Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
RBA set to prioritise inflation fighting over economic growth
“The RBA appears to be prioritising price stability over economic growth,” is the opinion of Andrew Tang, equity strategy analyst at Morgans Wealth Management. Last month’s higher than expected inflation reading confirmed what many had long feared. Australia is not immune to the rising price of goods as a result of massive stimulus efforts during the pandemic, higher energy prices, supply disruptions and labour shortages. Everything seems more and more expensive.
And that’s because it is.
Inflation pressures are mounting in Australia but the good news is they remain weaker than in the US. That is, Australia’s March Quarter CPI – 5.1% versus the April CPI 8.3% in the US. Last week’s 50bps interest rate increase, well ahead of expectations, “is clearly prioritising price stability over employment and economic stability. We think the change in focus will leave to door open to further 50bps moves at upcoming policy meetings and thus no near-term respite for equity investors,” says Tang.
Australia’s household savings during the pandemic together with a tight labour market will help provide some form of cushioning in the short term. But such aggressive monetary policy typically operates with a lag and that means, higher rates will hit consumer demand, the property market and economic growth in time.
Tang says, by lifting rates well ahead of expectations, the RBA is leaving the door open to further 50bps to ensure pricing stability. It also means the remainder of this year and perhaps the first half of next year will be tough. Higher rates, tighter financial conditions for households and a shift away from risk assets, will require a re-positioning of investor portfolios to account for stubbornly high inflation.
Tang concludes by saying investors need to position portfolios to take advantage of the rising rate environment. Banks are one sector that does well. “Although a rising official cash rate will benefit bank Net Interest Margins (NIM), higher interest rates will likely place downward pressure on asset prices and credit growth,” says Tang.
All in all, 2022 is going to be a difficult year will be a year driven by high inflation, rising rates and supply disruptions. Central banks are tasked with the job of withdrawing excess stimulus liquidity but at the cost of market uncertainty, weaker growth and the threat of higher volatility in equity and bond markets. The RBA is tipped to raise rates to 135bps in July and to 260bps by year end. These implied rates ould see a further PE compression of growth stocks still trading at above pre-pandemic levels.
Here are Morgan’s best ideas – stocks offer the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are the most preferred sector exposures.
| Company | Sector | Size | Price | Entry | Target 12m | Div Y | Gross Y | 12 TSR |
| Incitec Pivot (IPL) | Chemicals | Mid | $3.52 | 2-Sep-20 | $4.45 | 4.80% | 5.90% | 31.30% |
| Nufarm (NUF) | Chemicals | Small | $5.29 | 2-Oct-20 | $6.65 | 1.10% | 1.60% | 26.80% |
| Lovisa (LOV) | Consumer Disc. | Small | $15.06 | 27-Nov-20 | $24.00 | 3.80% | 3.80% | 63.10% |
