The storm clouds are gathering according to the latest Morgan Stanley “Australian Macro+” report.
The investment bank has materially downgraded its outlook for economic growth, the ASX, and earnings growth for Australian companies. They also have a very bearish outlook for the Aussie dollar by the end of 2015 which will help some stocks but not the index overall.
Here are the key takeaways:
Deteriorating Macro Growth Outlook:
Morgan Stanley has revised their growth forecast for the 2015 calendar year from 2.4% to 1.9% on the back of, “a step down in GDP growth, a higher peak in unemployment levels and ultimately a longer and harder transition out of the preceding Resources boom. This downdraft presents a headwind to already subdued market earnings growth.”
Low EPS Growth Reality:
“Bottom up growth forecasts for the ASX 200 over the next three years are in firm single digit territory,” Morgan Stanley says but adds that while “In the past this could have been seen as a bullish signal, should earnings momentum turn positive. The reality is that the current single digit growth profile between FY15e and FY17e seems to fit the current trading and macro backdrop.”
Single digit growth is still growth but Morgan Stanley says the bias will remain negative.
Lowering Index Target:
The ASX 200 is trading at 5,498 today but Morgan Stanley has downgraded their target from 5,800 in 12 months to 5,350.
The reason they say is because “market multiples remain elevated in the context of such a growth outlook, with the pervasive attraction of Yield being the stop gap.”
But the bearishness doesn’t stop there and they say that “near term risks skewed to the downside.”
Retaining Thematic Focus:
Morgan Stanley is underweight the banks and wants to stay that way ahead of the release of the FSI later this month.
They say that they want to “retain our four buckets of investment focus -being Non-Bank Financials (less Reg more Growth), Global Growers (FX with Benefits), Dividend Growers (Blue Chip appeal) and Structural Growers (Cycle Agnostic).”
A lower AUD:
Morgan Stanley says that, “after a period of AUD strength that has challenged consensus positioning within the market for much of this year, the prospect of ultimate AUD weakness (MS forecast 76c 4Q15e) should support the offshore earners basket again.”
Yes that’s 76 cents, against the current level of 0.8750.
A large part of all of the above is because having avoided the GFC and used Chinese growth and the mining boom for all its worth Australia is now well behind the rest of the developed world in terms of growth outlook.