Here's How to Make Money From Australia's Downturn

  • U.S. bank sees economic slowdown Down Under with limp consumer
  • Buy defensives from Sonic Healthcare to Spark: Morgan Stanley

Moody's Cut Australia's 'Big Four' Banks

Morgan Stanley, the most bearish Wall Street firm on Australia’s currency, sees the economy struggling and the stock market falling.

It’s not all bad news, though, with strategists at the top-ranked brokerage saying there are a number of winners that can profit amid the gloom. The key is avoiding companies that are most at risk as sagging earnings momentum weighs down growth and consumers rein in spending as incomes decline.

Here’s a breakdown of their trades by theme:

Crunch on the consumer

Online property-listings firm REA Group Ltd. and Ltd. rank highest on Morgan Stanley’s quant screen. But investors should avoid stocks exposed to a slump in consumer outlays, including: JB Hi-Fi Ltd., Automotive Holdings Group Ltd., Super Retail Group Ltd., Crown Resorts Ltd., Harvey Norman Holdings Ltd., Southern Cross Media Group Ltd., and Flight Centre Travel Group Ltd. 

Australians will need to use their savings to fund purchases as income growth falls, Morgan Stanley predicts. Individuals aren’t reflecting the upturn seen in business sentiment this year as the cost of energy rises and debt-to-income levels soar as home prices climb.

Pressure on the Aussie

Morgan Stanley expect the local dollar to slide more than 15 percent to 64 U.S. cents by the end of next year, the weakest level among analysts surveyed by Bloomberg. The narrowing between policy rates in the U.S. and Australia as hikes continue in America is seen as the main driver for the Aussie.

These stocks will do well in an environment where the Aussie weakens, according to Morgan Stanley: Ansell Ltd., Cochlear Ltd., Sonic Healthcare Ltd., Ramsay Health Care Ltd., CSL Ltd., BlueScope Steel Ltd. And these shares have less sensitivity to currency fluctuations while still being rated overweight: Orora Ltd., Treasury Wine Estates Ltd., LendLease Group and Corporate Travel Management Ltd.

The resilience of the economy Down Under provides some comfort to counter the pessimists. Australia’s gross domestic produce is forecast to grow 2.4 percent this year, outpacing the average rate across developed economies for a seventh-straight year. Still, some 26 years of uninterrupted expansion has left some forecasting that the run will come to an end.

Morgan Stanley was top ranked in an Institutional Investor poll for brokerage research for a third consecutive year. That’s a survey of investment professionals managing a combined $1.7 trillion in Asian equities. These trades were highlighted in a report dated June 19, led by strategists including Sydney-based Steven Ye.

— With assistance by Garfield Clinton Reynolds

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