| Baby Bunting Group (BBN) | Consumer Disc. | Small | $4.34 | 4-Mar-22 | $6.00 | 4.40% | 4.40% | 42.60% |
| Eagers Automotive (APE) | Consumer Disc. | Small | $10.90 | 31-Jul-20 | $14.40 | 6.60% | 9.40% | 38.70% |
| Wesfarmers (WES) | Consumer Staples | Large | $47.19 | 1-Feb-22 | $58.50 | 3.80% | 5.50% | 27.80% |
| Endeavour Group (EDV) | Consumer Staples | Large | $7.26 | 30-Sep-21 | $7.30 | 3.00% | 4.30% | 3.60% |
| GQG Partners (GQG) | Financial Services | Mid | $1.66 | 4-Mar-22 | $2.15 | 8.30% | 8.30% | 37.50% |
| QBE Insurance Group (QBE) | Financial Services | Large | $12.03 | 2-Oct-20 | $14.45 | 2.20% | 2.70% | 22.30% |
| Macquarie Group (MQG) | Financial Services | Large | $185.98 | 4-Mar-20 | $214.96 | 3.80% | 4.50% | 19.40% |
| Challenger (CGF) | Financial Services | Mid | $7.23 | 4-Mar-22 | $8.21 | 3.60% | 5.10% | 17.20% |
| Treasury Wine Estates (TWE) | Food & Ag | Large | $11.90 | 30-Jul-21 | $13.93 | 3.00% | 4.30% | 20.10% |
| Mach7 Technologies (M7T) | Healthcare | Small | $0.62 | 2-Oct-20 | $1.55 | 0.00% | 0.00% | 152.00% |
| ResMed Inc (RMD) | Healthcare | Large | $29.18 | 3-Oct-19 | $39.23 | 0.90% | 0.90% | 35.30% |
| Pro Medicus (PME) | Healthcare | Small | $42.13 | 1-Feb-22 | $56.20 | 0.60% | 0.60% | 34.00% |
| Healius (HLS) | Healthcare | Small | $4.29 | 4-Mar-22 | $5.15 | 4.00% | 5.70% | 24.00% |
| Acrow (ACF) | Industrials | Small | $0.47 | 26-Jun-20 | $0.76 | 6.40% | 9.10% | 68.10% |
| Reliance Worldwide (RWC) | Industrials | Mid | $3.92 | 29-Apr-21 | $4.83 | 3.90% | 4.20% | 27.10% |
| Dalrymple Bay Infra. (DBI) | Infrastructure | Small | $2.05 | 31-Mar-21 | $2.30 | 9.30% | 9.30% | 21.50% |
| Transurban Group (TCL) | Infrastructure | Large | $14.37 | 30-Jul-21 | $14.42 | 4.20% | 4.30% | 4.50% |
| Domino’s Pizza (DMP) | Leisure & Gaming | Mid | $68.83 | 1-Jun-22 | $100.00 | 2.90% | 3.80% | 48.20% |
| Aristocrat Leisure (ALL) | Leisure and Gaming | Large | $33.79 | 1-Jun-22 | $43.00 | 2.40% | 3.40% | 29.60% |
| South32 (S32) | Metals & Mining | Large | $5.00 | 1-Feb-22 | $6.10 | 7.20% | 10.30% | 29.20% |
| BHP Group (BHP) | Metals & Mining | Large | $44.61 | 4-Mar-20 | $48.30 | 7.30% | 10.40% | 15.50% |
| Whitehaven Coal (WHC) | Metals & Mining | Small | $5.28 | 29-Apr-21 | $5.24 | 7.60% | 10.80% | 6.80% |
| Karoon Energy (KAR) | Oil & Gas | Small | $2.04 | 31-Jul-20 | $2.70 | 0.00% | 0.00% | 32.40% |
| Santos (STO) | Oil & Gas | Large | $8.20 | 26-Jun-20 | $10.00 | 4.90% | 4.90% | 26.90% |
| Seek (SEK) | Online | Large | $24.25 | 1-Feb-22 | $32.33 | 2.00% | 2.90% | 35.30% |
| HomeCo Daily Needs (HDN) | Property | Small | $1.35 | 29-Jan-21 | $1.73 | 6.70% | 6.70% | 34.80% |
| Dexus Industria REIT (DXI) | Property | Small | $3.21 | 4-Mar-22 | $3.65 | 5.60% | 5.60% | 19.30% |
| IDP Education (IEL) | Services | Mid | $24.07 | 4-Mar-22 | $36.10 | 1.80% | 1.80% | 51.80% |
| Technology One (TNE) | Technology | Small | $10.50 | 1-Dec-21 | $11.53 | 1.60% | 2.00% | 11.40% |
| NEXTDC (NXT) | Telecommunications | Mid | $11.01 | 2-Sep-20 | $14.64 | 0.00% | 0.00% | 33.00% |
| Corporate Travel (CTD) | Travel and Leisure | Small | $22.17 | 1-Jun-20 | $29.25 | 1.70% | 2.40% | 33.60% |
| Webjet (WEB) | Travel and Leisure | Small | $5.97 | 1-Feb-22 | $6.55 | 0.30% | 0.30% | 10.10% |
