BHP.

And the bank has a year-end price target of 5,950 for the ASX200. A short time ago, the index was trading at around 5,930 after a sharp fall this morning following the overnight selloff on global markets.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.