Macquarie Securities has recommended a shift to a more defensive Australian equity position in its model portfolio, suggesting that clients add gas and electricity company APA Group, real estate investment trust GPT, toll road operator Transurban, gold miner Ora Banda Mining and waste management company Cleanaway to their portfolios.
Macquarie says: “The S&P/ASX 200 rose 27 per cent from the December 2018 peak to the high in early August. That’s a high return in seven months. In the last cycle, which started in February 29016, the S&P/ASX 200 rose 35 per cent over two and a half years.
“We suspect the market will trade in a range, driven by concerns about global growth and hopes of more stimulus. But with a view equity returns could get worse before they get better, we are taking risk off the table until there is better value in quality growth stocks.”
Macquarie points out that even though the market has come off 8 per cent from its early August high, industrial are still trading at around 22 times estimated 2109/20 earnings per share.
“We removed most bond proxies in April, on the expectation a US recovery would lift bond yields. We are now reversing that view. The negative impact from the US-China trade war are reflected in declining trade and weak PMIs. The OECD leading indicator for the Euro Area also appears to signal a renewed downturn, and this could occur in other regions.
“Central banks will likely respond with more easing but we may need more volatility first. The expectation of rate cuts and Euro Ara weakness seem likely to keep driving down bond yields globally.”
It has reduced its positions in insurer QBE, big banks Westpac and NAB, annuity provider Challenger Financial, building products supplier CSR and energy company Origin.
“With an expectation of more aggressive central bank rate cuts and still lower bond yields, we remove Challenger and QBE, which benefit from higher bond yields.
“While still positive on Australia’s housing recovery, to make room for more defensive positions, we remove CSR. We also remove Origin as the electricity business faces multi-year headwinds. We still have energy exposure through Oil Search.”
It is reducing its weighting in NAB and Westpac because it believes lower interest rates will have a negative impact on bank margins.
Macquarie says it remains positive about the US economy and recommends exposure through holdings in Aristocrat Leisure and James Hardie Industries.
Its take on the reporting season close to the halfway mark is that the majority of companies have reported earnings in line with expectations. Stocks that have come in under expectations include Bendigo and Adelaide Bank, Janus Henderson Group, SCA Property Group, Vicinity Centres, REA Group, CIMIC Group and Rio Tinto.
Macquarie has downgraded the 2019/20 earnings outlook for a number of companies, following the release of their financial reports. They include mortgage insurer Genworth, fund manager Pinnacle Investment, insurer IAG, AMP, retailer Nick Scali, News Corp and gaming company Tabcorp.