Insights

Advantage Australia — Why Morgan Stanley upgraded ASX shares to overweight

While some ASX shares have posted huge gains this year, the ASX has underperformed most national indexes. But that looks set to change.
The post Advantage Australia — Why Morgan Stanley upgraded ASX shares to overweight appeared first on Motley Fool Australia. –

Upgrade of asx shares represented by boxing glove printed with australian flag

A select group of ASX shares have shot the lights out this year. And garnered most of the headlines.

Yes, we’re looking at you Brainchip Holdings Ltd (ASX: BRN). The Brainchip share price is up 640% year to date, despite tumbling around 50% since 10 September.

And you Afterpay Ltd (ASX: APT), with share price gains of 167% since 2 January.

Yet, while there are scores of high-quality shares on the S&P/ASX 200 Index (ASX: XJO), the index of the top 200 Australian listed stocks has lagged most other developed nations’ markets in 2020.

While edging higher in late morning trade today, year to date the ASX 200 is still down 11%.

In comparison, Germany’s DAX Performance-Index (DB: DAX) is down 3%; the United States’ S&P 500 Index (SP: .INX) is up 3%, and Japan’s Nikkei 225 (NIKKEI: NI225) has gained 1%.

Chinese and technology shares have been among the strongest performers. China’s CSI 300 Index (SHA: 000300) is up 11% in 2020, while the tech-heavy Nasdaq Composite (NASDAQ: .IXIC) has gained 22%.

With Brexit negotiations still unresolved and COVID-19 cases spiking, the United Kingdom’s FTSE 100 Index (FTSE: UKX), down 22% in 2020, is one of the few to greatly underperform the ASX 200.

Why Morgan Stanley sees value in ASX shares

Australia, fingers crossed, looks to have rounded the corner in its battle against the coronavirus. Victoria is emerging from its strict lockdown measures, and many states haven’t had any new cases in weeks.

State borders, with the exception of Western Australia for the time being, are reopening. And there is talk that the much-touted trans-Tasman travel bubble could eventuate before the Christmas holidays.

All that spells good news for the beaten down travel and leisure shares still lagging on the ASX.

This hasn’t escaped the attention of the analysts at Morgan Stanley. Noting that it’s likely ASX share earnings have hit their lows, the broker upgraded Australia to overweight in its regional country model.

According to Morgan Stanley’s equity strategist Chris Nicol (as quoted by the Australian Financial Review):

Despite a better-than-feared initial COVID impact and best-in-class economic trough, the ASX 200 has lagged developed market peers when comparing recovery in equity market levels from crisis lows… Catch-up catalysts are now in focus from investors. The set up from here is interesting where Australia’s recovery outlook contrasts with developed market economies entering winter and second-wave COVID risks rising amid fiscal debates and varying recovery impacts.

Foolish takeaway

If you take a look through the leading shares in the travel and leisure business, you’ll find most of them are still well down for the year. Yet, again for most of these companies, nothing has changed from their previously successful business model. Aside, of course, from the pandemic.

If Australia is indeed on track to reopen its domestic borders alongside travel to New Zealand over the next few months, these shares should enjoy some of the strongest rebounds.

One blue chip share that’s really been pummeled by the travel bans is Sydney Airport Holdings Pty Ltd (ASX: SYD). Historically a reliable dividend payer with strong annual share price growth, the Sydney Airport share price has gained nearly 30% since the 19 March lows, but it is still down almost 33% from 17 January.

That means if the share price recovers to its 17 January levels — which I believe is likely inside the next 1 to 2 years — investors buying shares today could be looking at gains of 50%.

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More reading

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Advantage Australia — Why Morgan Stanley upgraded ASX shares to overweight appeared first on Motley Fool Australia.

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